AIIB Loans to Bangladesh: A New Arena of Economic Diplomacy?

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The Asian Infrastructure Investment Bank (AIIB) is a multinational development bank aimed at improving Asia’s economic and social prospects. It is the second-largest multilateral development institution in the world. There are presently 106 members in the bank. Bangladesh is a founder member of the bank established by the Chinese government.

Furthermore, the AIIB should examine its varied lending requirements since the world economy is struggling, and Bangladesh is no exception. Additionally, it is consistent with Bangladesh’s aim of closing the infrastructure deficit and achieving sustainable development, as outlined in Bangladesh’s Perspective Plan 2021-2041. Nonetheless, Bangladesh’s economic diplomacy has shown its effectiveness by enlisting non-Western aid at a time when the globe is seeing a divided gesture between western and non-Western countries. Nevertheless, the support emphasized Bangladesh’s balanced position in this big power conflict.

As a consequence, it is indisputable that the world economy is in the grip of its greatest crisis in recent memory, which has had a tremendous influence on the whole energy industry. Bangladesh, a developing nation, is also feeling the effects of this tremendous shift. As a result, the AIIB authorized two large assistance projects in the power sector in January 2023. The AIIB granted $110 million for a 584 MW combined-cycle gas turbine CCGT power plant to expand the availability of high-efficiency gas power production capacity in Bangladesh, reducing the use of a more polluting and costly source of electricity. The AIIB, on the other hand, granted a $165 million loan for a power distribution system renovation and expansion in Bangladesh.

Recent Assistance in the Energy Sector; A New Milestone 

A combined-cycle gas turbine (CCGT) power plant is basically an electrical power plant that combines a gas turbine with a steam turbine to achieve more efficiency than would be attainable separately. The Project entails the planning, financing, engineering, construction, operation, and maintenance of a greenfield gas-fired combined-cycle gas turbine (CCGT) plant with a capacity of 584 megawatts (MW), to be constructed on a build-own-operate (BOO) basis and used as an independent power producer (IPP) facility. In addition, the project has been designed in accordance with the Environmental and Social Policy (ESP 2019) of the AIIB. This policy includes the Environmental and Social Standards (ESSs) as well as the Environmental and Social Exclusion List.

In addition, the price of crude oil on a worldwide scale has increased significantly over the course of the last year, and there have been interruptions in the supply of LNG in recent months. From this point of view, a new CCGT project is very necessary for Bangladesh in order for the country to make use of its own natural resources in order to guarantee its future power supply. Therefore, on the one hand, the project exemplifies the breadth of Bangladesh’s diplomatic approach, and on the other hand, it serves as a hedge against potential threats to energy security in the future.

In addition, the Asian Infrastructure Investment Bank has given its approval for a loan in the amount of $165 million to be used for the modernization of the electricity distribution system. The goal of the project is to increase the number of people who have access to electricity by installing 2.5 million additional service connections in rural areas and converting 85 circuit kilometers of overhead distribution lines into subterranean cables in the northern part of Dhaka. It is anticipated that 12.5 million people living in rural regions would benefit from it, and that it will produce a substantial influence that will be maintained on the economic and social aspects of rural development. A loan will be provided to Bangladesh in order to fund the project, and then that money will be transferred to Infrastructure Development Co. Ltd. (IDCOL). IDCOL will then lend the cash to privately held enterprises in Bangladesh (sub-borrowers) in order to assist infrastructure projects that meet the eligibility requirements. In addition, the loan has a payback term of 18 years, with a grace period of 5 years included in that term. The commitment charge for funds that have not been withdrawn is also 0.25% every year, on top of the annual front end cost of 0.25%. The interest rate on the loan will be equal to 0.60 percent of the AIIB’s borrowing cost margin (variable).

Boosting Economic Diplomacy

The recent economic development of Bangladesh is a great example of how one country may experience rapid expansion and progress. As a consequence, successful economic diplomacy is also a direct contributor to the expanding economy. Against the background of the ongoing economic crisis throughout the world, the recent assistance that Bangladesh has received from the AIIB may be observed in numerous elements of the country’s cautious economic diplomatic gesture.

To begin, the term “economic diplomacy” refers to the use of diplomatic efforts to promote a nation’s economic interests, such as trade, investment, and economic development. This may be accomplished via a variety of means. Because China is the driving force behind the Asian Infrastructure Investment Bank (AIIB), Bangladesh has a massive economic link with China. When Bangladesh introduced an energy cooperation with China, it naturally established a channel for more Chinese investment in the energy sector. In addition, attaining energy self-sufficiency would not only boost the economy but also provide further help in the fight to overcome the present energy issues.

Second, the support provided by the AIIB makes reference to the basics of economic diplomacy, which may be defined as the partnership between the public and private sectors that is used to negotiate and carry out the terms of international economic accords. Both programs underlined the significance of cooperation between the public and private sectors, which would one day lead to the establishment of a more formal cooperative structure.

Thirdly, economic diplomacy covers attempts to solve global economic concerns like as poverty, inequality, and sustainable development. This aspect of economic diplomacy is particularly important in today’s political climate. As a result, the recent assistance is also an excellent illustration of timely collaboration, diversity, and creativity to combat the ongoing global economic crisis.

Finally, this strategy not only exemplifies Bangladesh’s prudent diplomatic gesture toward a key developing partner, but also demonstrates the diversification of energy cooperation. As a direct consequence of the significant effect that the conflict in Ukraine has had, Western energy superiority has been rocked, and practically all of the energy distribution or generating processes in Bangladesh are associated with help from the west. The prolonged and severe winter is having a negative impact on the economy of the western world by driving up the price of energy. As a direct consequence of this, new players entered the field of energy distribution, which naturally resulted in an increase in market pricing. Therefore, the global energy sector is now confronted with significant obstacles, and Bangladesh, which is a developing nation, is also experiencing its good proportion of difficulties. As a result, Bangladesh was left with no option other than to link new entities in the energy sector in order to maintain the fabled economic voyage.

In conclusion, Bangladesh is well on its way toward securing its energy security now that it has achieved energy self-sufficiency. In addition, Bangladesh takes a holistic approach to the situation and involves all of the development partners in the process. This comprises a continuous supply of energy from both local and foreign sources, a good strategy for energy diversification that incorporates both renewable and non-renewable sectors, and coordinated energy infrastructure resilience from western and non-western players. As a result, the recent support provided by the AIIB in the energy area has shown Bangladesh’s economic diplomacy on a deeper level than ever before.

– S. M. Saifee Islam is a Research Associate at the KRF Center for Bangladesh and Global Affairs (CBGA).

Published in Eurasia Review [Link] and the Geopolitics [Link]