The Chittagong University Journal of Business Administration, Volume 26, 2011, pp.

281-294

Foreign Aid Dependency of Bangladesh: An Evaluation†

Md. Didarul Hasan‡

Abstract
This paper examines the degree of aid dependency of Bangladesh
economy. The aid scenario of the country has been changing during the
last two decades not only in terms of sources and volume of aid, but also
in terms of sectoral allocation and utilization. More importantly, though
ODA is still a significance source of foreign exchange, its importance has
declined over the years as the exports and remittances picked up. As the
economy has grown, the flow of aid as a proportion of GDP or
percentage of investment has declined over time. While in the early post
independent period ODA financed entire ADP, now it is financing less
than 50 percent of ADP. Thus, the overall dependency of the economy on
foreign aid has reduced. Despite that the role of aid in dealing with
critical issues and goals, some of which are directly and indirectly related
to MDGs, cannot be undermined. The contribution of ODA is still very
significant in different development projects, especially in health,
education and physical infrastructure. As a result, the influence of donors
in policy matters has paradoxically increased significantly.

Key words- Bangladesh, foreign aid, aid dependency.

1. Introduction

Official Development Assistance (ODA) or popularly known as 'foreign aid' is an important

source of international flow of financial resources in the developing countries like
Bangladesh1. Bangladesh has received a sizable amount of foreign assistance over the years.
According to the traditional development theory foreign aid like other foreign resources helps
to fill up two important gaps of developing countries: one is saving-investment gap and
another is foreign-exchange gap (i.e. two gap model developed by Chenery and Strout in
1966).

The literatures on the role of foreign aid are not conclusive in the context of Bangladesh (as
well as internationally). Early studies on the effects of aid e.g. Islam 1972, Alamgir 1974, and
Rahman 1984, found that foreign aid has positive effect on economic growth of Bangladesh.
Thus their studies support the traditional pro-aid views. On the other hand, more recent
studies e.g. Ahmed 1992, Islam 1992, Quazi 2000 and 2005, found evidence contrary to the
earlier studies, that is foreign aid doesn't affect economic growth positively.
†
The original version of the article is a print version.
‡
Assistant Professor, Department of Accounting and Information Systems, University of Chittagong. E-mail:
didar732001@gmail.com

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Not concentrating on the issue of aid effectiveness this paper examines the importance or
significance of foreign aid for the Bangladesh economy. The main question of the study is
how much the economy of Bangladesh is dependent on foreign aid? To evaluate that firstly,
the paper demonstrates the trends and composition of foreign aid flows to Bangladesh since
the independence. Secondly, it measures the degree of aid dependency of the economy by
analysing different indicators like aid as percentage of GDP, ADP, and budget; share of
debt/debt service in GDP; share of export and remittances in GDP.

The study shows that Bangladesh has received a massive influx of more than $60 billion as
foreign aid since its independence. However, the aid scenario of the country has been
changing during the last two decades not only in terms of sources and volume of aid, but also
in terms of sectoral allocation and utilization. More importantly, though ODA is still a
significance source of foreign exchange, its importance has declined over the years as the
exports and remittances picked up. As the economy has grown, the flow of aid as a proportion
of GDP or percentage of investment has declined over time. While in the early post
independent period ODA financed 100 percent of ADP, now it is financing less than 50
percent of ADP. Thus, the overall dependency of the economy on foreign aid has reduced.
Despite that the role of aid in dealing with critical issues and goals, some of which are directly
and indirectly related to MDGs, cannot be undermined. The contribution of ODA is still very
significant in different development projects, especially in health, education and physical
infrastructure. As a result, the influence of donors in policy matters has paradoxically
increased significantly.

The analyses of the paper are based on secondary data. Most of the data are collected from
Economic Relation Division (ERD), Ministry of Finance, Government of the People's
Republic of Bangladesh's website. We also use World Bank's latest World Development
Indicator data. Some of the data are taken from two presentation papers: 1) 'Moving Out of
Aid Dependency: Reflections on LDC Experience'- by Dr. Debapriya Bhattacharya, presented
at a UN conference in 2007, and 2) 'Policy Priorities for Foreign Aid Reforms in Bangladesh'-
by Selim Raihan, presented at an international conference at Colombo, Sri Lanka, 2010.

