First of all I would like to thank the Almighty Allah for giving us the strength, and the aptitude to

complete this report within due time. We are deeply indebted to our course teacher, mentor,
and counselor, Marufa Akter mam for assigning us such an interesting topic
named “ the Impact of foreign aid in the development of Bangladesh ”. We also express the
depth of my appreciation to our honorable course teacher for
his suggestion and guidelines, which helped us in completing this report.
 Introduction
Foreign aid refers to the transfer of goods, capital or services from an international organization
or a country to offer some benefits or help to the recipient country. This aid comes in several
forms for example; military, emergency humanitarian or economic and development aid.

Foreign aids are provided in a country in two forms. One is foreign grants and another is foreign
aid. In this assignment paper we tried to show what factors are affected by foreign aid. Beside
this we tried to show that how Exchange rate, GDP, Inflation, & Lending Rate (dependent
variable) all development factors are influenced by Foreign aid (independent variable)..

Objective of the assignment

The assignment paper has the following objectives:

1. To find out the impact of foreign aid on every development sectors such as economy.
2. To find out the explanatory power of foreign aid.
3. To find the impact of foreign aid in economy through historical data analysis.

Sources of Data

I have no option to use primary data that’s why here the secondary sources of information were
used. The secondary sources are:

 Books.
 Economic Relation Division.
 Government and non-government`s Website.

Limitations

While conducting the report on “the Impact of foreign aid in the development of Bangladesh”
some limitations were yet present there:

Because of time shortage many related area can’t be focused in depth.

Recent data and information on different activities was unavailable in some cases.
According to Oxford Dictionary:

“Foreign aid is economic, technical, or military aid given by one nation to another for
purposes of relief and rehabilitation, for economic stabilization, or for mutual defense”.

International relations: aid (also known as international aid, overseas aid, or foreign aid) is
from the perspective of governments a voluntary transfer of resources from one country to
another.

Carol Lancaster: (Former USAID official), in her book Foreign Aid (2007) defines foreign aid
as: "a voluntary transfer of public resources, from a government to another independent
government, to an NGO, or to an international organization (such as the World Bank or the UN
Development Program) with at least a 25 percent grant element, one goal of which is to better the
human condition in the country receiving the aid."

According to Banglapedia : Foreign aid is essentially economic aid and is provided

internationally on a governmental basis Foreign Aid

Foreign aid refers to the transfer of goods, capital or services from an international
organization or a country to offer some benefits or help to the recipient country. This aid
comes in several forms for example; military, emergency humanitarian or economic aid. It is
aimed at providing help in terms of crisis or disaster. Foreign aid in economic terms is served
basically for infrastructural development. There are four types of foreign aid mostly practiced
and Bangladesh get all four types of aid as per its need. Those are given below:

Bilateral aid – when the capital flows from a developed nation to a developing nation.
Multilateral aid – when the capital flows to developing nations from a world agency such as the
World Bank.

Tied aid – when funds are used to buy imports from the donor country or for a specific project.
Project aid – when the funds are used to finance a particular project.
Types of Foreign Aid: The term 'Foreign Aid' is broad one. It refers to any money or resources
that are transferred from one country to another without expecting full repayment. Official
Development Assistance (ODA) includes all grants and concessional or soft loans that are
intended to transfer resources from More Developed Countries (MDCs) to Less Developed
Countries (LDCs) with the intention of fostering economic development.. To be considered
foreign aid a flow of funds should meet two simple criteria:

1. It should be non-commercial from the donor’s point of view.

2. It should be concessional so that the interest and repayment is less stringent or softer than
commercial terms.

Foreign aid can be classified under various categories as following…

Bilateral aid: when the capital flows from a developed nation to a developing nation
Multilateral aid: given through international organizations such as the World Bank rather than
by one specific country

