Aid, Macroeconomic Stability and Economic Development in Bangladesh

Abstract

This chapter assesses the role of aid in macroeconomic stability and economic development in Bangladesh. Beginning with high aid dependency since independence in 1971, the country sharply reduced the dependence by the late 1990s. Aid played a critically important role during this period, in supporting the external and internal balances and sustaining macroeconomic stability, as well as in laying the foundations for the shift to a higher, more inclusive growth trajectory with faster poverty reduction, which were to follow after 2000. Since then, along with the share of aid, donor priorities also shifted as the country’s capacity to finance an increasing part of the development plans improved. Aid allocation to health and education increased, and the access to low-cost foreign exchange resources provided by aid enabled allocation to longer gestation infrastructure projects, thus ensuring sustainable debt levels. By 2015, Bangladesh became one of the better performing low-income countries in achieving the core Millennium Development Goal targets. While the aid-GDP ratio declined to 1 percent by 2015, it will continue to be important for infrastructure development, especially transport and energy. Involvement of the multilateral donors will also remain important in enabling access to external financing—both public and private. However, still there are some key challenges in the aid-development nexus in Bangladesh. Greater attention by donors to the local context, government ownership, more implementable institutional reforms in the rapidly changing economic context, effective monitoring and evaluation to improve aid disbursement and achieve stronger results, etc., are needed, while Bangladesh remains on track to graduating from aid over the next decade.