Loan-funded investment in Karnaphuli Tunnel at risk

The Karnaphuli Tunnel, a costly and loss-making mega project in Chattogram, has become a financial burden on Bangladesh’s economy. The tunnel, constructed with significant borrowed funds, now struggles to generate enough revenue to cover even a fraction of its expenses. Experts have pointed out that the loan taken for this project, along with the accruing interest, is being repaid from funds borrowed for other projects. As a result, the country’s economy is trapped in a vicious cycle of debt.

Nearly a year after its inauguration, economists and experts are now warning that the investment made in the Karnaphuli Tunnel might be a near-total loss, likely to become an increasing burden on the economy. The tunnel, which was opened on October 28 last year, started operating for traffic the next day.

Before construction, surveys had predicted that the tunnel would handle over 20,000 vehicles per day. However, only about 3,910 vehicles currently use the tunnel daily, generating around BDT 1.037 million in toll revenue. In contrast, the daily maintenance cost alone is approximately BDT 3.747 million, resulting in a loss of over BDT 2.709 million per day. This ongoing loss adds to the financial strain as the government is also forced to pay off the massive debt associated with the project.

According to the Economic Relations Division (ERD) of the Ministry of Finance, Bangladesh began repaying the Chinese loan for the tunnel in the 2022-23 fiscal year, starting with BDT 1.6 billion, and nearly BDT 2.2 billion last fiscal year. Consequently, the government is now seeking additional loans to continue repayments.

Several other mega projects, such as the Padma Bridge rail link, metro rail, and the Dohazari-Ghumdum rail line, have also failed to meet their revenue targets. The Sheikh Hasina administration’s projects, funded by large loans, incur operational costs that exceed their income. This results in the need for new loans to service previous ones, a situation that is particularly challenging during the ongoing reserve crisis. As a result, Bangladesh requires annual budget support loans totaling BDT 200–250 billion.

Reports reveal that the government had to take BDT 230 billion in budget support loans last fiscal year just to meet foreign debt payments, following BDT 195 billion in 2022-23 and BDT 260 billion in 2021-22.

Additionally, in the current fiscal year, the government is expected to pay about USD 4.5 billion in principal and interest, following USD 3.35 billion last fiscal year and USD 2.67 billion in 2022-23. By the next fiscal year, this amount is projected to exceed USD 5 billion.

The ERD notes that the end of the grace periods for major projects like the Padma Bridge rail link, Karnaphuli Tunnel, and Matarbari Power Plant has increased the repayment burden. Upcoming loan repayments for other mega projects like the Rooppur Nuclear Power Plant, metro rail, and the third terminal of Hazrat Shahjalal International Airport will only add further strain, with annual repayment amounts expected to surpass USD 5 billion by the 2026-27 fiscal year.

Economists highlight that the sustainability of these debts depends on the benefits derived from these projects and the country's ability to increase local productivity. The deficit in financial accounts observed since last fiscal year could hinder efforts to bring them back to a surplus due to rising principal repayments. As the grace periods for major loans expire, the demand for foreign currency will only increase.

Experts recommend that the government should focus on securing timely returns from these investments to counteract the growing debt burden. According to Dr. Zahid Hossain, former lead economist at the World Bank’s Dhaka office, if the government resorts to taking loans to pay off other loans, the debt burden will only worsen.

He stressed the need for productivity in these investments and timely returns, stating, “Foreign currency will be essential to repay foreign debt, so policies must be set accordingly. Without the necessary foreign currency, debt repayments will inevitably create pressure.”