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Debt sustainability is a risk factor for the poor countries of the world. Many poor countries had to suffer due to low sustainability of debt, mostly in foreign loans. Though several global efforts are there to reduce the risk of debt sustainability, the current trend indicates that it is gradually deteriorating in the developing world. At present, the global debt-GDP ratio is 33 per cent higher than it was on the eve of the global financial crisis in 2008. Debt-GDP ratio exceeded 70 per cent in a fifth of emerging and middle-income countries and was more than 60 per cent in low-income countries by the end of 2017.
Revealing the facts the Intergovernmental Group of Experts on Financing for Development (IGEFD) has expressed deep concern about the deterioration of debt sustainability in the developing nations including Least Developed Countries (LDCs). IGFED is an arm of the United Nations Conference on Trade and Development (UNCTAD) and dedicated to work on development finance.
In a meeting during the second week of this month in Geneva, the group also expressed concern on channelling adequate finance for Sustainable Development Goals (SDGs). It was of the view that debt as a tool to finance sustainable development is risky. The group, instead, suggested a policy of making well-planned foreign investment in the developing countries.
What is the position of debt sustainability in Bangladesh? Debt sustainability is generally termed as the ability of a country to meet its debt obligations without calling for debt relief or accumulating arrears. Higher amount of debt makes a country sometime vulnerable to debt sustainability. If a country faces some difficulties in debt repayment, it is also considered as erosion of its debt servicing capacity.
Bangladesh is doing reasonably well in terms of debt servicing, especially in external borrowing. The country has successfully managed its debt sustainability so far. Nevertheless, the growing volume of external debt may pose some threats to the macroeconomic stability in near future.
In fact, the gradual rise in private commercial borrowing has become a matter of concern for the debt sustainability of the country. Latest statistics, released by Bangladesh Bank, show that outstanding stock of private sector external debt stood at around US$14 billion by the end of the past fiscal year (June 30, 2018). The amount is one-fourth or 25 per cent of the country's total external outstanding debt which was only 13 per cent five years ago.
At the end of FY18, the total stock of outstanding external debt of the country stood at US$ 54.73 billion of which the amount of public sector external debt was US$ 40.77 billion. The share of public sector external debt in the total external debt stood at 74.48 per cent while the share of private sector was 25.52 per cent.
Central bank statistics show both public and private sectors external debts have increased in the past fiscal year. Total external loan increased by $ 8.83 billion or 19.25 per cent over the previous fiscal year. During the period public sector foreign borrowing jumped by $ 5.40 billion or 15.29 per cent while private sector by $3.42 billion.
Thus, in terms of annual borrowing the ratios of both public-private external debt and private-total external debt require examination. Calculation on the basis of central bank data shows that in FY16, about 28 per cent of the country's total external borrowing was private commercial borrowing which increased to 34 per cent in FY17 and further jumped to 39 per cent in FY18. It means the liability of private external debt is increasing slowly.
Many believe that there is no harm on short-term private commercial borrowing due to lower interest rate which is largely tagged with the London Inter-bank Offered Rate (LIBOR). It is a global benchmark rate and rates for external borrowing generally hover around LIBOR plus 3.0 to 4.0 per cent. But the benchmark rate fluctuates daily and very sensitive to any global development. Any change in the rate is likely to affect any borrowing.
Again, any unexpected big fluctuation in the exchange rate is another matter of concern. Fall in the value of local currency or taka against the foreign currency, US Dollar to be precise, may cause big difficulties for Bangladeshi borrowers. As they have to pay back dollar-denominated debts, they will have to shell out more taka than they had previously estimated to purchase the required amount of dollars. Though, while setting the lending rates, possible fluctuations in the value of currencies are generally taken into account, big fluctuations in exchange rate are very difficult to offset.
The International Monetary Fund (IMF), in its latest analytical report on the debt sustainability of Bangladesh, has observed that the risk of external debt distress and overall debt distress in the country remains low. It, however, points out that in the case of project financing, it is important to rely on concessional financing and try to avoid non-concessional borrowing. In this connection, IMF mentions that both Chinese and Indian loans on various infrastructure projects may put the country's debt sustainability under pressure in near future. "While the investments are much needed to boost infrastructure and address a shortage of power, higher non-concessionally externally financed infrastructure spending could push up the debt path," the report warns.
The IMF report, however, does not mention anything about the private external borrowing. On the other hand, Bangladesh Bank has recently observed in a brief analysis that the level of external debt is 'well managed' and 'quite sustainable' in the country. Comparing with current account receipt (CAR) and Gross Domestic Product (GDP), it has drawn the 'safe' conclusion.
CAR includes earnings from merchandise and services exports as well as other external receipts. According to the central bank, CAR to external debt ratio stood at around 104 per cent in the past fiscal year which indicated that the country's current external earnings were sufficient to offset the outflow of external borrowing. What requires attention is rapid decline of CAR-external debt ratio in the last five years - from 141.40 per cent in FY14 to 103.40 per cent in FY18. Continuation of the trend may make debt sustainability of the country vulnerable in near future.
If considered in terms of GDP, external debt to GDP ratio decreased from 19.6 per cent in FY14 to 18.40 per cent in FY17 but again increased to 19.90 per cent in FY18. It means, currently one-fifth of the economy is burdened with external debt.
Checking the debt sustainability through the glasses of different eco-financial ratios may sometime appear misleading. These ratios can't fully expose the risk of falling into debt trap. Reviewing the ratios with nominal figure and in a longer-term perspective will provide a better picture.