Beyond traditional aid: Why Bangladesh needs to diversify public project financing

Highlights:

• Bangladesh will graduate from LDC status in November 2029, reducing access to concessional financing
• ODA commitments fell 37% year-on-year to approximately $5.24 billion in FY26
• ERD's traditional project-by-project aid model can no longer meet financing needs
• ERD should diversify financing through climate funds, guarantees, bonds and capital markets
• A dedicated Project Finance and Structuring Unit should become ERD's top priority

The Economic Relations Division (ERD) has historically been the country's principal interface with Multilateral Development Banks (MDBs) and bilateral development partners, securing concessional loans and grants that financed the bulk of Bangladesh's public infrastructure and development projects. As Bangladesh marches toward its goal of becoming an upper-middle-income country and building a larger, more diversified economy, the landscape of development finance is shifting decisively, and several converging developments now compress the timeline for reform.

First, Bangladesh is scheduled to graduate from Least Developed Country (LDC) status in November 2029. It will reduce International Support Measures (ISM) on a fixed clock, including duty-free quota-free market access and access to the most concessional financing windows.

Second, Official Development Assistance (ODA) commitments have themselves been declining even ahead of graduation – falling to approximately $5.24 billion in FY26, a 37% year-on-year drop, with net loan disbursement down nearly 25%.

Third, the newly elected BNP Government (returned to power in February 2026 after twenty years, on a 51-point election manifesto) has adopted a headline goal of building a $1 trillion economy by 2034, alongside a "3R" (Recovery-Restoration-Reconstruction) reform framework, a target that requires sustained high growth, total investment rising toward 40% of GDP, and foreign direct investment (FDI) rising from roughly 0.45% to 2.5-2.7% of GDP.

Infograph: TBS

Taken together, these shifts mean ERD's traditional model – negotiating concessional ODA project-by-project – can no longer carry the financing load on its own. Estimates of the scale involved vary by source and methodology but are consistently large (as reported across sources, 2024-2026).

Therefore, the graduation and declining concessionality, SDG financing gap, increasing debt sustainability concerns propose that ERD needs to evolve from a traditional aid negotiator into a strategic financer and capital-markets actor having innovative alternative instruments for public projects of the government. 

ERD can pursue a four-pillar strategy encompassing the following instruments and approaches.

Pillar A – optimising and expanding concessional and innovative public finance by tapping and actively purse funds from various green, climate and nature finance like (a) GCF, GEF, Adaptation funds, the loss and Damage Fund, (b) global carbon-credit markets under Article 6 of the Paris Agreement, and (c) thematic bonds issued by MDBs. As a climate-vulnerable nation, Bangladesh is a prime candidate for grants and concessional loans for climate adaptation and mitigation projects (coastal embankments, renewable energy, resilient infrastructure, nature-based solutions) yet has mobilized only a fraction of available international climate finance to date. ERD should establish a dedicated, permanent Climate Finance Cell to track and apply for these opportunities, scale direct-access accreditation of national entities, and accelerate concept-note preparation (recent Climate Finance Leadership Labs have already produced dozens of GCF concepts). ERD can tap into the opportunities being offered by the EU's Global Green Bond Initiative (GGBI), launched in April 2026. ERD should also continue to negotiate with MDBs and bilateral creditors to forgive a portion of outstanding sovereign debt in exchange for the government's commitment to invest an equivalent local-currency amount in specified climate-resilience or biodiversity-conservation projects. This provides fiscal space for priority environmental projects without requiring new foreign exchange outlay. Since 2021 these swaps have moved from niche to mainstream, with over $5 billion transacted globally and an International Institute for Environment and Development (IIED) estimate that more than $100 billion of developing-country debt could be swapped for climate and nature spending. A very recent discussion is being done to go further from Debt-for-Climate/ Debt-for-Nature Swaps to Debt-for-Carbon Credit Swaps. ERD should put full effort into realising this newest opportunity.

Pillar B – ERD can use its sovereign strength to de-risk public projects to catalyse private sector investment by making them bankable and thus helping the Government's aim of raising total investment to roughly 40% of GDP and FDI to 2.5-2.7% of GDP. Key tools include:

Partial Risk Guarantees (PRGs): Guaranteeing specific sovereign risks (e.g., breach of contract, change in law, expropriation) to lenders.

Partial Credit Guarantees (PCGs): Guaranteeing a portion of debt service to extend tenors and reduce interest rates.

Political Risk Insurance (PRI): Partnering with MDBs or bilateral agencies (such as MIGA) or private insurers to provide this.

