Foreign aid account in context of Bangladesh

From our schooling in international economics, we come to know that a deficit in current account is not always a curse; nor the surplus always breeds blessings. The former may encroach benefits and the latter might claim some costs, at times. However, since the slide in the surplus in current account is raising storm over a cup of tea, we shall limit our comments on the issue of hugely growing demand for foreign exchange in the market. And, as readers might get fatigued with figures, we shall try to be qualitative in the total approach. A priori, we can hypothesize that the current deficit is a blessing, not a curse. We can also call it a 'growth-pain'. As an economy experiences a higher rate of growth, some of the side-effects are reflected in terms of inflation and foreign exchange shortage. The Bangladesh economy is expected to reach a growth rate of 6.7 per cent during the current fiscal year. Available indicators so far on agricultural, industrial and services sector show that the economy is poised to achieve the targeted growth rate This necessitates an investment rate of about 27 per cent of our gross domestic product (GDP).

To meet this investment target, import payments are likely to shoot up, especially in the face of import-intensive activities. For example: (a) imports of capital machinery and raw materials, needed for running the wheels of the economy, warrant huge imports; (b) if we allow rental power stations, for example, import bill on petroleum would increase, given its price; (c) to keep food inflation low, food grain imports also claim a part of the total import-pie. By and large, if the imports are used for productive purposes, the current pressure may yield short-term pains but bring long-term pleasure in terms of economic growth. Is there any indication to that? The quantum of industrial production index tends to show that it has significantly increased over time, pointing to increased imports being used to grease industrial production. In this context, one can possibly take into due cognizance the concern of the critics: a part of the supply of dollar could have been siphoned-off through over- and under-invoicing of imports and exports. This is an issue of rigorous research that falls outside the purview of the present write-up. The capital account in the balance of payments is called the mirror image of the current account. In other words, a deficit/surplus in the current account is duly matched by the surplus/deficit in the capital account. The moot question is: how much of the on-going current account deficit can be matched by the inflows in the capital account? In the capital account, there are many items but foreign aid and grants is obviously the most important ones. Available estimates show that aid inflow has decreased over the years. This year particularly, the construction of the Padma Bridge will bag in a substantial amount of foreign exchange. If that is so, much of the woes would be waned. However, the million dollar question that continues to hunt is the absorptive capacity of the economy in the utilization of foreign aid.






There are many reasons for which aid money can not be utilized on time and for which aid in the pipe line does not get disbursed. The following are the reasons as to why foreign money is not utilized on time:


(a) In funding a project, the requirements from donors' side become time consuming and tedious, taking much longer time than justified. Added to this is the conditionality imposed by the donors and Bangladesh's wrestling in reigning over their demands. The donors must shed their traditional mind-set to help Bangladesh achieve its development goals.


(b) The important constraint is the bureaucratic hurdle. Bangladesh's bureaucracy is infamously known as one of the most inefficient ones in talents, if not in making foreign trips. The bureaucrats sit on file related to development projects causing a dilly-dally. Thus, unless bureaucratic barricades can be bashed, the chances of more aid inflow would remain a remote possibility.


© Donors think that some of the projects are economically unsound and driven by political interests to negate any commitment of disbursement. And finally infrastructural problems and absence of good investment climate constrain inflow of foreign direct investment (FDI) which is another source of supply of foreign exchange. The on-going drive at meeting energy crisis and the reforms at governance should pay a dividend in the medium- to long-run.






By and large, given that already a huge amount of foreign exchange is in the pipe line and given that the constraints are reduced to make them available on time, the current crisis in the foreign exchange market is likely to witness a modicum of calm in the very near future. Meantime, the Bangladesh economy would have to pay price in terms of inflation and volatility in the foreign exchange market. But come what may, there is a little chance that the foreign exchange crisis would hit the bottom line when our foreign exchange reserve has to be ready to buy three-months' imports. Meantime, assuming no deep dip in remittances and assuming that imports capital goods and raw materials would enhance export earnings, the 'crisis' may turn into a comfort. The United Statespresidency is a complex role, encompassing both domestic and foreign policy responsibilities. As a major world power, the United States has a large role in the realm of foreign policy, and it is the duty of the president to assume the role of an international figurehead. Aside from being one of the most politically powerful nations, the United States enjoys its status as one of the wealthiest nations in the international system. However, immense political power and wealth have resulted in the need for theUnited States to devote a significant amount of its resources toward the assistance and development of those lesser-developed countries throughout the world.


The developing world constitutes a significant portion of our planet, with underdeveloped countries existing in almost every region of the world, including the Middle East, North Africa, Sub-Saharan Africa, Asia, Latin America, and the Caribbean. There is not one simple cause for underdevelopment in the Third World, and developing nations suffer from a host of developmental issues, such as poor governance, corruption, war and revolution, insufficient economic systems, and various public health crisis. As an international leader, the United States has traditionally accepted the responsibility to alleviate some of the suffering in the Third World and has allocated resources toward the development of poor nations. Within the United States government, agencies like the United States Agency for International Development (USAID), under the guidance of the U.S. State Department, have been established to develop and implement humanitarian and development projects to those countries most in need.


