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Wednesday, March 23, 2016

ADB & AIIB: How Bangladesh can benefit from both

Nironjan Roy

It is generally recognised that the Asian Development Bank (ADB) has made a big contribution to our country's economic development. ADB is the only regional development financial institution where Asian countries have exclusive access to receive financial aid for economic development. However, a new development financial institution styled as the Asian Infrastructure Investment Bank (AIIB) has recently been established in a bid to provide financial aid to the developing countries of Asia.

In the post-Second World War era, Japan not only rebuilt its war-ravaged economy but also quickly emerged as an economic superpower in the world. At one point Japan realised that in order to remain as economic superpower, they will have to establish very good economic ties with Asian countries. So it undertook various programmes by which financial assistance was provided to the developing Asian countries. Scholarship, grant and loans are very common means of financial assistance under Japanese bilateral programmes. In reciprocity Asian countries became a very good market for Japanese products. Japanese consumer durables, particularly electronic goods, clothes, automobiles, are very popular in Asian markets. Subsequently Japan realised that financial aid under bilateral arrangement is not good enough to maintain and flourish its economic ties with its Asian neighbours. It also realised that institutional support alongside bilateral assistance is required to uphold its dominant presence in Asian countries.

The Asian Development Bank was eventually established in 1966 and thenceforth extensive financial aid has been provided to its member countries. This bank is effectively controlled by Japan. ADB has assets worth US$ 116 billion and counts 67 member countries. It has lent more than US$ 10 billion last year (2014) which is 17 per cent higher than the amount of 2013. The incremental lending operation of ADB is likely to continue in the coming years. It undertook last May an extensive plan for increasing its annual operation by 50 per cent. The projects under this enhanced operation will mostly include development of ports, industrial zones, roads & highways, bridges, subways and rail lines. The countries primarily considered for these projects include Myanmar, Vietnam, Cambodia, Thailand, Indonesia and India.  

ADB has extended its lending support to our country in building infrastructure which mostly includes roads & highways and bridges. Apart from this basic sector, ADB has provided financing facilities for the development of the country's financial market. Some programmes under ADB finance have been undertaken to strengthen country's financial market. Strengthening country's capital market as well as capacity building thereof was a much-discussed ADB-supported project undertaken immediately after share market crash in 1996. The need of ADB finance has not ended yet, rather, increased to some extent, particularly in the event of World Bank's reluctance to finance many projects. Bangladesh economy is growing fast and the country has set the goal of reaching middle income group by 2021. Current rate GDP (gross domestic product) growth and achievement in all relevant economic parameters support this goal.

However, the condition of existing infrastructure is not good or supportive. Existing dilapidated condition of the country's infrastructure may become a big impediment to the goal of achieving middle-income country status. Therefore huge investments in the country's infrastructure development is required to sustain the rate of growth and continue to improve social parameters so as to achieve the goal. All highways or inter-district roads must be converted into four lanes with divider for not only ensuring road safety but also making communication faster. Substantial investment is required for the development of railways which is necessary as complementary to road communication. Besides, big investment is required for drastically improving commuting system of Dhaka City where extensive communication network comprising roads, rails and elevated expressway will have to be built. Country's economic development mostly depends on investment in infrastructure because improved infrastructure means developed economy. Without making huge investments in infrastructure, no country can expedite its economic development. At the same time, spending money in country's infrastructure development is a very long-term investment because infrastructure facilities will have to be built considering the growing need of the next hundred years. In addition, special financial assistance is required for streamlining country's financial sector, particularly the banking industry which must get rid of a huge amount of non-performing loans (NPL).

So Bangladesh has a great need for financing to develop its dilapidated infrastructure and streamline its financial market. In order to mobilise this enormous amount of investable fund, our country may have to substantially depend on both domestic and international sources. There is another potential source of long-term financing which is mobilisation of fund from the expatriate Bangladeshi people by means of selling sovereign bonds. However, this potential area has never been thought of by any quarter of policy makers and as a result, this remains an unexplored area. In this situation Bangladesh may consider increasing financing option from ADB for investment in infrastructure. Since ADB has contemplated to increase its lending operation by 50 per cent, Bangladesh should prepare itself to take this advantage.   

Although ADB has decided to increase its lending operation, yet a kind of uncertainty may cast a shadow on its incrementally growing operation because ADB is heavily influenced by Japan's involvement and Japanese goal to maintain warm relationship with the developing countries of Asia is now threatened by the rise of China. China has become the second largest economy in the world and it has too much excessive foreign reserve. Like Japan, China has also expanded its economic ties with Asian developing countries through providing financial assistance. These countries have started building roads and bridges taking financial aid from China and resultantly, a good market for Chinese products has been created and many Japanese goods have been replaced by Chinese products. Since bilateral financial assistance has some limitation, China was facing difficulty in taking the leading role because Japan was maintaining its dominant presence through simultaneous means of its bilateral programmes and ADB. China in due course realised the importance of having a multilateral institution under its influence to maintain and strengthen its presence in the Asian market.

Against this backdrop, China has established a new regional development institution styled as the Asian Infrastructure Investment Bank (AIIB) which has close similarity with the ADB. Official operation of AIIB has been launched in June last.  Initial capital of this bank is US$ 100 billion and the bank may be effectively controlled by China. Fifty-seven countries have already joined the bank as members. The US and Japan have, however, declined to join this institution. Japan has refrained from joining AIIB obviously it will presumably act as the rival of ADB.

Launching of the operation of AIIB has opened a new source of long-term financing of infrastructure development in the Asian countries. Bangladesh should prepare itself to take full advantage of this newly-created opportunity.    

Henceforth the presence of two multilateral financial institutions, i.e., ADB and AIIB, will provide Asian countries a better opportunity than before to mobilise long-term finance for investment in infrastructure development.

It has now become very difficult for Japan to keep pace with China in carrying out its lending operation in Asian countries. Japan's economy is declining and the Japanese government is heavily in debt. Japan will, however, try to maintain close economic ties with the Asian countries.

On the other hand, China has maintained its second position, next to America, in global economy - and its economy is still growing. China has accumulated a huge foreign currency reserve, part of which it intends to use for helping Asian countries, particularly in developing infrastructure and business facilities so that demand for Chinese goods remains high all the time in these countries.

The presence of two regional financial development institutions, viz., ADB and AIIB is now a reality from which all Asian countries may be immensely benefitted. It may be noted that 42 Asian countries are already members of both the ADB and AIIB. However, this is a very sensitive issue and careful measures should be taken. Bangladesh has very good relation with both Japan and China.                         

Nironjan Roy, CPA, CMA is a Toronto-based banker. Toronto, Canada.

Source:  The Financial Express, 18 August 2015