Is Bangladesh at risk of falling into the Chinese debt trap?

Bangladesh, the second highest recipient of China’s investment in South Asia after Pakistan, imports the highest volume of goods from China, making the country Bangladesh’s largest trading partner. This is the beginning of the story where China offers Bangladesh financial assistance and development experience for its “big-ticket megaprojects” to fulfil the latter’s “Vision 2041″—a well-crafted dream to be a developed country. However, the massive amount of funding from China makes critics ask, citing the example of Hambantota in Sri Lanka: “Is Bangladesh getting entangled in China’s ‘debt trap’ diplomacy?”

Debt-Trap Diplomacy, a widely used narrative against China, is thought to have originated from the “infrastructure war” between China and the Western world. It’s an apple of discord regarding whether China really has any “Machiavellian strategy,” as Chinese projects in Bangladesh are too fragmented to achieve such cunning strategic objectives. Once “the sleeping giant,” now the “second most influential economic superpower,” China follows socialist ideology in political affairs, but adopts open market policies under the name of “market socialism.” The historical data demonstrates that China always has strong affiliation with the South Asian countries because of the region’s “big bazaar.” The geopolitical eminence and commercial noteworthiness of Bangladesh has made China pay special attention to cash in on this money-making market.

To utilise the potential of becoming the “economic hub” of South Asia, Bangladesh needs external funding for its flagship development projects, the financing of which goes beyond domestic affordability. This has led to Bangladesh looking for external funding options under conducive conditions. Bangladesh’s loss of substantial financial assistance from global lenders—e.g. World Bank’s rejection to finance the Padma Bridge—and the attractive nature of China’s investment created a gateway for the country to step into Bangladesh’s economy. On the other hand, China, as a part of its external orientation, comes closer to Bangladesh by affiliating the country with different China-led regional platforms, e.g. Asian Infrastructure Investment Bank (AIIB), Belt and Road Initiative (BRI), etc.

The Sino-Bangladesh relations, which began in 1976, were limited to trade deals until the first decade of the 21st century. The bilateral relations have experienced two different phases before and after the initiation of the BRI. The relations turned into strategic partnership after 2010, when the countries signed a number of trade, transit and defence procurement agreements. Both countries are working to alleviate the huge trade-deficit by establishing free trade zones. China is trying to prove itself as Bangladesh’s time-tested friend by entwining diplomatic, defence and economic ties.

Though Bangladesh and China have distinct political and social status quo, collaborative efforts brought them closer. China’s non-intervention principle to the domestic affairs of its partners leads Dhaka to welcome more and more investment from Beijing. As an emerging economy, Bangladesh requires hefty investment to tackle its socioeconomic problems, which China can support. On the other hand, Bangladesh is all-important in China’s strategic calculus, since it can connect the south-eastern landlocked province of China. Besides, the cheap workforce of Bangladesh offers China an opportunity to relocate its sunset industries. Yet, critics give a contentious look on this relationship by denouncing China’s role—or lack thereof—in resolving the Rohingya crisis.

According to the World Bank and the International Monetary Fund (IMF), that a country will cross the danger mark if its external debts exceed 40 percent of GDP ensures that Bangladesh is in the “safe zone,” as its total foreign loan is less than 15 percent of its GDP. “Flow of External Resources into Bangladesh,” a publication by the Ministry of Finance, reported that the total outstanding foreign loan of the country was nearly USD 44.06 billion, depicting per capita loan to be around USD 278 in 2019-20 fiscal year. This clearly shows how the reality differs from the assumption that Bangladesh is overburdened with external debts. Another misconception that Bangladesh is going to be a victim of the Chinese debt trap, pointing the finger to the growing Chinese investment, also doesn’t reflect the ground reality. Of Bangladesh’s total external debt in the 2019-20 fiscal year, 38 percent was from the World Bank, 24.5 percent from the Asian Development Bank (ADB), 17 percent from the Japan International Cooperation Agency (Jica), 6.81 percent from China, 6.14 percent from Russia, and 1.3 percent from India. This data shows that Bangladesh is on the right trajectory.

The strategic advantage of cross-border trade tilted Bangladesh exponentially towards China, which has led critics to say that too much reliance on China’s money will make Bangladesh beholden to it. But Bangladesh’s diplomatic manoeuvres of the last few decades demonstrate that the country has been striking a fine balance among its donors. By pumping money into Bangladesh, China is actually trying to take the longstanding relations to a new height. Albeit, there is a narrative that Bangladesh is going to be a victim of “payday loan diplomacy,” but the counter-narrative explains how Chinese soft loans reduce the pressure of Western donors for economic and political reforms.

Bangladesh perceives Chinese investment as a welcome addition to existing sources along with creating a competitive environment. Before reaching foregone conclusions by tagging China’s debt trap with Bangladesh, it needs to be remembered that the funding options for Bangladesh are very limited. Besides, a loan becomes a burden if it is not optimally utilised. To date, all the Chinese-funded projects in Bangladesh have been proven to be financially viable. There is no instance where Bangladesh has accepted all the diktats, while signing financial agreements blindfolded.

The current stronger position of Bangladesh, in terms of external debt from China, will alter with the rise of Chinese investment, but the long-run returns will be more attractive if funds are effectively utilised. Bangladesh needs to negotiate carefully before signing any financial agreement, focus more on soft loans, and ensure timely implementation of projects. Along with taking funds for infrastructural boost, Bangladesh may also leverage the development experience of China to create a win-win situation. Not to mention, the macro-economic management policy of Bangladesh is prudent enough to avoid China’s debt trap, even if there is one.

Hussain Shazzad is a strategic affairs and foreign policy analyst.