Dealing with huge external debt

Some studies done in the past showed that in the case of low-income countries, total external debt was found to have left a negative impact on GDP growth. But in the case of middle-income ones, external debt was positively associated with income growth. Those studies further found that in some cases, even a debt-to-GDP ratio of as low as 20 per cent can be harmful for the economies concerned, while for others detrimental effects begin to show up when the ratio is as high as 60 per cent. (Journal of Macroeconomics, March 2020).

In particular, when the levels of external debt prove to be high and unusual, it becomes risky for developing countries as in that case they are exposed to exchange rate fluctuations and a fall in capital flows which may precipitate into banking and currency crisis.

So, there is reason for policymakers to be cautious about a country's external debt considering the short- and long-term impact of foreign debt on economic growth.

These observations have relevance to Bangladesh as it is soon to join the group of middle-income countries after graduating from its current status as a least developed country (LDC). In this context, the recent report of the Bangladesh Bank (BB) on the country's present external debt situation is germane to the issue. The BB report says that Bangladesh's external debt has for the first time crossed the US$100 billion mark reaching US$100.6 billion. This is US$4.1billion more than previous year's total at US$ 96.5 billion. This debt comprises of US$79.69 billion as public sector debt and US$20.1 billion as private sector debt.  The foreign lenders to whom the total external debt is owed include global multilateral lenders, foreign commercial banks and financial institutions. The good news is that 85 per cent of the external loans are long-term ones, while the remaining ones are short-term. The report has come at a time when the country is experiencing challenges like falling rate of inward flow of foreign remittance (from migrant workers), volatile foreign currency market, dropping value of domestic currency against US dollar, and declining forex reserve. On Thursday last, the BB informed the nation of the status of the country's external debt until December 2023. However, while disclosing the report, the BB's spokesperson with a note of reassurance told the press that the debt-to-GDP ratio was within tolerable limit and that there would be no problem even if additional loans are sought from any external sources. In fact, this amount of external debt has not also crossed the threshold set by the International Monetary Fund (IMF). But the BB spokesperson's remark that even with this huge debt burden on the nation's shoulder, the country is still credit-worthy is questionable. A country's credit rating at a particular point of time is an important consideration for prospective lenders. However, the fact that the total debt is okay vis-à-vis the country's GDP leaves no room for complacency for the simple reason that this huge amount of loan has, after all, to be repaid. So, it would be important to know how the government is going to service the debt and what the debt's composition is. Then, how did the amount of debt surge to such a humongous scale? The central bank's recent reports show that only seven years back in 2017, the nation's total external debt was US$50.31 billion. That means in the last seven years the amount has doubled to reach the latest figure at over US$100 billion. Only a decade back in 2014, the total volume of debt was USD37.47 billion. Obviously, the volume of external debt has risen at a rather faster rate in recent years than any time in the past. Experts point to bilateral loans received from China and Russia to build big infrastructure projects like Padma Bridge rail link, Karnaphuli tunnel, Rooppur Nuclear Power Plant for the steep rise in the amount of foreign debt in recent times. Also, to implement pandemic time vaccine support programmes, loans were extended by multilateral donors including the World Bank (WB), Asian Development Bank (ADB), Japan International Cooperation Agency (JICA), International Monetary Fund (IMF) and European Investment Bank (EIB). Going by the BB data, just in two years' time between 2019 and 2021, debt amount jumped from US$60.29 billion in 2019 to US$90.79 billion in 2021. During the pandemic, businesses and investments were in the doldrums. Understandably, the loans from multilateral donors were cheaper and the lenders, too, were eager to advance loans to LDCs like Bangladesh so they might fight the pandemic better. So, from that point of view, the US$30.50 billion worth of loan taken from different multilateral donors, which mostly comprises long-term ones, should not be an issue of big concern. Even so, the fact remains that debts are debts and the government should have a plan about how it is going to repay those when there are additional pressure from bilateral debts of commercial nature.

Some experts are of the view that the government should not go for any more loans from bilateral lenders, especially on suppliers' credit basis. Now that the economy's growth has slowed down due mainly to meeting forex crisis, servicing of existing debt may prove problematic.

Notably, between July and November of the current fiscal year (FY 2023-24), the government, as part of external debt servicing, paid an amount of US$ 562 million in interest. Year-on-year, this marks a 137.6 per cent rise in government's spending on debt servicing. Once the time for servicing bilateral commercial debts comes, the amount will see another big jump. Since returns from the projects implemented with loans, bilateral or otherwise, will come in BDT, not USD, the amounts to be paid back to service debts will be more than what the government would pay when the value of taka against USD was higher (at the time of getting the project loan).

So, these points have to be considered while dealing with an external debt of such prodigious amount.

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