Tied aid: when funds are used to buy imports from the donor country or for a specific project
Project aid: when the funds are used to finance a particular project
Programmed aid: Aid is given for a specific sector e.g. funding of the education sector of a
country.
Budget support: A form of Program Aid that is directly channeled into the financial system of
the recipient country.
Emergency or short-term aid: needed after sudden disasters such as the 2000Mozambique
floods or the 2004 Asian tsunami.
The net foreign aid disbursed by bilateral and multilateral sources increased over the past two
decades, with a significant annual increase in the rate of net foreign aid disbursed since the year
2010. During the period between 2001 and 2021, the top five bilateral donors were Japan (USD
71,250 Mn), United Kingdom (USD 44,835 Mn), United States (USD 31,933 Mn), Germany
(USD 14,666 Mn), and the Netherlands (USD 11,648 Mn) and while the top three multilateral
donors were International Development Association (USD 107,260 Mn) EU Institutions (USD
19,803 Mn), and United Nations (USD 12,799 Mn),

Between 2001 and 2021, the highest cumulative investment by sectors was Economic
Infrastructure and Services with a cumulative investment of USD 40,488 Mn, this includes aid to
the Transport, Communication, Energy, and Financial Institutions among others. The second
highest was Social Infrastructure & Services with USD 25,710 Mn, which includes aid to
Education, Health, Water Supply and Sanitation, along with others.

Total ODA disbursed by bilateral and multilateral.

2007-2008: Cyclone Sidr struck the southwest coast of Bangladesh in mid-November 2007. It
was a devastating storm that caused damages estimated by the Joint Damage, Loss, and Needs
Assessment (JDNLA) of approximately USD 1,700 Mn. Along with that, the monsoon floods
were particularly heavier than expected which resulted in the loss of agriculture products and
destruction of property which is estimated to be worth USD 1,100 Mn]

2009-2011: During 2007-2008 the United States of America went through the greatest
financial crisis since the great depression in the 1930s. This caused a domino effect which had
great implications in world policies and specifically global aid policy. Following the bankruptcy
of Lehman Brothers, many European countries started to have a debt crisis, more specifically
Greece and Iceland. So global aid policy shifted because donor countries had to provide stimulus
packages to stabilize their economy, hence the foreign aid received by Bangladesh naturally fell
during the period 2009-2011.

2013: The collapse of Rana Plaza and the fire in the Tazreen Fashions factory on the outskirts
of Dhaka in 2013, two of the biggest industrial accident in Bangladesh, highlighted the severe
lack of labor rights in the country. After the initial backlash faced by Bangladesh, it was quickly
realized in order to improve the working conditions of the factory worker, specifically RMG
workers, foreign assistance in terms of both financial technical aid was required. The United
States sent over a labor attaché to conduct a thorough investigation into the country’s labor
practices and highlighted key areas of improvement. Since 2011 the Department of Labor of
United States has provided at least USD 23.2 Mn on labor rights program in Bangladesh.

2017: Violence in the state of Rakhine, Myanmar, drove approximately 742,000+ Rohingya
people to the Southwest region of Bangladesh.[15] Initially, various donor agencies, both
Bilateral and Multilateral have stepped up to support Bangladesh to provide aid to the refugees.
A total of USD 537 Mn has been sent to Bangladesh since 2017 to meet the needs of the
refugees. The majority of the funding, approximately USD 115 Mn, has been used for food
security while a further USD 29 Mn has been dedicated to WASH. Around 27% of the total
funding was provided by the United States while 16% was provided by the United Kingdom.
Among the multilateral donors, Central Emergency Response Fund provided 7% of the total aid.

2020: The global pandemic in 2020 increased the flow of foreign aid in Bangladesh by 167% of
the targeted foreign aid assistance. Along with that multilateral agencies such as IMF and The
World Bank have provided emergency loans of USD 732 Mn and USD 1,050 Mn respectively to
help Bangladesh during this crisis and the United States government has provided USD 173 Mn
in aid.

ADB's assistance 2020-2021 : ADB in 2020-2021 committed $4.56 billion for projects and
programs in Bangladesh including more than $2.6 billion for managing the immediate economic,
social, and health-related impacts of the COVID-19 pandemic.

