On India’s One Billion Dollar Loan

India’s billion-dollar soft loan to Bangladesh is considered as the biggest credit package New Delhi has ever given to any nation. This is under EXIM Bank (Export and Import Bank), India’s line of credit agreement. In addition, the two countries signed a 35-year landmark electricity transmission deal under which India will export up to 500 megawatts of power to Bangladesh starting from late 2012. Likewise, in February, Dhaka also signed a 1.7-billion-dollar agreement with India’s state-run National Thermal Power Corp (NTPC) to build two coal-fired power plants with a combined capacity of 1,320 megawatts in southern Bangladesh.
EXIM Bank India works through channels such as enhancing exports from India, integrating the country’s foreign trade and investment with the overall economic growth. EXIM Bank of India has been both a catalyst and a key player in the promotion of cross border trade and investment across regions such as Africa, Latin America and the Caribbean. Commencing operations as a purveyor of export credit, like other Export Credit Agencies in the world (such as EXIM Bank-China, EXIM Bank U.S.A, EXIM Bank South Korea) EXIM Bank of India has, over the period, evolved into an institution that plays a major role in partnering Indian industries, particularly the Small and Medium Enterprises, in their globalisation efforts. They offer a wide range of products and services at all stages of the business cycle, starting from import of technology and export product development to export production, export marketing, pre-shipment and post-shipment and overseas investment. It is quite possible that Government of Bangladesh can also take an initiative to establish EXIM Bank of Bangladesh in order to facilitate her exports (mainly garments products and machineries produced in small and medium scale sector aka suppliers credit) to other countries based on public and private sector partnership . This is an excellent way of creating demand for local products in other economies.
The main terms and conditions of the one billion dollar credit line agreement include 1.75 per cent interest (fixed) per annum, 0.5 per cent commitment fee per annum on unutilised credit after 12 months from the date of contract approval, and 20 years' repayment period including a grace period of five years.

Well for the moment and for argument’s sake some people may say that the cost of borrowing in the current global context has been stagnated. Therefore, this is not at all lucrative. It is useful to note that in order to acquire the credit in the long run one must face both transaction and translation exposures. To qualify cash loan but not tied loan, the country should be an obvious investment darling. For example, as a proxy if LIBOR ( London inter Bank offer rate) rate is used as the most competitive interest rate, then country specific risks are significant contributory factors in defining cost of borrowing in the long term.
Alternately a country can also float long term sovereign bond ( or call this one as infrastructure Bond) to attract non-resident Bangladeshis (NRBs) to invest in those bonds . But average maturities of bond have gone down from fifteen years to seven years now in the emerging economies. Because of the reason the NRBs may not be interested here at 1.75 per cent interest rate even it is dollar denominated interest rate. They may have the better option such as either to buy real estate properties or to do transport business in Bangladesh where rate of return is very high. Why? Evidently, risk perception is not a general term. This risk perception may differ from person to person and then country to country in the environment of asymmetric information condition. Quite naturally, yield seeking NRB investors will try to lock in these sectors. In the process whether NRB investors are getting enough compensation for the risk of holding long-term infrastructure debt is questionable.
The example of China EXIM bank may bear some useful lessons. In recent time China EXIM Bank has offered Sino Hydro a 270 million U.S. dollar loan at 6 per cent interest to build the Kampot province dam in Cambodia. Similarly Chinese EXIM Bank charged 10 per cent interest rate to obtain $500 million loan for the construction of Abuja light rail project.
Historically, Bangladesh has also borrowed loans from various countries and multilateral agencies the interest rate of which ranged between 2 per cent and 5 per cent. Even countries such as the USA or Japan had given tied loan to Bangladesh in the past. Sometime back, the country had signed a $109 million dollar Supplier's Credit deal with China to fund the Barapukuria coal mine project at the rate of 5 per cent interest rate. The repayment was scheduled in 17 years period. More interestingly, the country made commitment to make down payment of 10 per cent of the total loan.
The projects identified under one billion dollar package are as under,
1 Procurement of six high-powered dredgers at $71.69 million. Of the dredgers, one will be used for dredging at Mongla Port while three for Bangladesh Inland Water Transport Authority and two for Bangladesh Water Development Board.
2 Construction of an internal container river port at Ashuganj at a cost of $36.23 million. Bangladesh and India have recently signed an agreement under which Ashuganj in Bangladesh and Silghat in India have been declared ports of call.
3 To buy 10 broad gauge locomotive engines worth $31.55 million for Bangladesh Railway.
4 Some 125 broad gauge passenger coaches will be bought at a cost of $53.63 million
5 Sixty tank wagons for fuel oil transportation and two break vans at a cost of $8.85 million
6 To buy 50 metre gauge flat wagons and five break vans at a cost of $4.55 million for Bangladesh Railway.
7 Two railway bridges , one, second Bhairab Bridge and two, second Titas Bridge will be constructed, which will cost $120 million.
8 To buy 300 double-decker buses for Bangladesh Road Transport Corporation (BRTC) at an estimated amount of $29.65 million.
9 Fifty articulated ( luxury) buses would be bought for BRTC at a cost of $6.12 million.
10 Development of road communications for a land port. Under the project, Sarail-Brahmanbaria-Sultanpur-Akhaura-Senarbadi road will be constructed at a cost of $33.82 million.
11 For construction of an overpass at Jurain rail crossing and a flyover at Malibagh rail crossing in Dhaka. These will cost $31.44 million.
12 Connectivity between Bangladesh and India. Under this project, a road will be constructed between Ramgarh and Sabroom [Tripura's southern border town] at a cost of $14.53 million.
13 An amount of $150.86 million will be spent to set up power gridline between India and Bangladesh. Under the project, a 400KV grid inter-connection between Bheramara of Bangladesh and Baharamapur of India will be set up.
14 To built capacity building of Bangladesh Standard and Testing Institute (BSTI). Laboratories will be set up at a cost of $8.92 million to test foods, cement, brick and gold.
15 The cost of other three projects estimated to be US$ 398.16 million.