The rest of the paper is organized as follows: section 2 presents the overall trends and patterns
of aid flows to Bangladesh since its independence; section 3 analyses the aid dependency

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scenario of the country; section 4 discusses the future prospect of foreign aid for Bangladesh;
and finally, section 5 gives some concluding remarks.

2. Trends and Patterns aid flows to Bangladesh

Bangladesh has received a sizable amount of foreign assistance over the years. Table 1 in
Appendix provides the data on foreign aid flows to Bangladesh from 1971 through 2013.
During this period, the country received more than $60 billion of foreign aid, with an annual
flow of aid that has ranged from about $1 billion to some $3 billion. A number of important
features of the foreign aid inflows to Bangladesh may be noted as follows:

Share of aid by purpose (food aid, commodity aid, and project aid): During the period
immediately after independence Bangladesh received significant amount and share of food aid
in total aid. But since the early 1980s the share of food has declined gradually and now
Bangladesh receives very insignificant amount of food aid. For example, in 1971/72 the share
of food aid in total aid was about 48 percent, while the share declined to just 1.2 percent only
in 2013/14 (Table 1). This reflects that the production and import capacity of foods of the
country has increased gradually and that is why the need for food aid diminished. However,
this does not mean that Bangladesh has ensured the complete food security. Every year the
country has to import significant amount of food to meet the growing demand as the
population is increasing. Even, in some years food supply shortage occur due to adverse
natural and economic shocks. 2

Commodity aid was also significant in the earlier post-liberation period (50.8 percent in
1971/71 and 45.2 percent in 1975/76). However, in recent years, both commitments and
disbursements of commodity aid have fallen close to zero with no buildup of the pipeline.

Following the general trend in development assistance, policy lending—both at the macro and
at the sectoral level—has become an important, and dominant part of the donors aid program,
and in some cases has supplanted simple project lending. This development has been
accompanied by increasing economic and sector work—the so-called knowledge products—
by the multilateral financial institutions. Nevertheless, despite the apparent increase in policy
lending, data on policy lending are not readily available and the government is maintaining its
old classification system that lumps both project and policy lending together under “project
aid.” In the early years after independence project aid was very low. However, since the early

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1980s the share of project aid has increased rapidly (as the corresponding share of food and
commodity aid declined) and now project aid constitute more than 98 percent share of total
aid (Table 1)

Share of grants and loans: In the earlier years the majority share of foreign aid was in the
forms of grants (i.e. don't need to repay), but in the recent years the share of loans has
increased significantly. For example, in 1980/81 the share of loan in total aid was 48.2
percent, in 2013/14 the share has reached to 78 percent. However, as most of the foreign loans
the country receives are concessional, the buildup of debt has been slow. The total external
debt, as of 2014, was slightly above US$23.7 billion. The majority of the loan —more than
90 percent—is long term and concessional (ADB 2009a). Compared with other developing
countries, Bangladesh’s external debt is not high; it is well within prudential limits. In 2013,
the country's external debt per capita was only $188 with global rank of 168 (Mecometer,
2015)

Share of aid by source (bilateral vs. multilateral): In the early post-independence years,
bilateral sources accounted for the bulk of the foreign aid the country received; however, by
the early 1990s, the pattern began shifting in favor of multilateral sources, which now provide
almost three times the amount of foreign assistance that bilateral sources offer (this is
opposite of the global trend where bilateral donors still dominates). For example, since the
early 2000s multilateral donor agencies (e.g. World Bank, ADB, and various UN agencies)
have been proving on average 70 percent of total aid, while the bilateral donors provided only
30 percent (Table 1). This is a positive feature of aid disbursement in Bangladesh as global
experience shows that, for most bilateral donors, poverty and development are not the primary
determinants for how aid is allocated; rather, a whole raft of political and strategic objectives,
combined with developmental objectives, drive bilateral donor allocation decisions, both
between and within countries. Multilateral donors are somewhat more economically rational,
although they also want to dominate in case of policy making by imposing different
conditionality3. Though the multilateral international financial institutions are the principal
source of aid for Bangladesh, the role of bilateral sources such as the governments of Japan,
the United Kingdom, and Canada is also significant. 4 The two main sources of multilateral aid
for Bangladesh are the World Bank and the Asian Development Bank (ADB), which have
provided assistance largely, though not exclusively, from their concessional windows 5.
However, the terms and conditions of the International Development Association and the
ADB have somewhat hardened, and in addition, ADB is now classifying Bangladesh as a

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blend country—a country that borrows from both concessionary and nonconcessionary
sources—which has contributed to the dilution the grant element of the foreign assistance it
receives.