A modest sovereign commitment can catalyse multiples of private financing without the government taking on the full project risk. ADB's PPIDF facilities and IDCOL on-lending already demonstrate this leverage model in Bangladesh.

In November 2025, the Chittagong Port Authority signed a 33-year Design-Build-Finance-Operate-Transfer (DBFOT) concession with APM Terminals (AP Moller-Maersk) and local partner QNS Container Services for the Laldia Container Terminal – a $550 million greenfield project, the single largest European FDI in Bangladesh's history, delivered under a revenue-sharing model with no debt burden on the government. CPA retains ownership and regulatory control while receiving an annual concession fee plus a per-container throughput fee; the terminal is expected to add over 800,000 TEUs of capacity (a 44% increase) and 500-700 direct jobs by 2030. Construction broke ground in August 2026.

For ERD, Laldia is the reference case to cite when pitching DBFOT-style structuring to other sectors – power generation, economic zones, and dry ports are the most readily transferable.

Pillar C – to access global and domestic capital markets on sovereign terms ERD – in coordination with the Finance Division and Bangladesh Bank – can facilitate larger, more frequent sovereign green/blue/social bond issuances in international markets, using the EU GGBI's offered technical assistance to move toward a sovereign (not only corporate) green or blue bond; the LDC-graduation window makes near-term issuance strategically timely, since sovereign bond investors will be pricing the same graduation transition regardless. Similarly, it can facilitate in designing and issuance of bonds specifically targeted at the Bangladeshi diaspora, offering a patriotic and secure investment vehicle to contribute to national projects (e.g., a sector-specific "Bangladesh Trillion-Dollar Bond). Diaspora bonds can convert a portion of the stable foreign-exchange inflow into long-term development capital. ERD should also work to develop a sovereign yield curve in key foreign currencies and deepen the domestic sustainable-bond market under the 2025 BSEC amendments.

Pillar D – to introduce digital finance and innovation ERD can adapt World Bank's own tokenized-bond pilots' framework and use blockchain technology to issue digital tokens representing fractional ownership in a revenue-generating public infrastructure asset (a toll road, a power plant, or a Laldia-style terminal's future revenue stream). This could democratise investment, allowing smaller retail and diaspora investors to participate directly in infrastructure financing. 

To operationalise these methods, ERD must undergo the following internal transformation through proper legal and administrative procedures:

a) Establish a "Project Finance & Structuring Unit" to move beyond negotiation and house experts in financial modelling, risk analysis, climate finance, and capital markets. It would be ERD's center of excellence for designing complex financing packages. This should be the single highest-priority action, ideally stood up within the current fiscal year and ahead of LDC graduation.

b) Publish a "Diversified Financing Toolkit" for Line Ministries to create a user-friendly decision guide for all line ministries explaining the available financing options and clear decision trees.

c) Strengthening coordination with key stakeholders like the (a) PPP Authority – to formalise a joint review process for all major infrastructure projects to determine the optimal financing mix (sovereign, PPP, blended), and (b) Bangladesh Bank, Finance Division and BSEC – to work on the regulatory framework needed to enable new instruments, and finally (c) Line ministries/divisions to build their capacity to prepare "bankable" projects, not just "development" projects. 

d) Engaging in proactive matchmaking by connecting project sponsors with the global community of institutional investors, climate funds, and impact investors rather than waiting for them to come through traditional aid channels.

e) Implementing Pilot programmes by selecting 3-4 "shovel-ready" projects from the ADP across different sectors (e.g., a renewable-energy project, a water-treatment plant, an economic zone, resilient coastal infrastructure) and task the "Project Finance & Structuring Unit" with structuring a diversified financing package for each, using a mix of the tools above. Where feasible, target completion within 12-18 months and under the Recovery/Restoration phases of the 3R strategy, so pilots can be cited during graduation-related investor outreach.

The need for diversification is not an optional complement to the trillion-dollar plan – it is close to the only mechanism by which the investment surge required for the 2034 target would place excessive pressure on the sovereign balance sheet and risk crowding out private credit. ERD's near-term KPIs should therefore be tracked explicitly against the manifesto's FDI and investment-to-GDP targets, not only against traditional ODA disbursement volumes. The future of public project financing in Bangladesh lies in sophistication and diversification. By moving from a sole focus on aid negotiation to a strategic role in project-finance structuring, ERD can unlock vast new pools of capital, share risk with the private sector, and ensure that the infrastructure needed for a prosperous Bangladesh is financed sustainably.

The author is a joint secretary at the Economic Relations Division. He can be contacted at tomukut007@gmail.com.