Capacity to service external debt

The issue of government's foreign borrowings has been a subject of much debate among economists for some time now. One of the leading think tanks in the country, the Centre for Policy Dialogue (CPD) has addressed the issue in a study titled 'Bangladesh's External Public Borrowings and Debt Servicing Capacity'. Undoubtedly, foreign credit has been eagerly sought by policymakers and billions have been taken from various sources to finance the ambitious infrastructure development in the country for several years now. What has become increasingly worrisome is the cost of such debt because of taking more and more loans that are deemed to be too costly for the country, i.e. on high interest rates with shortened repayment periods.

The study focuses on public and publicly guaranteed (PPG) external debts, their servicing and repayment which all had well been within tolerable limits until recently. However, the acceptance of short-term loans to finance the seemingly endless number of "mega-projects" is now being questioned. One has to admit that the macro-economic condition of the economy is not what it used to be a few years ago. A series of events like global pandemic (Covid-19) followed closely by the seemingly endless Russo-Ukrainian war and the sharp rise in the import bill for all sorts of commodities including foodstuffs and energy resources have had a detrimental effect on the economy. When coupled with the sharp devaluation of the national currency against the US dollar (US$), and a sustained period when inward remittance took a nose-dive because remitters were getting a better rate from informal financial channels like 'hundi', things had gotten a lot trickier.

The global economy itself hasn't been doing particularly well and Bangladesh's principal export, i.e. readymade apparels (RMG) have taken one after another hit. While RMG has made some recovery, the same cannot be said about other export items. Hence, Bangladesh's capacity to repay this segment of external debt, one that is short-term, high-interest bearing in nature, has become a source of growing concern. The rate at which the country has been going for multiple mega-projects means that other sources of credit had to be sought and increasingly, these loans are hard in nature, not soft.

Hard loans carry tougher conditions and already signs have surfaced that Bangladesh has been struggling to repay loans due to conditions set by the International Monetary Fund (IMF). Again, while servicing its multi-billion-dollar external debt, the country is under stress with profit repatriation of multi-national companies on the one hand, unable to a large extent to make payment for energy bills on the other. Increasingly, it is being witnessed that more short-term, hard loans are being taken to service existing debt. A vicious cycle no doubt, to put it mildly, but something needs to change because this is unsustainable.

One of the problems with foreign loans is that the projects they were taken against have, for various reasons, witnessed inordinate delays in implementation. Hence, projects that overshot completion dates by years basically ate up the grace periods offered on these loans and hence, the country ended up having to start repayments as soon as projects were finished - leaving little or no room to recuperate the investment made. This has been going on for years and little was done to improve on the implementation side. Projects kept on being added every financial year with little thought about how repayments on borrowed money would be made.

As pointed out in a report in this newspaper: "The composition of the debt portfolio of Bangladesh has also changed sharply in recent years. The share of concessional, IDA-type loans, is coming down, while the share of non-concessional, including market interest-based bilateral and multilateral loans, has been on the rise. As is known, IDA-type loans have annual interest rates of, on average, 0.7 per cent, with a grace period of 5-10 years, and a maturity period of 30-40 years."

The study suggests that it is time for a rethink as to how the country should be more selective about the projects it undertakes and also highly cautious about the way of financing those. It is crucial to have competent negotiators who can study the terms of payment and hence there is a great need to develop the right sort of human resources who are adept at sifting through the complexities of foreign loans. There is no short-cut here. The country has a long track record of employing foreigners in various segments of its economy and in that vein, it can also engage reputable international negotiators to engage in such negotiations, while it develops its own pool of experts who are adept at studying "credit rating, forex exchange movements and forex reserve situation, and closely monitor the trends in private sector borrowings."

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