Source: based on Table 2 in Appendix

3. Dependency on foreign aid

Even though official development assistance (ODA) is still a significant source of foreign
exchange, its importance has declined over the years as other sources of foreign exchange,
such as exports and workers’ remittances, have picked up. The gradual declining of
dependency on foreign aid can be evaluated by several indicators such as share of aid in GDP,
ADP and national budget; share of export in GDP, share of remittance in GDP, and share of
debt/debt service in GDP.

Aid as % GDP or investment: Table 1 shows that the flow of foreign aid in nominal term is
relatively stable fluctuating between 1 to 3 billion dollars. As the economy has grown, the
foreign aid as a proportion of gross domestic product (GDP) or a percentage of investment
has declined over time. In the 1970s through the early 1990s, the net flow of aid as a
percentage of GDP was more than 5.5 percent, but it declined to about 3 percent in 2013/14
(Table 2 and Figure 1). Note also that in recent years Bangladesh has received less foreign
aid, as a percentage of GDP, than either heavily-indebted poor countries (HIPCs) or other
low-income countries (LICs)6. In the 1970s, soon after independence, external resources
financed more than 70 percent of the country’s investment, but this had fallen to less than 10
percent in 2005 (World Bank 2007). This reflects on the one hand the government’s relative
success in mobilizing domestic resources and on the other, the increasing vigor of the private
sector. The data also indicate that the importance of foreign assistance to the economy, as a

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percentage of GDP or investment, has declined over time, though the absolute volume
remains considerable.

Source: based on Table 3 in Appendix.

Shares of export and remittance in GDP: In 1990, the flow of foreign development assistance
exceeded the corresponding earning flows from exports and workers’ remittances; in 2006,
the situation has changed dramatically, with total export-earnings and workers’ remittances
exceeding the flow of foreign assistance by a factor of 10 and 6 respectively (World Bank
2007). Figure 1 and Table 2 show that export earnings as percentage of GDP has increased
dramatically since the early 1990s and reached about 20 percent in 2013. Similarly the
percentage of remittance increased significantly from early 1980s (1.9% in 1981) to 2013
(9.2%). Thus, now foreign aid finances very smaller proportions of import bills compared to
the previous decades.

Debt and debt services as % of GDP: Total external debt as percentage of GDP has been
declining since 1990s (Table 2 in Appendix). The total foreign debt, as of 2008, was slightly
above US$20 billion, which was equivalent to about 26 percent of GDP and about 140
percent of export earnings (ADB 2009a). The majority of this debt—more than 90 percent—is
long term and concessional. Debt service as percentage of GDP is relatively stable, though as
percentage of export is gradually decreasing. For example, total annual debt service as a
proportion of export earnings was slightly higher than 6 percent in 2013, while it was about
29 percent in 1981. The debt obligation per capita was $144 in 2007 compared to per capita
aid of $11.3.
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Aid as % of ADP and budget: Table 3 (in Appendix) and Figure 2 show that throughout the
1970s and 1980s foreign aid constituted the major share of our national budget. More
importantly, the country's annual development program (ADP) was entirely relied on foreign
aid in those decades. However, since the 1990s the situation has improved significantly.
Throughout 2000-2008 period aid has contributed on average about 17 percent of national
budget and on average about 48 percent of ADP. In 2013, aid as % of budget has come down
to only 7.64% and aid as % of national budget has fallen to about 43%. Thus, budget
dependency of foreign aid has declined significantly.

