Alternatives to foreign aid

Apparently the coveted foreign aids and loans seem to be cheap and attractive for the country but in real terms these are not. An analysis is given below;

a) The donors' representatives in the projects have to be paid salaries, allowances, air-fare, provided with car, accommodation and many more facilities.

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b) Due to exchange gain of the donors' currency the equivalent Taka figures of principal and interest often go up tremendously surpassing the low interest rates of foreign loans i.e. 2 to 5 percent p.a. Consequently at the end of the term the loan figures increase, sometimes, many fold.

c) In case of commodity aids or suppliers' credits, the prices given by the donors cannot be verified by comparison with counterparts, rather the dictated prices have to accepted.

d) Often inefficiency and corruption of the bureaucrats and contractors involved in a project make it more costly. The honourable Finance Minister himself has mentioned that cost of construction of 1 km road amounts Tk 10 crore, whereas it should not exceed Tk. 2 crore.

The factors narrated above make the foreign aids/loans as costly as almost 30 percent equivalent of interest p.a. indicating that these are ultimately not beneficial to the nation. Hence it is imperative that we must look for alternative, cheaper and honourable sources of foreign exchange for the government to utilise in development works. The alternative source seems to be the banking system and expatriates or wage earners bank.

Banking system

The banking system maintains or may maintain the following savings and fixed deposit schemes in foreign exchange, part of which may be borrowed by government:

(i) Wage Earner Development Bonds for five years (renewable) which is a very popular scheme for saving by the wage earners abroad and traps a good portion of the foreign wages earned. The interest rates on these bonds was at one time 22 percent (compound) p.a., but presently the interest rates have been reduced to 12 percent p.a. which is same as those for Sanchapatras in local currency. It cannot be justified to allow same rate of interest for local currency and foreign exchange savings. In my opinion, if the interest rates are increased to 15 percent p.a more savings in Wage Earner Bonds will be forthcoming, which may be used by the government for development work.

(ii) Non-resident Foreign Currency Accounts (NFCD) is also an attractive source of savings in foreign currency by Wage Earners abroad and investors in general. The present rate of interest by Sonali Bank for US $ is over 10 percent p.a. which is really attractive compared to 1 percent or 2 percent in USA. If economic and political stability is sustained in the country and slight increase is made in interest rates, then savings under this scheme might rise substantially.

(iii) Dollar Bonds which have floated in the market recently through banking channel, bear the following terms and interest rates:

Tenure Interest Interest

(Development) (Premium)

1 year 5.5% p.a 6.5% p.a

2 year 6.0% p.a. 7.0% p.a

3 year 6.5% p.a 7.5% p.a

The interest rates allowed in these bonds seem to be low, not even equal to those allowed for Sanchapatra in local currency. So it may not produce the expected results. It is recommended that if the interest rates and tenure are further enhanced then wage earners abroad might place more savings in these bonds and because of longer tenure the government may utilise the funds in development work.

(iv) Wage Earners or Expatriates Bank which was proposed to be established but not materialised so far is envisaged to go a long way in accumulation of the savings of the Bangladeshi wage earners abroad. Formation of this bank may by guaranteed by the government and only wage earners will qualify to be its shareholders and customers. They will be able to send their remittances direct for purchasing shares and opening deposit accounts which should bear attractive interest rates. Only the shareholders and the government can borrow loans in foreign currency from this bank. This will enable the government to borrow foreign exchange instead of borrowing from foreigners and donors for financing the development works.

If these proposals are heeded and implemented then savings in foreign exchange might rush in the schemes described above. Such savings together may accumulate to over Tk 50,000 crore from remittances, export earnings, investments etc, part of which may be borrowed from banking system and the Expatriates Bank and utilised in development work. Thus the country may be self-dependent in foreign exchange.

I must, however, praise the honourable Finance Minister for his success in boosting the remittance which is likely to go up to Tk 20,000 crore in 2003 as against Tk 15,000 crore in 2001. If export earning, investments etc are added to remittances total inflow of foreign exchange in the country may amount to Tk 75,000 crore but the entire plan depends upon political stability and law and order situation in the country.

Ali M Idris, is an FCA, working with an international organisation.