The danger posed by debt servicing

Economists have been sounding the alarm bell to the effect that the rate of external/foreign borrowing and the servicing of the same are now a reason for concern. There is a wide gap between the official line of thinking and what think tanks perceive in this regard. The general tendency at policy level is to simply dismiss everything that deviates from the official line, but there is no point playing the proverbial ostrich. Whatever is being discussed in the public sphere about external debt and the country's capacity to service that debt should not be taken at face value. The Centre for Policy Dialogue (CPD) recently, in partnership with The Asia Foundation, Bangladesh, organised a dialogue titled "Bangladesh's External Borrowings and Debt Servicing Scenario: Are There Reasons for Concern?" to discuss the country's debt servicing issue in details.

External borrowing is nothing new for Bangladesh, but the debt has always been within manageable limits. What has caused consternation is that today, external borrowings as a percentage of GDP have risen rapidly as Bangladesh embarked on major infrastructure development over the last decade. Billions have been borrowed to transform the basic character of the economy with major outlays to cover construction of roads and highways, transform maritime ports and airports, upgrade the energy sector, etc. Unfortunately for the country, a significant portion of the funds needed for these projects have come from commercial (and less concessional) loans with short grace periods and higher interest rates.

Projections were made that the export sector would remain buoyant and remittances remain stable.  That unforeseen external shocks like the Russo-Ukrainian war, and more recently, tensions in the Middle East were apparently not given due importance is a failure at policy level. Similarly, the hope that the international market for fossil fuels would remain stable over the mid to long-term did not materialise at some point and hence massive outlays were committed (most of it financed by international commercial loans) to build up an infrastructure that must be repaid in foreign currency. It was also assumed that domestic revenue collection could keep up with what the economy needed, but that hasn't panned out unfortunately due to a lack of reforms needed to accelerate the direct income tax regime.

Today, Bangladesh is facing a scenario with revenue shortfalls and increased outflow of foreign exchange, mostly directed at servicing a ballooning foreign debt. While economists have pointed out that nations across the globe are facing the same problem of debt servicing, it is of little solace to policymakers here. Presently, we are witnessing the country borrowing from international financial institutions just to meet debt servicing costs -- which is a self-defeating exercise because this is economically unsustainable. As pointed out by Dr. Mustafizur Rahman in his keynote presentation at the CPD - Asia Foundation event, there needs to be a prioritisation of "the enhancement of Domestic Resource Mobilisation (DRM) through taxation, given the rising Public and Publicly Guaranteed (PPG) debt and servicing of the growing PPG debt." There is no recourse but to increase "direct taxes, reassessing tax expenditure and incentives, closing loopholes, broadening the tax net, and adopting a zero-tolerance stance against tax-evasion."

Of equal importance is the governance side of things that manages the effective and timely implementation of Public Investment Projects (PIP). That every major infrastructure project in the country has overshot timelines by years leading to both cost escalations and reducing the grace period before interest on foreign loans has been a chronic problem for policymakers. The reasons have been amply explored and discussed before but have any lessons been learnt? These are areas that policymakers will have to address now and not tomorrow. For many years international finance was easily available. That window of opportunity has now narrowed and it has a lot to do with the international ratings Bangladesh has. Those ratings have dipped of late and it has a lot to do with many of the stalled reforms in the financial sector, the massive capital flight that has taken place and continues (according to some experts and economists), reduction in domestic investments, falling exports, etc. -- all these factors are taken into consideration by international rating agencies. Those are the figures that are looked at by foreign financial institutions when judging a country for its credit-worthiness.

This brings to the fore whether policymakers are doing enough to accurately estimate debt service obligations before seeking further foreign loans. Things won't magically get better internationally in terms of exports. Foreign labour markets are contracting as more and more of those countries look inward to replace foreign workers with their people. There is no other recourse but to increase domestic revenue and to find, if possible, new funding sources that carry concessional terms more favourable to Bangladesh.

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