Though the dependency on foreign aid has reduced, the role of aid in dealing with critical
issues and goals, some of which are directly and indirectly related to MDGs, cannot be
undermined. The contribution of ODA is still very significant in different development
projects, especially in health, education and physical infrastructure. However, allocation for
education and health is higher than for infrastructure, which needs massive investment.
Globally, the sectoral allocation of aid within countries has shifted towards the social sectors
from the productive sectors. There has been a significant increase in aid for the health and
education sectors, with particular emphasis on HIV/AIDS and basic education in the poor
countries of Africa and Asia. Agriculture and industry have experienced lesser allocation.
Allocation for infrastructure has started to increase recently. While increased allocation for
social sectors is important for increasing productivity (healthy and educated people can be
more productive) and achieving MDGs, a decline in the productive sector will also have
serious implications on the poverty reduction initiatives as there is direct linkage between
poverty reduction and performance of productive sectors. These sectors not only contribute to
the GDP of countries, but are also sources of employment and income for the vast majority in
the developing countries. Investment in infrastructure improves connectivity, which has a
direct positive bearing on productivity.

Despite the decline in the relative importance of foreign aid in the overall economy, the
influence of donors in policy matters has paradoxically increased significantly. In recent
years, the locus of donor activism not only encompassed the economy, but also transcended
into the broader political and societal domains. Donor representatives are now found involved
not only in the public discussions of technical economic matters but also in social and
political issues - which in recent years included arbitrating in political disputes and arranging
dialogues between two feuding parties. While this arbitrary broadening of the mission of the

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donor activities - which runs counter to the charters of many of these organizations - may
have sometimes yielded positive outcomes in diffusing political tensions in the county, it also
held the potential of political backlashes if the outcomes run counter to popular expectations.
Considering the pros and cons, the donor agencies would be well advised, from the
perspective of their long-term effectiveness, to stick to their assigned mission, as enshrined in
their charters.

4. The prospect of foreign aid

Though the share of foreign aid in GDP has declined recently, the role of aid in dealing with
critical issues and challenges, some of which are laid down in the MDGs, cannot be
underestimated. Moreover, the threat of climate change, food crisis, fuel shortage and
financial crisis may have an impact on the progress of MDGs. Hence, aid as a source of
financing for reaching the MDGs is still an important component of required resources.
However, unless this aid can be made more effective, the objective of reducing poverty may
remain a far-fetched goal.

The prospect of getting more aid in the future is gloomy. Though there has been huge debt
relief in countries with social, natural and political problems, Bangladesh has not benefited
from such programs. In addition to traditional recipients, the demand is increasing in conflict
and post-conflict countries. Increased aid to Afghanistan, Iraq, and Pakistan; debt relief for
Iraq and Nigeria; emergency assistance to countries hit by earthquakes, tsunamis, and other
natural calamities do actually imply that fewer resources are available for poverty reduction
and achievement of the MDGs in other countries.

In this circumstance of diminishing flow of foreign aid, the effective utilization of aid fund is
critically important. Unfortunately, there exist a big question mark on the proper utilization of
foreign aid in the countries like Bangladesh.

5. Concluding Remarks

Despite the huge inflows of foreign aid over last four decades since independence,
Bangladesh still ranks among the poorest nations in the world. The studies on the impacts of
foreign aid are inconclusive and often illustrate contradictory results.

This paper concentrates on examining the degree of aid dependency of Bangladesh economy.
The aid scenario of the country has been changing during the last two decades not only in
terms of sources and volume of aid, but also in terms of sectoral allocation and utilization.

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More importantly, though ODA is still a significance source of foreign exchange, its
importance has declined over the years as the exports and remittances picked up. As the
economy has grown, the flow of aid as a proportion of GDP or percentage of investment has
declined over time. While in the early post independent period ODA financed 100 percent of
ADP, now it is financing less than 50 percent of ADP. Thus, the overall dependency of the
economy on foreign aid has reduced. Despite that the role of aid in dealing with critical issues
and goals, some of which are directly and indirectly related to MDGs, cannot be undermined.
The contribution of ODA is still very significant in different development projects, especially
in health, education and physical infrastructure. As a result, the influence of donors in policy
matters has paradoxically increased significantly.