The assistance includes $500 million in rapid budget support approved in April 2020, within
around one month after receiving the Government request. This support forms part of ADB’s
COVID-19 Active Response and Expenditure Support (CARES) Program, which is funded
through the COVID-19 pandemic response option (CPRO) under ADB’s Countercyclical
Support Facility. This budget support has built on an earlier concessional emergency assistance
and a grant to help provide for the immediate needs of medical supplies and logistics support.

Foreign aid to developing countries has been an

important source of finance to enhance economic growth. However, numerous studies of aid
effectiveness have failed to arrive at a consensus. Some studies on aid effectiveness found that
foreign aid adversely affected domestic resource mobilization. While others hold the view that
aid has a positive impact on growth. Now the question is how does foreign aid affect the
economic growth of developing countries?

Donor countries generally give aid because it is in their own interest to do so. Undoubtedly some
aid is given with humanitarian motives in mind; however, most foreign aid is given for variety of
political, strategic and economic reasons that benefit the donor countries in the longer term.

Military Aid : Although the defense of a country plays an important role in its development and
business activities, a school of thought based on an economic viewpoint often excludes it from
foreign aid because it does not create an immediate and direct effect on the economic activities
of the country. Example: Bangladesh India join force during liberation war of Bangladesh in
1971

Political Reasons: Official Development Assistance (ODA) is often designed to achieve

political objectives other than increasing prosperity in recipient countries. In the United States,
national security considerations often influence foreign-aid decisions. Example: In Japan, aid has
historically flowed disproportionately to neighboring Asian nations in which Japan has the
greatest commercial interests, and has often been tied to purchases of Japanese products. Such
as: Toyota, Honda, Nissan etc.

Economic Reasons: Official Development Assistance (ODA) is often designed to achieve

economic objectives rather than political reasons.
 Filling Gaps
 Self-interest of Donor Country
Filling the gaps Providing aid to Less Developed Countries (LDCs) ensures that the savings gap
and the foreign exchange gap are filled. There should also be technical assistance to ensure that
the capital is efficiently used. For some economists, development is synonymous with the
creation of a sizable, modern manufacturing sector, as opposed to reliance on exports of primary
products. The international product life cycle theory suggests that as countries industrialize they
off-load more labor-intensive industries to countries in earlier stages of industrialization.
For example: According to Bepza top foreign 5 enterprises in Bangladesh

https://www.bepza.gov.bd/content/dhaka-list-of-investors
Self Interest of Donor Countries

Less and less development assistance is given in the form of outright grants and increasingly
interest is being charged albeit at concessionary rates. Tied aid is also becoming more prevalent.
Tied aid occurs where conditions are place by the donor upon the recipient about what they use
the aid assistance for. Usually the recipients are required to purchase the exports of the donors.
This may be a more expensive option than purchasing the capital from sources other than the
donors. Tied aid may help fill savings and foreign exchange gaps; however, it may not always be
in the best interests of the recipient country.

The positive impact of foreign aid can be expressed as following:

1. To avoid Starvation and Malnutrition

Foreign aid is useful to avoid starvation and malnutrition resulting from drought and natural
disasters in the poorest developing countries. Although this use of foreign aid does not
directly speed up development process, it is important on humanitarian grounds. Foreign aid
is most effective when it acts as a catalyst to greater domestic development effort by
overcoming bottlenecks

2. To Invest More than Savings: In developing countries like Bangladesh the savings level is
very low as compared to their required investment level. Foreign aid makes them able to
fulfill this gap and undertake new projects for their development and prosperity. In this way
foreign aid makes it possible to invest more than savings.

3. Import More than the Exports In developing economies the export volume is low and
consists of raw material and agricultural products whose prices are low in international
markets, which is why normally developing economies have low export earnings. Whereas
they have to import a lot of goods and services, such as machineries, new technologies,
experts’ services, medicines etc. for their development. Foreign aid makes it possible for
them to import more than their export earnings and accelerates their economic development.
4. Capital Formation and Vicious Circle of Poverty: Foreign aid is essential for capital
formation and to break the vicious circle of poverty. People hardly fulfill their basic needs.
Thus when there is none or lack of savings, there will be low capital formation in the
country.
5. Technological Progress: In a developing country like Bangladesh production techniques are
backward and less efficient. As a result the cost of production per unit is relatively high.
Because of low skills of manpower and low quality of capital goods, productivity of labor
and capital is also quite low. Foreign aid not only helps to overcome the deficiency of capital
but it also helps to overcome the technological backwardness. Foreign aid, besides
transferring physical and financial capital to developing countries, also brings in the technical
 know-how, highly qualified persons with administrative experience and advanced techniques
of production. It provides opportunities for local labor to be trained in new skills. Thus
foreign aid helps to accelerate the rate of economic growth in the aid-recipient country.

