How the “self-financing” Padma Bridge triggered a money market crisis and inflation

Highlights:

• Significant amount of foreign exchange obtained from local banks, reserves
• Used to import machinery and raw materials and pay foreign workers
• Borrowed through treasury bills and local currency bonds at 7-8% interest
• The mobilization of domestic resources increased the tax burden on the public
• It increased energy prices several times and ultimately fueled inflation
• Huge dollar sales caused reserves to shrink to $19.8 billion in October 2024

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The foreign exchange expenditure for the construction of the Padma Bridge amounting to nearly US$ 1.9 billion, equivalent to about Tk 20,000 crore from the domestic market, triggered crises in both the foreign exchange and local currency markets, which led to the erosion of the the country’s foreign exchange reserves.

State-owned Agrani Bank raised the entire foreign exchange amount for the project from the local market, which experts consider to be one of the main reasons for the money market crisis that the country has been facing in the last two years.

Dollar spending was used to import capital machinery and raw materials and to pay the salaries of foreign workers. According to the bank, of the total $1.9 billion, a payment of $200 million is still outstanding.

The government had to finance this huge foreign exchange requirement from its own resources after the World Bank canceled its US$1.2 billion (Tk84 billion) financing package for the construction of Bangladesh’s longest bridge in 2012, citing corruption concerns.

Shortly after the cancellation of the low-cost foreign fund, then Prime Minister Sheikh Hasina announced that the country would implement the 6.15 km road-rail bridge project from its own resources, which would involve huge economic costs.

This is because the government had to borrow the local currency through treasury bills and bonds at interest rates of 7 to 8%, compared to the maximum cost of 1% for the World Bank loan.

Furthermore, a significant portion of foreign currency was procured from local banks and Bangladesh Bank reserves, which affected investments in other sectors.

The high borrowing costs increased the tax burden on the general public through higher energy costs, which ultimately fueled inflation, experts said.

Self-financing the Padma Bridge cost the nation

Dr. Fahmida Khatun, executive director of the Center for Policy Dialogue (CPD), said self-financing the bridge was a political decision with significant economic costs, as funding was mobilized from domestic sources at the expense of investments in other sectors.

In addition, poor governance has led to cost overruns, which has significantly increased construction costs, she noted.

Involving a multinational donor organization in a mega project usually ensures better governance through checks and balances, which was missing in the case of the Padma Bridge, leading to cost increases, the economist said.

The high cost of domestic borrowing at elevated interest rates further exacerbated the financial burden, which was ultimately passed on to the general public, it added.

For example, the toll for the Padma Bridge is high due to the high cost of construction, she said.

Each developing country would typically seek funding for mega infrastructure projects from multilateral donor organizations to secure low-cost financing and payment flexibility, she explained.

“The Padma Bridge has been completed, which is a positive achievement, but at what cost?” she asked.

Given the country’s low tax rate, the government had to mobilize resources at higher costs, which increased the tax burden on the general population and fueled inflation, it noted.

Initially, the estimated project cost was Tk 10,161.75 crore and the completion date was June 30, 2015. However, the bridge was finally opened to traffic on June 25, 2022, taking the total cost to Tk 31,105 crore.

How the mobilization of resources from the domestic market triggered a crisis

According to the bank statement, Agrani Bank started spending dollars for the construction of Padma Bridge in 2013 with a small amount of $6.26 million when the dollar price was Tk 77.50.

Foreign exchange reserves were $17 billion to $18 billion at the start of foreign exchange spending on the project.

However, the country felt the crisis only in 2021, when the foreign exchange reserve hit a record $48 billion thanks to the suspension of foreign payments and a huge inflow of remittances during the Covid-19 pandemic.

Meanwhile, the country had already spent $1.4 billion on the project by 2021 when the dollar price rose to Tk 88.80.

From mid-2022, reality began to set in as imports and other foreign payments resumed following the pandemic.

The banking sector experienced a severe dollar crisis due to the huge payment burden that accumulated during the pandemic, leading to a faster depreciation of the taka.

Bangladesh Bank started selling dollars from reserves in the second half of fiscal 2022 to mitigate devaluation pressure and exchange rate volatility. In FY22, Bangladesh Bank sold $7.3 billion from reserves to banks after buying $7.7 billion the previous year.

Dwindling reserves, rising inflation

That was the start of reserve erosion as banks rushed to the Bangladesh Bank to buy dollars to clear international payments.

It had a chain effect on local liquidity, investment and inflation.

For example, selling dollars put pressure on local currency liquidity as banks bought dollars from Bangladesh Bank in exchange for taka. As banks faced liquidity constraints, bond interest rates rose, making government borrowing more expensive.

The government purchased dollars through Agrani Bank and borrowed through bonds and bills at high interest rates while revenues were low.

This high interest rate increased the government’s debt burden, which it ultimately passed on to the public by increasing energy prices several times, which ultimately fueled inflation.

Agrani Bank spent nearly $300 million on the Padma bridge project from 2022 to 2024, even amid the severe dollar crisis. Bangladesh Bank had to sell $20 billion from reserves in the second half of FY2022 to FY23 as the dollar price rose from Tk90 to Tk110. The depreciation pressure continued in FY24 with the dollar touching Tk120.

The huge dollar sale saw reserves shrink to $19.8 billion on October 8, 2024.

On the other hand, through these massive dollar sales, Bangladesh Bank has collected nearly Tk 250 crore from the market in the last two years, leading to a severe liquidity crisis.

In this situation, the central bank had to provide money to the government by printing Tk1 lakh crore, which further fueled inflation.