How Bangladesh Learned to Love the Belt and Road

Bangladeshi Prime Minister Sheikh Hasina’s early July visit to China saw the two countries sign nine instruments — these included five agreements, three memorandums of understanding (MoUs), and a document — covering a range of sectors including power, investment, culture, tourism, and technology. Important among these is a Letter of Exchange under which China will provide Bangladesh with 2,500 metric tons of rice as aid for Rohingya refugees and two agreements that relate to China’s extension of loans worth $1.7 billion for Bangladesh’s power sector.

During Hasina’s visit, Beijing also assured Dhaka that it would better align its projects under the Belt and Road Initiative (BRI) with Bangladesh’s development priorities, a key issue of concern for the Bangladeshis.

A member of the BRI since 2016, Bangladesh has received large amounts of funding from China for infrastructure projects. The two countries signed 27 agreements for investments and loans worth around $24 billion during Chinese President Xi Jinping’s visit to Dhaka that year. Together with the $13.6 billion invested in joint ventures earlier, Chinese investment in Bangladesh is said to be worth over $38 billion, making China Bangladesh’s single largest investor.

Bangladesh is the second-largest recipient (after Pakistan) of Chinese loans under BRI in South Asia. But unlike in Pakistan and Sri Lanka, where there is growing concern over the implications of mounting indebtedness to China, the mood in Bangladesh is still optimistic over the BRI’s potential. So what is Bangladesh doing right?

Sino-Bangladeshi relations have come a long way. Ties were troubled in the early years of Bangladesh’s independence. As a result of the Cold War and the region’s geopolitics, China not only backed Pakistan in Bangladesh’s liberation war in 1971 but was among the last countries to recognize newly independent Bangladesh. It also vetoed Bangladesh’s efforts to become a member of the United Nations.

It was only in 1976 that formal diplomatic relations were established and since then ties have strengthened significantly. In 2016, Bangladesh and China became strategic partners.

Bilateral defense ties are robust. Chinese and Bangladeshi military personnel train in each other’s defense academies. Bangladeshi army officials are reportedly more at ease with Chinese defense equipment than with that of India. Not only is China the only country with whom Bangladesh has a defense cooperation agreement but it is also Bangladesh’s largest supplier of weapons.

China is also Bangladesh’s largest trade partner and trade is growing rapidly. Two-way trade, which was worth $12 billion in 2014, is expected to exceed $30 billion by 2021. While trade is booming, there is a strong imbalance in favor of China.

As mentioned above, Chinese investment in Bangladesh has been growing remarkably in recent years. Between 1977 and 2010, Beijing’s investment in Bangladesh totaled just $250 million. This rose to roughly $200 million in 2011 alone. In the wake of the BRI, China has emerged Bangladesh’s largest investor.

Like other emerging economies, Bangladesh is anxious to develop its infrastructure. However traditional sources of funding have proved inadequate, driving Dhaka to look to the BRI and China to meet this need.

China is playing an important role in Bangladesh’s infrastructure development. It has upgraded Chittagong port and is building an industrial park there. It is also constructing road and railway lines linking the Bay of Bengal port to Kunming in China’s Yunnan province. China has also built eight friendship bridges in Bangladesh, including the $3.7 billion road and rail bridge across the Padma River. Additionally, China is investing in a $1 billion project to improve digital connectivity. And China is investing heavily in Bangladesh’s power sector. Indeed, most of its investment in the 2018-19 fiscal year went into Bangladesh’s energy sector, particularly to coal-fired power plants, including those being constructed at Chittagong and Payra.

What makes Chinese investment attractive to Bangladesh is the fact that Beijing has shown willingness to finance infrastructure projects that are important to Dhaka. Western funders had refused to fund several such projects in the past. BNP Paribas and the Norwegian government’s sovereign wealth fund, for instance, declined to finance the Rampal coal-fired power plant at Khulna for environmental reasons. The World Bank cancelled a $1.2 billion credit for the Padma Multipurpose Bridge project, citing high-level corruption. In contrast, China is executing these projects. Consequently, Bangladesh views the BRI as an opportunity to develop its infrastructure.

But unlike other BRI member-states that are falling into debt traps, Bangladesh has been a cautious borrower. According to a Ministry of Finance report, Bangladesh’s total external debt stood at $33.52 billion in June 2018. The weighted average rate of interest on these loans is just 1.23 percent and the country has an average of 31 years to pay off the loans, with an average grace period of eight years. This is well within Bangladesh’s financial capacity given the brisk rate at which its economy is growing, the report says, ruling out any cause for alarm. Additionally, Bangladesh is staying clear of leaning excessively on Chinese loans by also drawing on Indian and Japanese funding and building expertise.

Importantly, Bangladesh has turned down projects that are not economically viable. This was the case with the Sonadia deep-sea port project, which the Chinese had proposed. Preferring the Japan-proposed deep-sea port project at Matarbari, and recognizing that two deep-sea ports in such close proximity didn’t make economic sense — Sonadia and Matarbari are just 25 kilometers apart — Bangladesh called off the Chinese project at Sonadia.

All the while, Bangladesh has taken care to avoid ruffling India’s feathers. None of the projects the Chinese are executing in Bangladesh have strategic implications. While China is building a port at Payra, its location is “deep within the Ganges delta” and the port is approachable only through a 75-kilometer-long canal that will have to be dredged through mudflats. That “makes it a very unlikely place for a naval base.”

The BRI seems to be working well for Bangladesh so far. Still there are problems that could stand in the way of China and Bangladesh realizing its full potential.

Foremost among these questions is the fate of the Bangladesh-China-India-Myanmar Economic Corridor (BCIM-EC), a 2,800-km connectivity corridor that proposes to link Kunming in China with Kolkata in India via Mandalay and Dhaka. This corridor, which will in effect link three subregions — South, Southeast, and East Asia — and has enormous geostrategic and geoeconomic significance, was conceived first in the 1990s but has made little progress on the ground. During Hasina’s visit to Beijing, China and Bangladesh signaled their shared commitment to revive the BCIM-EC project. But will they be able to get India, which is strongly opposed to the BRI, on board?

There are problems too that could derail or delay individual BRI projects. Bangladeshi and Chinese workers at the site of the Payra power plant clashed violently in June, resulting in the death of a Chinese worker and injuries to dozens of others. As in other BRI member countries, Chinese personnel comprise a significant proportion of the labor on project sites in Bangladesh. Tensions among workers could delay project execution.

In addition, Bangladesh is concerned over China’s slow pace of reimbursement. Apparently, China has disbursed just $981.36 million, less than 5 percent of the funding promised since the preliminary agreements were signed in 2016.  With regard to the $689.35 million-Karnaphuli river tunnel project, for instance, only $194.81 million has been released by the Chinese so far; the deal was signed in October 2016. During Hasina’s visit to Beijing the two sides agreed to form a working committee to identify and eliminate the issues that are delaying payment and thus standing in the way of meeting project deadlines.

If Sri Lanka and Pakistan have become examples of how the BRI can drag countries into debt traps, Bangladesh provides lessons for how to do business with the Chinese.  Whether and for how long Bangladesh can continue to avoid the downsides of the BRI remains to be seen.