Endnotes
1 Foreign aid consists of all official grants and concessional loans, in currency or in kind, that are broadly aimed
at transferring resources from developed to less developed nations on development or income distributional
ground. See- Michael P. Todaro and Stephen C. Smith, Economic Development, 8th ed. (Indian Branch, Pearson
Education pte. Ltd, 2004), p. 265-266.
2 In 2008, Bangladesh was faced with a shortage of food supply due to a number of adverse economic shocks,
leading to a substantial food import. However, there are reasons to believe that this was more of a short-term blip
than a long-term trend. Indeed, in 2009 agriculture output rebounded sharply with better weather and improved
access to farm inputs. The long-term prospects are likely to improve further as agricultural innovations in the
form of improved seeds and fertilizers become more widely available.
3 Though it is generally presumed that multilateral aid is more economic and less political with fewer strings
than bilateral aid, it does not seem to stand up to scrutiny. The political and ideological perspectives of
multilateral donors are not too different from those of the bilateral donors, as the ownership structure of the
multilateral financial institutions remains concentrated in a few major donors with similar political and
ideological perspectives. In addition to the fact that the major bilateral donors are also the major shareholders of
multilateral financial institutions, the donor agencies are also involved in continuous real-time ‘donor
coordination’’, thereby ensuring that everyone is on the same page with regard to policies and conditionality.
4 The role of the US as a source of bilateral aid has declined significantly over the years, making it a marginal
contributor to the country’s development process. In addition to its meager volume, much of the US assistance is
channeled through non-governmental entities, pre-selected by USAID, a fact that arguably undermines the
quality of its foreign aid. In short, the quality and quantity of US assistance to the country has declined over

time.

5 Another important source of multilateral finance is International Monetary Fund ( IMF) , whose loans are
intended to address balance-of-payments problems. IMF provides special loans to low-income countries at a
concessional interest rate under its Poverty Reduction and Growth Facility. While these loans are important,
IMF does not make long-term loans for project financing like the multilateral development banks such as the
World Bank and the ADB.

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6 A notable exception is, however, India, which given its recent vigorous economic growth and new-found
confidence in its own economic capabilities, has decided to drastically reduce its dependence on foreign aid as a
source of investment.

References

ADB, 2009a. Key Indicators 2009: Enterprises in Asia. Manila: ADB.

ADB, 2009b. Country Assistance Program Evaluation for Bangladesh. Manila: ADB
Ahmed, S. 1990. '' Foreign Capital Inflow and Economic Growth: A Two Gap Model for the
Bangladesh Economy''. The Bangladesh Development Studies. vol. XVIII. pp. 55 –79.
Alamgir, M. 1974. "Foreign Capital Inflows, Saving and Economic Growth: A Case Study of
Bangladesh." Bangladesh Economic Review. April Issue.
Chenery, H. and W. Strout, 1966. ''Foreign Assistance and Economic Development"
American Economic Review, vol. LVI, 4(1). pp. 679 – 733
Economic Relation Division (ERD), 2010, Flow of External Resources, Ministry of Finance,
Government of the People's Republic of Bangladesh, http://www.erd.gov.bd
Islam, A. 1992. "Foreign Aid and Economic Growth: An Econometric Study of Bangladesh."
Applied Economics. Vol. 24. pp. 541-544.
Islam, N. 1972. "Foreign Assistance and Economic Development: The Case of Pakistan."
Economic Journal. March Issue
MacroEconomy Meter, External Debt Per Capita -Bangladesh. http://mecometer.com/
Quazi, R. 2000. "Macroeconomic Effects of Foreign Aid in Bangladesh Revisited", Journal of
Bangladesh Studies, Vol. 2(2). pp. 7-15.
Quazi, R. 2005. "Effects of Foreign Aid on GDP Growth and Fiscal Behavior : An
Econometric Case Study of Bangladesh", The Journal of Developing Areas, Vol. 38
(2). pp. 95 -117.
Rahman, Akhlaqur. 1984. Foreign Aid and Self-reliant Growth - The Case of Bangladesh.
Dhaka: Jahangirnagar University Press.
Raihan, S. 2010, Policy Priorities for Foreign Aid Reform in Bangladesh, Paper presented at
the international conference organized by IPS-FES, Colombo, 29-30 July 2010.
Todaro, M. and Stephen C. Smith, Economic Development, 8th ed. (Indian Branch, Pearson
Education pte. Ltd, 2004)
World Bank, 2007. World Development Indicators (Washington, D.C.: World Bank, 2007)
World Bank, 2015. World Development Indicators (Washington, D.C.: World Bank, 2015)