Furthermore, a major focus of the Bush administration was the notion of accountability. These two elements, security and accountability, played a critical role in the formation of developmental aid policy under the Bush administration. Ultimately, the key to assessing any policy decision is to examine to what extent the stated goals were achieved in practice. This chapter will examine the formation, details, methodology and goals of the central developmental assistance policy during the George W. Bush presidency – the Millennium Challenge Account. In addition, this chapter will examine how successful the Millennium Challenge Account was in achieving its goals of independence and wealth for the Third World, and security for the United States.


In February 2003, President Bush introduced legislation that proposed new methods for the delivery and implementation of developmental assistance for Third World nations. This proposed legislation would establish a new system for the selection, delivery and administration of developmental assistance. The stated goal of the legislation was to dramatically increase the level developmental assistance by $5 billion a year by fiscal year 2006, and to establish an account for developmental aid, the Millennium Challenge Account (MCA), which would be administered by a small government-run corporation known as the Millennium Challenge Corporation (MCC).2 Bush also outlined new criteria and standards for the administration of development assistance. According to the proposal, countries would be eligible for aid from the MCA if they met the new standards set forth by the MCC. For the distribution of developmental assistance, the Bush Administration believed that there was a direct link between financial accountability and developmental success; therefore, the standards set forth by Bush included a country’s ability to rule justly, to invest in its people, and to encourage economic freedom.3 Only those countries that satisfied those criteria would be eligible for increased aid and assistance from the MCA. Bush noted that the key to ending poverty throughout the world was tying increased assistance to performance and accountability, and that the MCA would promote the need for country ownership, financial oversight, and accountability.4 Rather than subscribing to older methods of distributing developmental aid, the Bush Administration had outlined clear guidelines that they believed would guarantee results in the Third World, ultimately ending, or at least drastically alleviating, the need for further U.S. assistance.


The legislation that followed, Millennium Challenge Act of 2003, largely reflected the goals that President Bush had laid out in his initial proposal. The Millennium Challenge Act and its stated goals and ideals appealed to both Democrats and Republicans in Congress, and the legislation passed by an overwhelming majority of 382 to 42 in the House of Representatives.5 As established in the legislative proposal, the Millennium Challenge Act of 2003 created the Millennium Challenge Corporation, which would be responsible for selecting and administering assistance and programs related to the MCA. Under the legislation, the Board of Directors would consist of the Secretary of State, the Secretary of the Treasury, the administrator for USAID, the chief executive officer of theMCC, and the U.S. Trade Representative.6 Four other members on the Board would be selected by the President from a pool of individuals nominated by the minority and majority leaders in both houses of Congress.7 The act also outlined many limitations for the uses of developmental assistance. According the to legislation, developmental assistance could not be allocated for military training, anything that may prove to hazardous to the environment, abortions and sterilization, or any project that may result in substantial U.S. job loss.8


Also contained within the Millennium Challenge Act of 2003 is the methodology for the distribution of MCA funds. Under the new plan, developmental aid would not be distributed to eligible countries in the form of a blank check to be utilized the way in which the recipient country sees fit. The Millennium Challenge Act of 2003 established the Millennium Challenge Compact, which were mutual agreements between the United States, specifically the MCC, and the recipient country outlining the stated goals and objectives for various development projects. Section 609 of the Millennium Challenge Act outlines the roles of these compacts:


The Board, acting through the Chief Executive Officer of the Corporation, may provide assistance for an eligible country only if the country enters into an agreement with the United States, to be known as a ``Millennium Challenge Compact'', that establishes a multi-year plan for achieving shared development objectives in furtherance of the purposes of this title. The compacts themselves carried a number of requirements. In total, the Millennium Challenge Act outlined eleven requirements that must be met as part of the compacts. For example, the compacts had to contain the specific objectives and responsibilities of both the recipient and the United States, benchmarks to monitor progress, a multi-year financial plan, a plan to ensure accountability, and a plan to demonstrate how the recipient country planned to continue developmental projects once the compact has expired.10 In addition to these requirements, recipient countries had to demonstrate that a national development strategy was in place. According to the legislation, a national development strategy meant,


…any strategy to achieve market-driven economic growth and eliminate extreme poverty that has been developed by the government of the country in consultation with a wide variety of civic participation, including nongovernmental organizations, private and voluntary organizations, academia, women's and student organizations, local trade and labor unions, and the business community.11


Undoubtedly, these Millennium Challenge Compacts were intended to ensure a holistic approach to development in each recipient country. Funding from the MCA was contingent upon each recipient country satisfying these strict requirements. These guidelines for funding fall in line with the Bush administrations desire for accountability. While the United States would maintain a position as a strong partner, the MCC left much of the responsibility to the countries themselves. By requiring recipients to establish plans for the continuation of development following the expiration of MCA compacts, the Bush administration was essentially forcing countries to take the reigns of their own projects and to truly work toward economic growth and independence.


