Originally posted in The Business Standard on 19 October 2024
How ‘self-financing’ Padma Bridge triggered money market crisis, inflation
High borrowing cost increased the tax burden on the general public through higher energy costs, which eventually fuelled inflation
Highlights:
- Significant amount of foreign currency sourced from local banks, reserves
- Used for importing machinery, raw materials, paying foreign workers
- Local currency borrowed thru treasury bills, bonds at 7%-8% interest
- Domestic resource mobilisation increased tax burden on public
- It raised energy prices multiple times, eventually fuelling inflation
- Huge dollar selling eroded reserves to $19.8b in October 2024
The foreign currency spending for the Padma Bridge construction of nearly $1.9 billion, equivalent to about Tk20,000 crore sourced from the domestic market, triggered crises in both the forex and local currency markets leading to the erosion of the country’s foreign exchange reserves.
The state-owned Agrani Bank arranged the entire amount of foreign currency for the project from the local market which experts consider one of the main reasons behind the money market crisis that the country has been facing over the last two years.
The dollar expenditure was used for importing capital machinery, raw materials, and paying the salaries of foreign labourers. Of the total $1.9 billion, a $200 million payment remains pending, according to the bank.
The government had to fund this massive foreign currency requirement from its own resources after the World Bank cancelled its $1.2 billion (Tk84 billion) financing package to build Bangladesh’s longest bridge, citing corruption concerns in 2012.
Soon after the cancellation of the low-cost foreign fund, then-prime minister Sheikh Hasina announced that the country would implement the 6.15km road-rail bridge project using its own resources, which came at a huge economic cost.
It is because the government had to borrow local currency through treasury bills and bonds at interest rates of 7% to 8%, compared to the maximum 1% cost of the World Bank loan.
Additionally, a significant amount of foreign currency was sourced from local banks and Bangladesh Bank’s reserves, compromising investment in other sectors.
The high borrowing cost increased the tax burden on the general public through higher energy costs, which eventually fueled inflation, said experts.
Self-funding Padma bridge has cost the nation
Dr Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), said self-funding the bridge was a political decision with significant economic costs, as financing was mobilised from domestic sources at the expense of investment in other sectors.
Furthermore, poor governance led to cost overruns, significantly increasing the construction costs, she noted.
Involving a multinational donor agency in a mega project typically ensures better governance through checks and balances, which was lacking in the case of the Padma Bridge, resulting in cost escalations, said the economist.
The high cost of domestic borrowing at elevated interest rates further compounded the financial burden, which was ultimately passed on to the general public, she added.
For example, the toll for the Padma Bridge is high due to the elevated construction costs, she said.
Any developing country would typically seek financing from multilateral donor agencies for mega infrastructure projects to secure low-cost funding and payment flexibility, she explained.
“The Padma Bridge has been completed, which is a positive achievement, but at what cost?” she questioned.
Given the country’s low tax-to-GDP ratio, the government had to mobilise resources at a higher cost, which increased the tax burden on the general population, fueling inflation, she observed.
Originally, the estimated project cost was Tk10,161.75 crore, with completion date of 30 June 2015. However, the bridge was finally opened to traffic on 25 June 2022, with the total cost rising to Tk31,105 crore.
How resource mobilisation from domestic market triggered crisis
Agrani Bank started to spend dollars for the Padma Bridge construction in 2013 with a small amount of $6.26 million when the dollar price was Tk77.50, according to the bank statement.
The foreign exchange reserve was $17 billion to $18 billion when forex spending for the project started.
However, the country did not feel the pinch until 2021, when the forex reserve crossed a record $48 billion, thanks to the suspension of foreign payments and a huge remittance inflow during the Covid-19 pandemic.
Meanwhile, the country had already spent $1.4 billion on the project by 2021, when the dollar price rose to Tk88.80.
Reality started to bite from the middle of 2022 when imports and other foreign payments resumed after the pandemic.
The banking sector experienced a severe dollar crisis due to the huge payment burden that had piled up during the pandemic causing faster devaluation of the taka.
The Bangladesh Bank began selling dollars from reserves in the second half of FY22 to mitigate depreciation pressure and exchange rate volatility. In FY22, the Bangladesh Bank sold $7.3 billion from reserves to banks, having bought $7.7 billion the previous year.
Depleting reserves, rising inflation
That was the beginning of reserve erosion, as banks ran to the Bangladesh Bank to buy dollars to settle international payments.
It had a chain effect on local liquidity, investment, and inflation.
For instance, selling dollars put pressure on local currency liquidity, as banks were buying dollars from the Bangladesh Bank in exchange for taka. When banks faced a liquidity crunch, it pushed bond rates up, making government borrowing more expensive.
The government was buying dollars through Agrani Bank, borrowing through bonds and bills at high interest rates amid low revenue income.
This high interest rate increased the debt burden for the government which ultimately passed it on to the public by raising energy prices multiple times eventually fueling inflation.
Agrani Bank spent nearly $300 million on the Padma Bridge project from 2022 to 2024 even amid the severe dollar crisis. The Bangladesh Bank had to sell $20 billion from reserves from the second half of FY22 to FY23 as the dollar price surged from Tk90 to Tk110. The depreciation pressure continued in FY24, with the dollar reaching Tk120.
The huge dollar selling eroded reserves to $19.8 billion as of 8 October 2024.
On the other hand, with this massive dollar selling, the Bangladesh Bank mopped up nearly Tk2.50 lakh crore from the market in the last two years causing a severe liquidity crisis.
In this situation, the central bank had to supply money to the government by printing Tk1 lakh crore which further fuelled the inflation.