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Appendix

Table 1: Foreign aid flows to Bangladesh (197/72 – 2013/14)

Year Commitment Disbursement

($ US million) ($ US million) food commodity project loan (%) grants (%) bilateral (%) multilateral (%)
aid (%) aid (%) aid (%)

1971/72 610.8 270.8 47.9 50.8 1.3 9.5 90.5 85.7 14.3
1975/76 958.9 800.5 39.2 45.2 15.6 70.8 29.2 71.4 28.6
1980/81 1559.2 1146.5 16.9 34.2 48.8 48.2 51.8 72.1 27.9
1985/86 1661.5 1305.9 15.5 30.1 54.4 58.2 41.8 47.9 52.1
1990/91 1370.3 1732.6 15.5 23.6 60.9 52.0 48.0 39.3 60.7
1995/96 1279.6 1443.8 9.6 15.9 74.6 53.1 46.9 52.4 47.6
2000/01 2052.8 1368.8 3.7 13.4 82.9 63.2 36.8 50.9 49.1
2001/02 878.8 1442.2 2.5 10.7 86.6 66.8 33.2 49.1 50.9
2002/03 1692.6 1585.0 3.0 11.1 85.9 67.8 32.2 42.7 57.3
2003/04 1923.1 1033.4 3.1 0.0 96.9 67.2 32.8 49.0 51.0
2004/05 1580.7 1488.5 2.2 1.5 96.3 83.6 15.4 29.5 70.5
2005/06 1787.4 1567.6 6.2 0.0 93.8 68.1 31.9 26.4 73.6
2006/07 2256.1 1630.6 3.7 0.0 96.3 63.8 36.2 24.3 75.7
2007/08 2842.4 2061.5 5.4 0.0 94.6 68.1 31.9 22.9 77.1
2008/09 2444.3 1847.3 2.8 0.0 97.2 64.4 33.6 23.4 76.6
2009/10 2983.7 2227.8 4.2 0.0 95.8 71.3 28.7 16.3 83.7
2010/11 5968.6 1776.7 3.1 0.0 96.9 58.1 31.9 24.4 75.6
2011/12 4764.5 2126.5 3.3 0.0 96.7 72.3 27.7 35.0 65.0
2012/13 5854.6 2811.0 1.8 0.0 98.2 74.2 25.8 33.9 66.1
2013/14 5844.2 3084.4 1.2 0.0 98.8 77.9 22.1 44.1 55.9

Source: Economic Relation Division (ERD), Ministry of Finance, Government of the People's Republic of Bangladesh, 2015.

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Table 2: Indicators of aid dependency

Items fiscal year

1981 1991 2001 2005 2010 2013

1. As % of GDP
ODA disbursed 5.78 5.59 2.86 2.10 1.60 2.90
Export 3.66 5.55 13.52 14.42 16.00 19.50
Trade (export+import) 13.50 16.80 28.00 33.40 40.80 44.10
Remittance 1.91 2.47 3.94 6.70 9.80 9.20
Debt 37.4 56.1 41.5 31.3 21.1 19.3
Debt service 3.0 2.2 2.3 2.3 1.6 2.9
2. Export as % of import 37.10 49.50 63.30 65.80 68.10 81.60
3. Debt service as % of export 28.8 15.9 9.8 8.7 5.0 6.4
Source: 'Moving Out of Aid Dependency: Reflections on LDC Experience'- by Dr. Debapriya Bhattacharya,
presented at a UN conference in 2007. The data are updated from World Bank (2015), and Ministry of Finance
of Bangladesh (2015).

Table 3: Aid as % of ADP and budget

Items decades

1970s 1980s 1990s 2000-2008 2013

Aid as % of ADP 100.22 98.95 70.02 48.32 42.90

Aid as % of budget 57.85 52.41 32.48 16.95 7.64
Source: 'Policy Priorities for Foreign Aid Reforms in Bangladesh'- by Selim Raihan, presented at an
international conference at Colombo, Sri Lanka, 2010. The data are updated from Ministry of Finance of
Bangladesh (2015).

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