Managing public debts sustainably

Of the myriad issues clamouring for urgent attention that the interim government has inherited from its predecessor, the humongous amount of public debt is one. Some of the big external debts against mega projects have been reaching maturity. The US$12.65 billion Rooppur nuclear power plant, 90 per cent finance of which is being provided by Russian government as loan, is one example where the grace period for the loan is about to be over. Since these are bilateral loans, the terms are usually harsher than those from multilateral donors like World Bank, ADB and IMF. So, management of these debts is turning out to be  a major challenge before the interim government, especially at a time when the foreign exchange reserve is dwindling. Unless appropriate short-, mid- and long-term strategies are adopted to address such debts, the country may fall into a debt trap when debt servicing begins to fail potentially crowding out other spending. These and other issues demanding urgent attention came up at a recent discussion event in the city where eminent economists from local policy think tanks expressed their views and concerns about the public debt management and other emergent issues following July revolution.

Notably, as of June 30, 2024, the total public debt (both domestic and external) stood at  US$156 billion of which domestic debt was US$88 billion, while the rest was external debt. The question of sustainably managing the debt arises because despite low foreign exchange reserve position, the cost of debt servicing has come to around US$4.0 billion, whereas, it was around US$2.0 to US$2.5 billion, when the forex reserve was US$48 billion.  Under the circumstances, the interim government will be required to enhance its capacity for managing debts efficiently.  This is to ensure that financing and meeting debt servicing obligations could be met at the lowest possible cost and the benefits of the public debt can be maximised. To this end, it would be well-advised to move gradually towards a unified debt management framework. Though, as a percentage of GDP, the overall debt showed a downward trend in the past FY2016-17 at 26.20 per cent, it has seen a rising trend in the subsequent years. However, as a portion of total debt, external debt is still lower than domestic debt.

Even so, the external debts are becoming more problematic at a time when external financing is increasingly shifting from concessional to semi- to non-concessional regimes. In connection with the macroeconomic risks related to debt management comes the rising rate of inflation, which can increase expenditures on interest. This can render external debt servicing costlier in terms of local currency, unless the exchange rate is stable. Also concerning in this regard is the rising debt service to revenue ratio calling for better mobilisation of tax revenue. The interim government will be required to address the critical issues on course of an efficient and sustainable debt management regime including tackling other legacies of the past. These are massive corruption, flight of capital through money laundering, rising economic disparity, a lack of investment in the private sector.

Overall, the challenge before the interim government is one of rebuilding the economy as though from scratch since the past 15 years, according to some economists, is virtually a 'lost decade'.