China suddenly slows down release of loans

China’s release of loans for Bangladesh has slowed down. Neither has there been any commitment for loans on any new project in recent times.

Over the past two financial years China’s had released funds speedily. Beijing has provided loans for large projects at the time. But in the first six months (July-December) of the current fiscal, only one third of the loans were released compared to the previous financial year.

Sources in the Economic Relations Division (ERD) say that in July-December last year, China released a total of USD 360 million (USD 36 crore). This is equivalent to around Tk 40 billion (Tk 4000 crore) at the present market rate. In the corresponding period last financial year, China has released USD 540 million (USD 54 crore), equivalent to around Tk 60 billion (Tk 6000 crore). That means fund release has dropped by USD 100 million (USD 18 crore) or Tk 20 billion (Tk 2000 crore).

In the meantime, the Chinese government in July-December made not fresh commitment to provide loans for any new projects. However, negotiations are on over loan for a project to purchase vessels. Overall, the last six months have been bereft of any Chinese credit commitment and release of funds has fallen by 32 per cent.

It is not clear whether the fund release has fallen due to China’s lack of interest or because of slow implementation of projects. According to the norms, in the case of credit agreements, the loans must be release according to the agreement in regular tranches. However, ERD sources could not provide any information on the amount of loan that was supposed to be been released by China in July-December according to the agreement. Then again, in many instances the release of funds depends on the pace of project implementation. Several ERD officials have said that China is now more interested in providing loans in its own currency yuan rather that the US dollar. Certain officials feel that China has intentionally slowed down payment in dollars so that Bangladesh shows interest in taking the loan in yuan.

In total, China released USD 1.13 billion for Bangladesh as credit in the 2022-23 fiscal.

Speaking to ERD officials, it was learnt that China provides loans to Bangladesh in both dollars and yuan. However, the loans paid in yuan are relatively less because Bangladesh is more interested in taking loans in dollars.

Executive director of the Policy Research Institute (PRI), Ahsan H Mansur, speaking to Prothom Alo, said that China wants to strengthen its currency. He said, “Credit agreements have been signed with China, so why should there be any delay in releasing the funds for the ongoing projects? There are legal obligations to release the funds, according to the contract. China is not short of funds. Does China think we will not be able to repay the funds? That would be ‘mysterious’.” He said that Chinese contractors worked on Chinese projects. The Chinese contractors’ bills could be paid in yuan. But it would not be right to slow down release of funds.

There are 14 projects funded by China presently underway. These include projects of elevated expressway, the railway, roads and more. Chinese credit for these projects is around USD 10 billion (USD 1000 crore). ERD sources say China has released less funds for the Rajshahi WASA and government vessel purchase projects. This was because of the slow place in project implementation.

China is now among Bangladesh’s top lenders. It ranks fourth among the 32 countries and institutions that provide Bangladesh with credit. Only Japan, the World Bank and the Asian Development Bank (ADB) rank higher than China in this regard.

China’s ambassador to Bangladesh Yao Wen, meeting with the planning minister Abdus Salam on Wednesday, expressed China’s interest in carrying out transactions with Bangladesh in their currency yuan. After the meeting, Ambassador Yao Wen told newspersons that the dollar problem exists all over the world. The value of the dollar fluctuates due to the US monetary policy. All developing countries, even China, are suffering because of this.

Speaking about the decrease in fund release, the planning minister on the same day said such minor problems will be resolved through discussions.

A senior official of ERD told Prothom Alo, “If Chinese credit is taken in US dollars, the cost is a bit higher than Chinese yuan. That is why China is more interested in dealing in yuan. We have approached the finance ministry and the Bangladesh Bank for their feedback in this regard.” He said that China’s pace of releasing funds hadn’t slowed down that much. The big projects are being implemented with their funding.

The release of funds normally increases when the implementation of big projects pick up speed. That is why China’s fund release doubled in the 2022-23 fiscal compared to that of 2021-22. According to ERD sources, in 2019-20 China released funds totally USD 600 million (USD 60 crore). In 2022-23 that increased to USD 1.13 billion (US 113 crore). But then due to the Covid outbreak, in 2020-21 the release of funds fell to USD 240 million (USD 24 crore). In the 2021-22 fiscal, China for the first time entered the billion dollar club in releasing funds.

After Bangladesh’s independence, China first provided loans to Bangladesh in 1975. Many years after than China did not provide a significant volume of loans. In 2016 the Chinese president Xi Jinping visited Bangladesh and declared an increase in credit funding for several projects in Bangladesh. Chinese loans picked up pace since then.

One of the main setbacks in Chinese credit is that it is entirely on suppliers’ credit. It is the Chinese authorities who select the contractors. And in the negotiations, it is the contractor firm that finalises the costs. This often causes questions concerning the costing and quality of the work. In the case of Chinese credit, there is no scope for selecting from several bidders by means of tender.

The repayment schedule on Chinese loans is also very short. Without the grace period, the loan must be paid within 10 to 15 years.  That means the amount on each installment is high, creating pressure in debt repayment.