The criteria for the selection of countries that would be eligible for developmental assistance from the MCA was the central and most innovative concept behind Bush’s newly adopted legislation. As established by the Millennium Challenge Act, the Board of Directors of the MCC would be assigned the task of establishing candidate countries and, out of those, selecting those that would be eligible for assistance. A country would be deemed eligible, if in relation to the other candidate countries, it could demonstrate that it possessed the criteria for eligibility, specifically its ability to rule justly, promote economic freedom and activity, and invest in its citizens.12 The primary methodology behind the selection of eligible countries was to compare the candidates to one another using a series of sixteen indicators.13 The indicators used by the Board of Directors corresponded to the three major criteria for selection – ruling justly, promoting economic activity, and investing in people. In the 2004 Criteria and Methodology report, the Board took into account indicators such as Civil Liberties, Political Rights, Voice and Accountability, Government Effectiveness, Rule of Law andControl of Corruption as they related to the notion of a country’s ability to rule justly.14 Related to a country’s encouragement of economic freedom, the Board used indicators such as the Country Credit Rating, 1-year Consumer Price Inflation, Fiscal Policy, Trade Policy, Regulatory Quality andDays to Start a Business.15 Lastly, with respect to investment in a country’s citizens, the indicators established were Public Expenditures on Health as a Percent of GDP, Immunization Rates, Public Primary Education Spending as a Percent of GDP and Primary Education Completion Rate.16Clearly, these indicators represent many of the factors that are typically identified as the major causes for underdevelopment in the Third World. These indicators were intended to provide an objective basis upon which to compare all candidate countries. In order to be selected as eligible, a country had to be “above the median in relation to its peers on at least half of the indicators in each of the three policy categories and above the median on the corruption indicator.”17 However, even with these indicators in place, the Board of Directors still reserved the right to use discretion in interpreting and evaluating the information when making its final decisions.18


In subsequent years, the indicators for eligibility changed slightly as conditions in the Third World changed. For fiscal year 2005, the MCC substituted the indicator for Primary Education Completion rates for a more specific indicator, Girls’ Primary Education Completion Rates.19 The rationale behind the substitution was to not only demonstrate the need for eligible developing countries to closely invest in the education of its people, but to also stress the importance of women and girls and their capabilities as productive members of an economic system.20 As more and more reliable and consistent data became available to the MCC, further adjustments to the indicators were made in following fiscal years. In FY06, the Cost of Doing Business became a new indicator, replacing Country Credit Rating under the economic activity criterion. According to the MCC, the cost of doing business indicator proved to be stronger than the country credit rating indicator, as the cost of doing business is easily measurable and often results directly from government policy.21 For FY08, the MCC and the administration made several changes to the indicators and incorporated newer, more updated indicators as well. For instance, in order to strengthen the Economic Freedom category, the MCC combined Days to Start a Business and Cost to Start a Business into one indicator entitled Business Start-Up, utilizing data and statistical information from the International Finance Corporation of the World Bank.22 Additionally, the MCC included new factors, specifically related to natural resources and land, in its list of indicators. Falling under the criteria of Economic Freedom was a new indicator assessing Land Rights and Access. This new criterion was intended to assess a candidate government’s ability and willingness to “secure property rights and sound economic policy.”23 Lastly, Natural Resource Management was included under the criteria for Investing in People because, according to the MCC, the new indicator would assess the governments ability to invest in its resources, especially in ways which “will enable poor people, particularly poor women and children, to live health and productive lives.






Aid Modality and Fund Management of Health sector of Bangladesh






In the current mechanism, World Bank (WB) administers the pooled funds on behalf of all the pool donors. Ministry of finance (MoF) uses the current FOREX account with Bangladesh Bank. The aid modality for HNPSDP will follow the current mechanism with some modifications considering the experiences to date, and at the same time further discussion will continue to find out alternative options of fund management to increase government ownership in the program. The modified version will encompass joint analytical work, joint financing arrangement (JFA) between Development Partners and GOB, the establishment of a Pooled Funding Committee including GOB representatives, open eligible expenditure criteria, modified performance-based financing arrangement and procurement per-review with threshold revisited and streamlining the process. A TA should be engaged from the beginning to manage the fund and develop the capacity of the FMAU.

The process for fund release, expenditure, accounting and reporting of the pooled fund and the subsequent replenishment of the pooled fund will remain same as HNPSP, i.e. FMAU will compile and verify the reconciled SoE sent by the Line Directors and send to the disbursement office for reimbursement.

In view of the above it is evident that when probing the plight of nations of the third world, a simplistic approach to solving some of the developmental challenges would be to allocate money and resources to the poorest and most depraved nations; however, development is not this simple, as the challenges are complex and the solutions are not always clear. Building upon the institutions and methodologies of the past, the Bush Administration ushered in a new era of international development and foreign aid policy. Prior to Bush, it was often assumed that money was flowing into developing countries, but was ultimately ending up in the hands of corrupt government leaders who were using it for less-than-honorable purposes. Especially following the September 11th attacks, the Bush Administration began to focus on international development as a national security issue. As noted by Bush in regards to his development programs, “We also work for prosperity and opportunity because they help defeat terror.”1 According to the administration, without a properly function government and thriving economy, Third World countries would theoretically become more susceptible to becoming havens for terrorists.