Over the last decade and a half, Bangladesh has witnessed remarkable progress in its economy, characterised by robust growth, a stable balance of payments, low inflation, and unemployment rates. Furthermore, the nation has made significant strides in the development of its electric power infrastructure, which has yielded considerable benefits to households and businesses alike. Additionally, Bangladesh’s manufacturing sector is recognised as one of the most advanced in South Asia, cementing its position as a regional economic powerhouse.
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However, the unprecedented level of government spending in response to the Covid-19 pandemic has led to a dramatic spike in inflation in developing countries, with core inflation rates skyrocketing from 2% to 6-7% [core inflation rate]. Bangladesh is not immune to these economic challenges, and as a result, its balance of payments has also gone into deficit. The shortfall has caused the depreciation of Taka, leading to an increase in domestic prices. Moreover, the energy market disruptions, coupled with the war in Ukraine, have exacerbated the inflationary pressures and further worsened the balance of payments. Evidence suggests that the government’s induced excessive demand has added to the economic strain. Cost pressure from the increasing import costs resulted in increased domestic inflation.
Stalled development projects
Some 1,016 ongoing development projects that are worth around Tk4,50,000 crores and are being handled by seven government agencies are stuck in delays. These delays are said to be caused by a number of things, such as the government not releasing funds, high prices for construction materials, no changes to the schedule of rates, unpaid bills to contractors, and problems opening LCs to import construction materials during the dollar crisis. Almost 60% of these projects are currently on the verge of stalling, according to people involved in the projects.
The Education Engineering Department (EED) has made the most overall progress (53%), while the Bangladesh Water Development Board (BWDB) has made the least overall progress (23%), across the seven project-implementing government organisations, with its 245 active projects. The Department of Public Health Engineering, the Roads and Highways Department, the Public Works Department, the Bangladesh Bridge Authority, and the Local Government Engineering Department make up the remaining five organisations. “Work slowed down due to the Covid pandemic. After that, prices of various construction materials including rods and cement soared at an abnormal rate, but the project cost was not hiked. Also, construction firms are not getting their outstanding bills on time,” an official of Abdul Monem Limited – one of the four construction firms allocated to the project under the Roads and Highways Department stated.
What are the causes?
According to Engineer Shafiqul Haque Talukder, president of the Bangladesh Association of Construction Industry, development projects between FY2016-17 and FY2020-21 were approved by the Executive Committee of the National Economic Council (Ecnec). However, due to the global economic downturn and travel restrictions caused by Covid-19, the execution of these initiatives experienced a delay in mid-2020. The outbreak of the Russia-Ukraine war in early 2022 further added to the woes, resulting in a 30%-50% increase in the prices of construction materials, including rods and cement. “Even if the cost of the necessary building materials increased, the project costs remained same. Due to this, the majority of contractors stopped their construction projects. And since the Russia-Ukraine war dragged on, the country experienced high inflation and a shortage of foreign currency reserves,” Shafiqul remarked. Under this scenario, he explained that the government chose to be tight with the money it gave to the development projects. He further stated, “As a result, although some funds were released for ‘A’ category projects in FY20 and FY21, fund disbursement was held up for most of the lesser priority projects. As a result, most of the projects are almost stopped now.”
(The majority of money allocated for projects in the “A” category is typically distributed in full within a year.)
As the economic slowdown induced by the Covid-19 pandemic and the Ukraine-Russia war persists, reports suggest that the government has halted the release of funds for development projects. Officials from several government departments responsible for implementing such initiatives have confirmed the development. According to a senior finance ministry official, the funds allocated in the national budget for development projects originate from a diverse range of sources, including taxes, finances of relevant organizations, grants from development partners, and loans from foreign banks. “Funds for most mega projects are sourced from various foreign banks, thereby minimising cash crunch for such projects,” he added. However, obtaining funding for medium or small initiatives has become more challenging due to a lack of liquidity within the government and the organisations involved.
Schedule of rate adds to the difficulty
Since the onset of the Ukraine-Russia conflict in February last year, the prices of various construction supplies have skyrocketed due to transit challenges on several routes, including the Black Sea, and a surge in freight costs. In 2020, the cost of rods per tonne was Tk72,000, compared to the current price of Tk92,000 per tonne. Similarly, each 50-kg bag of cement currently costs between Tk500 to Tk550, up from approximately Tk400 in 2020. Bitumen costs have also surged to between Tk9,700 and Tk9,800 per drum from Tk6,500, while the price of bricks has increased by approximately 50% over the past two years. Despite the increase in construction supply prices, the schedule of rates for contractors remains unchanged since its last revision in 2019 when the pricing of construction supplies was based on market conditions at the time.
According to the managing director of Abdul Monem Limited, Mainuddin Monem, the prices of construction supplies have risen much more than what the contractors agreed to according to the existing schedule of rates, which has halted construction progress.
Addressing the issues
A representative of the Planning Division disclosed that the government is preparing a single tariff schedule for all ministries and divisions. “If formulated, it will eliminate the opportunity for different firms to charge different prices for similar work,” the official added. However, the idea is still being reviewed, he added, noting that it would take some time to reach a conclusion on this matter.
Kazi Wasi Uddin, secretary of the Public Works Department said, “A crisis is going on all over the world and Bangladesh is also influenced by this.” He agreed that numerous development projects were experiencing difficulties and said they were communicating with contractors to keep their projects on track.
Dr. Ahsan Ai Mansur, an economist, stated that the government could launch currency swaps with the countries from which it imports raw materials for rods and cement, among other construction supplies.
Can the int’l aids help?
The Asian Development Bank (ADB) has pledged $9.46 billion for the next three years under the Bangladesh lending pipeline 2023-2025, as confirmed in a conversation between the Manila-based bank and the Economic Relations Division (ERD) last year. ADB has compiled a list of 44 confirmed projects by collaborating with various government agencies, and it is providing loans for these projects. According to the Bangladesh Country Programming Mission (CPM) report-2022, ADB is supporting the ongoing improvement of the country’s major infrastructure. The bank is providing support for the development of roads and railway corridors, accompanied by necessary reforms to boost trade between territories, enhance people’s access to market and job opportunities, and create more investment opportunities for the private sector. According to Bangladesh Lending Pipeline 2023-2025, the transport sector will receive the most funding ($2.9 billion) from the three-year lending pipeline, followed by education and health ($2.35 billion), water and urban ($1.39 billion), finance ($1.3 billion), energy ($1.07 billion), and agriculture ($441 million).
Even though the IMF would make $476 million available right away, the lender’s effect would go beyond that. It would enable other multilateral organisations, like the World Bank, to give Bangladesh more money. In addition to restoring macroeconomic stability through the reserves, the program would give a boost to some long-overdue structural reforms, such as raising more tax revenue, increasing social spending, modernising the monetary policy framework, strengthening the financial sector, and building climate resilience.