Example: Construction work of Rooppur nuclear power plant runs under Russian labour.

6. Provision of Overhead Capital and Building of Basic Infrastructure: In countries like

Bangladesh foreign aid can help to build overhead capital and basic infrastructure. Overhead
capital like railways, highways, roads, canals, power stations, can provide basic infrastructure
for economic growth in the country.
7. Establishment of Basic Heavy Industries: A developing country like Bangladesh cannot
establish basic heavy industries from its own resources because these industries require huge
amounts of financial capital along with state of the art modern machinery. Foreign aid can
help to acquire financial resources required for the establishment.

Example: multinational company in Bangladesh

Berger Paints Bangladesh Limited.

British American Tobacco Bangladesh Co. Ltd.
Bureau Veritas (BIVAC) Bangladesh Ltd.
DHL Worldwide Express (Bangladesh) Pvt. Ltd.
Duncan Brothers (Bangladesh) Limited.
8. Increase in Employment Opportunities: Foreign aid increases employment opportunities
by helping build overhead capital; establish new industries, by utilization of idle natural or
other resources and by opening up inaccessible regions. Usually import of capital goods
made possible by foreign aid, help to increase employment opportunities in urban areas.

Example: Telecommunication industry in Bangladesh. A great number of people work

here.

The negative role of foreign aid in the development of developing countries is given below:

1. Debt Servicing There is a burden of debt service (repayment of principal and interest) for
development loans. There has been a progressive rise in the ratio of debt to the GDP of
developing countries.
2. Huge Projects Call for Huge Recurring Expenses: A grant to finance construction of
huge projects in fact is piling up of recipient country’s liabilities after project completion
with a form of recurring costs. If a huge project is completed with a grant, then after the
completion of the project, a heavy amount of money will be required to run such a huge
project and to maintain the machineries. There is a possibility that it may not be
affordable for the country. For example: Padma Bridge.
 3. Bilateral Aid is Politically Motivated: There is a problem that once aid is accepted, the
ability of recipient governments to extricate themselves from implied political and
economic obligations of donors and prevent donor governments from interfering in their
internal affairs can be greatly diminished.
Example: Developed counties forces Bangladesh to support UKRAINE
4. Foreign Aid and Disastrous Policies by Governmen: Foreign aid is sometimes
followed by disastrous policies by government. Sometimes IMF or World Bank imposed
condition on recipients to increase utility prices, taxes, so that the recipient would be able
to repay principal and interest to these institutions.
5. Unsuitable Models of Development are imported: With foreign aid sometimes
unsuitable exotic models of development are imported. Moreover, many a time the
developed countries train manpower of LDCs according to circumstances of developed
countries, which cannot perform an active role in their own countries. vii. Social and
6. Political Tensions: Foreign aid has immensely influenced the socio-political life of
developing countries. It has helped the rulers to extend their tentacles to prolong their
rule and to suppress opposition.
Example: American intension to force Bangladesh to join QUAD anti alliance of
china.
7. Too Much Dependence on Aid: Because of foreign aid, a recipient country’s
dependence on donor countries increases excessively. Foreign aid renders a recipient
country vulnerable to interference by donor countries.

