The other sides of the proposed sovereign bond

As media report suggests, the government is thinking of floating a sovereign bond, aiming to use a portion of the piled up foreign exchange reserve with the Bangladesh Bank. The forex now stands at more than $ 32 b. If understood correctly from what the Finance Minister said, the proposed bond will be issued in favour of the Bangladesh Bank which will lend the government in foreign exchange against the purchase of this bond. Initially, the ministry was thinking of borrowing up to $ 1.0 b by issuing this instrument, but in the subsequent period the amount may go upto $ 5.0 b. But certain things were not made clear, such as, what would be the tenure of the proposed bond and what interest rate it will carry. Also, it is not clear, how the government will pay back the debt and if pays, in what currency.
The more important question is that instead of floating such a bond in the international financial markets, why the government is opting for issuance of such a bond only for the Bangladesh Bank. No such bond was issued in the past, nor did any government borrowed directly in foreign exchange from the Bangladesh Bank. Also, the question arises, whether the government used alternative routes seriously for the project specific-loan from the international lending agencies like that of the World Bank, ADB and and the newly founded AIIB. Borrowing from these sources would have been much cheaper and the expenditure from such borrowing would have been more transparent. It would be interesting to know if other governments in the emerging economies borrowed directly in foreign exchange from their central banks.  If it wants to proceed with such a plan the government should see the international practice in this case. Usually sovereign governments issue sovereign bonds in foreign currencies for international subscribers. In Bangladesh too, that was the thought in the last one or two years, but probably that had been postponed for now. The government needs foreign exchange for mega projects like the construction of Padma Bridge. But to meet such obligation it can purchase foreign exchange from the BB by offering local currencies as is done by other users of the foreign exchanges. It is not known whether the government is finding that practice inadequate to finance projects like Padma Bridge.
Maybe, the government now wants to have a fund in foreign exchange under its own control, wherefrom it would spend money as and when the needs will arise.  The concern should be, if the funded projects are not run on commercially or if the government does not receive sufficient cash flows from the operations of such projects, wherefrom will it service the debt?  Very rarely are government-funded projects run on commercial basis. The Bangabandhu Jamuna Bridge was constructed by borrowing fund from foreign sources, but till now it is run as a government enterprise. No step was taken to convert its management into a company and no management board was there on behalf of the capital or equity suppliers. Most of the infrastructures built by the government remained its own enterprises and they were not run commercially. As a result, the government could not recover the cost it incurred to construct these infrastructures. In case of the Padma Bridge a huge amount of money is being spent in local and foreign currencies, but what will be the payback system when it gets constructed. Presumably, this bridge will be operated just like another government- owned enterprise, where the issue of commerce or making a profit out of its operation will be ignored. If that happens, it will take many years to fund another big project on government initiative. Every time the government will suffer from a shortage of fund for such projects.
The government should think broadly if it wants to fund capital-intensive infrastructure projects by borrowing. It is suggested that instead of issuing sovereign bond just only for the Bangladesh Bank, the government should form a sovereign Fund, as was done in other countries like Malaysia. Sovereign Fund, if created, will finance both equity of the specific project as well as buy the debt instruments to be issued by the said projects. The door of such fund will remain open to local investors' participation. What now Bangladesh is thinking in the name of issuance of sovereign bond in favour of only one customer -- the Bangladesh Bank, the government is virtually refusing the opportunity to other willing private investors to participate in the purchase of such bond. Did the Bangladesh government think seriously as to how to make the willing Bangladeshi investors to be partners in the financing of projects like the Padma Bridge? The people can be made partners in such project financing if the door of financing is also kept open to them. For that purpose Taka-denominated local sovereign bond can be issued. Those who want interest-free income, can be issued Islamic Bond known as the Sukuk.
Professor of Economics University of Dhaka, email: [email protected]