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The government has introduced a set of stringent preconditions for securing new foreign loans in a bid to address the persistent underutilisation of aid funds in development projects.

According to a recent circular issued by the Economic Relations Division (ERD), ministries and divisions must now meet several prerequisites before any foreign loan agreement can be signed. These include completing land acquisition, submitting a resettlement plan, preparing detailed component-wise cost estimates, and finalising draft tender documents.

The move follows a dismal performance in foreign aid utilisation during the fiscal year 2024-25. Despite starting the year with a substantial $42.85 billion aid pipeline, only 13.57% of the project-linked funds were spent, ERD data shows. Out of the $8.57 billion disbursed in total, just $5.42 billion was used for project financing, while the rest supported the national budget.

Typically, a 20% annual utilisation rate is considered acceptable. However, Bangladesh has long struggled to meet this benchmark for project implementation, even as budget support disbursements show relatively stronger performance due to easier release conditions once criteria are fulfilled.

New Pre-Loan Conditions

To improve project readiness and accelerate fund utilisation, the ERD’s new policy mandates that:

• Land acquisition must be fully completed before implementation.
• A resettlement plan must be approved by the relevant ministry for displaced populations.
• Detailed cost breakdowns by project component and draft tender documents must be submitted and ready for the full tendering process before the loan is signed.
• Finance Division clearance is required for both the negotiated loan terms and any associated subsidiary agreements.
• Service agreements with utility agencies must be in place to avoid delays during construction due to utility relocation.

The new approach is expected to reduce costly delays and improve the quality and efficiency of project implementation.

Utilisation Snapshot: Key Development Partners

Among development partners, the World Bank remains Bangladesh’s largest multilateral lender, offering loans at the lowest interest rates. In FY25, it disbursed $2.01 billion, including $750 million in budget support. However, only 14.44% of its project-specific funds were utilised. Nearly $1 billion was reallocated from underperforming projects, yet the undisbursed pipeline rose to $9.31 billion.

The Asian Development Bank (ADB) fared better, disbursing $2.52 billion last year — $1.5 billion of it in budget support. Excluding this, the project fund utilisation rate stood at 22.44%.

Among bilateral lenders, Japan demonstrated the highest efficiency, with a 23.61% utilisation rate. Its aid pipeline rose by $309 million to $7 billion by July.

China, which began lending after President Xi Jinping’s 2016 visit, disbursed only $414 million in the last fiscal year, a mere 10.67% of its project pipeline. No new loan agreements were signed during the period.

Russia, providing $12 billion exclusively for the Rooppur Nuclear Power Plant, utilised 12.50% of its project aid last year, leaving $4.72 billion undisbursed.

India recorded the lowest utilisation rate at just 3.10%, with $184 million spent from a $5.73 billion pipeline. Between 2010 and 2017, India committed $7.36 billion, but bureaucratic hurdles and complex loan conditions have severely slowed progress.

Underlying Causes of Delay

An ADB assessment outlined several systemic issues contributing to delays in project implementation:

• Inadequate financial and human resources for project preparation.
• Lengthy and complex approval processes for project and bid documents.
• Land acquisition delays and limited capacity of executing agencies.
• Weak procurement practices, poor design quality, and unrealistic cost estimates.
• Inefficient bid evaluations and prolonged approval timelines.

These inefficiencies not only delay development progress but also incur significant costs for the government. Bangladesh paid $3.58 million in commitment charges in 2024 alone, with cumulative charges reaching $30.89 million to date.

By enforcing these new requirements, the government aims to improve aid absorption, reduce financial waste, and ensure that foreign-funded projects deliver timely and tangible results.