Project Delays Cost Bangladesh World Bank Grace Periods

Representational image. Photo: Collected

Imagine a factory owner forced to begin repaying bank loans before production even starts. Financial strain would be inevitable. A similar situation is now confronting the Bangladesh government, with the difference that the burden of early repayments ultimately falls on taxpayers rather than leading to default.

A recent review by the Economic Relations Division (ERD) shows that grace periods for 29 World Bank–financed projects have already expired, even though Bangladesh has yet to utilise $1.93 billion of the committed funds. As a result, loan repayments are beginning before many projects are completed, driving up debt-servicing costs and increasing fiscal pressure.

In international lending, a grace period refers to the initial phase after loan approval during which the borrower is not required to repay the principal. While interest may accrue, this window allows projects to be implemented, benefits to materialise and revenue streams to develop before repayments begin. For developing countries, such provisions are a crucial cushion.

That cushion, however, is shrinking for Bangladesh.

Structural mismatch

ERD officials say the core problem lies in a structural mismatch between the World Bank’s financing framework and Bangladesh’s project approval process. Under World Bank rules, the grace period starts immediately after board approval. In Bangladesh, however, it often takes up to two years after board approval to complete feasibility studies, prepare development project proposals, secure inter-ministerial clearances and obtain final approval from the Executive Committee of the National Economic Council (Ecnec).

Loan agreements are signed only after Ecnec approval, meaning a large portion of the grace period is consumed before projects even begin implementation.

Officials acknowledge that negotiations with the World Bank have often proceeded without adequate preparatory work. While board approval follows swiftly, domestic procedures move slowly, leaving projects struggling to catch up.

“Our projects are like premature babies—they need constant support, from extending timelines to revising costs,” a senior ERD official said. “We have now decided not to take loans without full readiness.”

$1.9 billion undisbursed

According to the ERD review, several major projects still have large undisbursed amounts despite their grace periods having expired. These include the Western Economic Corridor and Regional Enhancement Programme (Phase I), the Dhaka Sanitation Improvement Project, rural bridge support initiatives, livestock and dairy development schemes, regional waterway transport projects, digital government programmes and power transmission upgrades.

While disbursement deadlines can be extended, grace periods cannot. Once expired, the concessional advantage is permanently reduced, eroding the benefits of low-cost financing.

A shift in approach

Senior ERD officials say Bangladesh previously entered loan negotiations under pressure, even when preparation was incomplete. That approach is now changing. Preparatory work is increasingly being completed before negotiations begin, even if this delays new lending in the short term.

Officials argue that while this may reduce World Bank financing temporarily, it lowers the long-term risk of losing grace-period benefits and facing early repayment pressures.

Bay Terminal case

The $650 million Bay Container Terminal project illustrates how grace periods shrink in practice. Although the loan agreement signed in April 2025 carried a five-year grace period, the first principal repayment is due in February 2029—effectively reducing the usable grace period to about four years.

Implementation has begun but remains slow, raising concerns that disbursements may again lag behind repayment schedules.

Approved but unsigned projects

ERD officials have also warned about risks from projects approved by the World Bank board but still awaiting loan agreements. Delays between approval and signing further shorten effective grace periods, as seen in earlier projects where nearly a year was lost before agreements were finalised.

In one such case, Bangladesh lost an estimated $440 million in grace-period benefits due to approval-to-signing delays and slow implementation caused by procurement bottlenecks and regulatory compliance issues.

Why grace periods matter

Grace periods are intended to allow projects to be completed and benefits realised before repayments begin. When they shrink, repayments start early, increasing debt-servicing costs, straining budgets and putting pressure on foreign exchange reserves.

Many infrastructure and social sector projects do not generate immediate revenue. Shortened grace periods weaken key financial indicators such as internal rate of return and net present value, while repayments must still be made in foreign currency amid global economic uncertainty.

Expert warning

Policy analysts warn that concessional loans derive their advantage not only from low interest rates but also from long tenures and generous grace periods.

“When grace periods are lost, much of that advantage disappears,” said economist M Masrur Reaz. “Early repayments squeeze development spending, pressure reserves and weaken long-term debt sustainability.”

He stressed the need for stronger project preparation, better inter-agency coordination and closer alignment between loan approval, signing and implementation timelines to prevent further erosion of concessional benefits.