It appears from the above that most of them related to development of railway and communications infrastructure in Bangladesh, particularly to facilitate trade and development to the isolated India’s northeastern region. The debate is perhaps to examine magnitude of costs and benefits due to one billion dollar loan in accordance with Bangladesh point of view.
In the current global environment one can observe two distinct scenarios such as the failure of global trade talks and then lower demand from major economies that were hit hard by the global economic crisis. Interestingly, regional trade agreements are emerging as a way for middle/small -income countries to increase trade, spur growth, and lower unemployment rates. In recent time the regions such as Eastern Europe, and Latin America —are increasing trade within their borders and building a broader free trade system. Sadly, regional trade agreements didn’t work best in South Asia because of participating countries is having major political differences. If South Asian region has failed to embrace globalization it is partly explained by non- coordination of their monetary and fiscal policies. The truth is that bottom-up approaches in which companies develop regional supply chains are more effective in improving regional integration than top-down approaches imposed by governments. For that matter creating an ideal infrastructure for them is a necessary condition. Look at the picture of Eastern Europe. The European Union—which bought 80 per cent of Eastern Europe’s exported goods in 2008—can spur further regional growth by implementing policies that reduce deficits and regain lost competitiveness. Latin America too is stronger now. With their relatively strong fiscal positions, Latin American countries can expand on existing agreements by ending administrative restrictions and tariffs and coordinating investment in transportation, energy, and telecommunications.
India’s North-East and Bangladesh enjoys a successful trading history. They became economically disintegrated as a result of political division of the sub-continent in 1947. Eventually, the region was cut-off from its traditional trading partners such as Bhutan, Myanmar, the then East Bengal now Bangladesh, Thailand and Indo-China. In fact, the region became land-locked and also exacerbated the isolation.
Historically the region generally has been a food-deficit region. Myanmar was the supplier of cereals, pulses, fish and other marine products. Manufacturing products on the other hand were supplied by Kolkata. People in the hilly villages used to plant oranges, coffee beans, paan, bay leaves, betal nut, sweet potatoes, yum and other tubers. They traded for rice, vegetables and dried fish at the weekly haat some 25 kms away, in what’s now Bangladesh and Myanmar. That trade stopped long back with the drawing of borders. People still dream those days.
Some people argue that Bangladeshi manufacturers will gain marginally in India’s North –East market because the general consumption patterns in the region are price sensitive but not income sensitive. This idea is static here because all trade theories are static. But who alters trade theories? The firm specific OLI model (O-Ownership advantages; L-Location or country specific advantages; I-Internalization advantages) is the most appropriate answer here because country doesn’t trade but firms does trade. If Bharati Telecom is competitive and innovator in price sensitive markets, you cannot just ignore Grameen phone in the similar market condition.
What are the priorities now for Bangladesh to address development and their challenges? To further broaden this appeal one must consider infrastructure, trade and development and poverty. In fact an efficient infrastructure development can help the building blocks for regional trade expansion. Note that India's assistance in improving the railway infrastructure will facilitate Bangladesh's transit to Bhutan and Nepal as well. One thing is certain that the rise of India and China will push African economies to grow because they need energy and resources. In our neighbourhood firms need market. That implies cooperation is a win-win game.

In the short run, there are few easy choices for Bangladesh when it comes to massive investment in the infrastructure sector. It is useful to quote an African sociologist here, “From my perspective, China’s goal is to develop China and to raise the living standards of Chinese people. Fortunately, there are benefits for Africa, as well. In the very narrow prism of economic development, I think it is better for the Chinese to be in Africa because they view Africans as business partners. And even when they don’t—because I don’t want to make it seem like the Chinese are perfect—I believe that there is scope for having that conversation. So African leaders, who should be accountable, should be standing up and saying to the Chinese: “We love the fact that you’re investing in our continent. However, we need you to employ more Africans or we need you to have higher health standards.” That, again, is the responsibility of government—to regulate—and so I don’t think Africa needs westerners to step in and wag fingers at the Chinese and say, “Oh, don’t go into Africa because you’re being exploitative.”The Chinese have created jobs; they’ve built roads. The West has failed to do that in sixty years in Africa.”
Who is responsible for the collapse of the Bangladesh Railway Transport system? It has been considered as highly price sensitive and environment friendly. Historically, we took advice from the experts of so-called multilateral agencies because it was not “cost effective.” Experts were myopic in their decision making. Road transport lobby must have influenced their decision.
But people are suffering. Who knows that this loan may bear a new beginning because you are to find out the best alternate option. Otherwise you may have few trips to the peoples’ welfare.