During the period of the Millennium Development Goals (MDGs), the GoB managed to receive
external support to implement the MDGs successfully. However, aid is still not fully utilized in
Bangladesh. According to the Aid Management Unit (AMU) under the ERD, aid effectiveness in
Bangladesh is performing less than its potential due to a number of interlinked and
interdependent structural, procedural and capacity problems (ERD, 2011). This is reflected
through lower implementation of the ADP each year. Major reasons for low ADP
implementation include institutional weakness, delayed implementation, and cost overrun (CPD,
2010; 2018b). Procedural lapses of a project, incomplete proposal, illogical expenditure target,
and inadequate feasibility study reduce the implementation of ADP. In terms of ADP
implementation, the following obstacles were identified: Role of Foreign Aid in Funding the
SDGs in Bangladesh: A Governance Perspective

(i) recruitment of project director and acquisition of land; (ii); recruitment of consultant/firm;
(iii) preparation of work plan; (iv) recruitment of human resources

Though the above observations were made a few years back, they are still relevant in the present
circumstances. Review of existing studies and discussions with experts reconfirm the issues
related to aid utilisation in Bangladesh. Some of the key factors for low aid utilisation are
discussed below:

 Project design and implementation: Difficulties in project implementation start from

the designing phase of projects. One of the most important elements of project
implementation is land acquisition. However, this does not receive due attention during
the designing phase. It takes several years to settle disputes during land acquisition. As a
result, project implementation period is extended.
 Project management: Government officials involved from the beginning of a project are
rarely able to complete projects as they are transferred to other departments or ministries.
To deal with complex procurement and other project related issues, experienced and
trained officials are required.
 Conditionalities: Due to conditionalities attached to aid, utilization of aid to its full
potential becomes difficult. Because of donors’ procurement policies, which require
floating tender and securing final approval from their offices, a significant amount of
time elapses. This delays project implementation.

Bangladesh has been able to reduce its dependency on foreign aid through improved
macroeconomic performance driven by increased international trade and higher remittances. In
other words, higher integration into the global economy has played crucial role in advancing
Bangladesh’s economy. However, the role of foreign aid in addressing some of the crucial issues
cannot be undermined. More specifically, support towards areas such as health and education
have been very useful for Bangladesh. Indeed, such support was crucial for meeting several
MDGs by Bangladesh, such as universal primary education, reduction in child mortality and
improvement in maternal mortality. In case of SDG implementation external support including
aid will become even more important because of the vast nature of the SDGs. Role of Foreign
Aid in Funding the SDGs in Bangladesh: A Governance Perspective.

The role of the above mentioned donor agencies mentioned are very important for the economic
development of Bangladesh. For example, WB gives financial aid and takes different projects for
the economic development of the country. IMF gives financial aid and at the same time helps to
take different policies which helps the economic growth of the country

All Bangladesh should do is to make arrangements ready to ensure the proper use of the
financial aids, suggestions and projects. Then it will be possible to achieve economic
development in real scene.
Sobhan, Rehman, 1982. The Crisis of External Dependence: The Political Economy of
Foreign Aid to Bangladesh. Dhaka: University Press Limited.
The World Bank dataset – The World Bank
Flow of External Resources into Bangladesh 2017-2018 – Economic Relations Division
Overview FY 19-20 – Economic Relations Division
Can Bangladesh do without Foreign Aid? – Centre for Policy Dialogue Bangladesh
Foreign Aid Dependency of Bangladesh: An Evaluation – The Chittagong University
Journal of Business Administration
Resources for Annual Development Programme – Ministry of Finance
Bangladesh – ADB
Statistics – Organisation for Economic Co-operation and Development
Overall Scenario of Foreign Assistance Management FY 2019-20 – Economic Relations
Division
Yearwise Disbursement by Type, Source and Purpose – Economic Relations Division
Cyclone Sidr in Bangladesh: Damage, loss, and needs assessment for disaster recovery
and reconstruction – United Nations Office for the Coordination of Humanitarian Affairs
Uncontrolled Risk: Lessons of Lehman Brothers and How Systemic Risk Can Still Bring
Down the World Financial System – Mark Williams
The Rana Plaza Accident and its aftermath – International Labour Organization
Bangladesh: Rohingya Refugee Crisis 2017 – OCHA

http://www.globalissues.org/article/35/foreign-aid-development-assistance>, Accessed on
July 02, 2011
https://www.bepza.gov.bd/content/dhaka-list-of-investors