Debt servicing pressure on the economy

Bangladesh would eventually feel the pressure of external debt repayment as a forgone conclusion made several years ago. However, what economists and analysts couldn't predict is the ongoing Russia-Ukraine war that has led to a global economic recession. With rapid inflation, commodity price hikes, dollar crisis, and energy shortage, things suddenly look gloomier than they were thought to be. How deep Bangladesh's foreign debt repayment crisis has been a topic of regular discussion for sometime. And how the country can avert the risks of an economic collapse should be the topic to discuss right now.

EXTRAORDINARY RISE IN FOREIGN DEBT: To understand how dire the situation is, we can look at some data released by World Bank (WB). In the span of just 10 years, from 2011 to 2021, Bangladesh's foreign debt rose 238 per cent to a huge US$91.43 billion from US$ 27.05 billion. This rise is extraordinary even if we take into account the growth of Bangladesh's economy in that period. To put things into perspective, none of our South Asian peers has seen such a huge growth of external debt. International Debt Report 2022 says that India saw a rise of 83 per cent during that period, Pakistan's debt rose by 101 per cent, and Sri Lanka's debt rose by 119 per cent.

The biggest headache for the government, however, is the rise of short-term external debt, which rose to US$ 18.09 billion at the end of 2021 from that of US$ 10.99 billion in 2020. In addition, Bangladesh's long-term principal payments have also gone up 47 per cent year-on-year to US$4.2 billion in 2021.

In June last year, the country's foreign debt peaked at US$95.23 billion, which stood at US$92.69 billion by the end of September last year. Bangladesh Bank data says the government took US$ 67.29 billion in loans by that time; of that, US$56.54 billion was directly borrowed as long-term loans, and different government institutions fetched the rest.

Starting this year, Bangladesh's loan repayment will increase each year sharply as some of the large loans' grace periods will end soon. According to Economic Relations Division data, the country paid US$ 2.4 billion in external debt in FY22, which is US$2.78 billion for the current FY, and will almost double in FY25, standing at US$4.02 billion. Before the number starts declining, it'll rise to US$5.15 billion in FY30.

COMMERCIAL LOANS POSE ADDITIONAL THREATS: Bangladesh's primary sources of foreign loans used to be the World Bank, Asian Development Bank, JICA and some other development associate organisations. However, in the past decade, the country has secured huge commercial loans from Russia, China and India for several mega projects, giving less repayment time than the other sources mentioned.

Bangladesh borrowed US$36.28 billion from these three countries in the last 10 years. Russia lent money to Nuclear Power Plant, China for 12 different projects, and India opened a Line of Credit for various purposes. While ADB and WB give 30-35 years of time on average to repay the debt, the borrowed money from China and India has to be repaid within 15 to 20 years only, minus the grace period. The situation is even tighter in the case of Russian loans, as the USD 11.38 billion loan has to be paid within 10 years only, after the grace period ends in 2026. As debts have piled up right now, economist and executive director of Policy Research Institute (PRI) Dr Ahsan H. Mansur recommends not taking any such commercial loans for at least for next 5-7 years.

Although the debt-to-GDP ratio hasn't gone over the red line yet, Bangladesh might struggle to repay debts if the mega projects don't boost exports, opined economist Professor Wahidudding Mahmud at the 6th South Asian Network on Economic Modeling (SANEM) Annual Economists' Conference recently. He also pointed out a major mistake by the Bangladesh government as it committed a significant portion of its reserve for project funding. According to him, the reserve should be treated as the last resort for unforeseen crises, not as a budgetary resource.

Another concern is IMF-suggested reforms. The organisation typically suggests checking corruption, institutional reforms and reducing subsidies. Bangladesh has already 'adjusted' fuel prices which have sparked uncontrolled price hikes. Since oil prices won't come down soon in the global market, they won't be readjusted in Bangladesh anytime soon, which will only exacerbate the situation. Also, the government's reliance on taxes on fuel prices makes things more critical.

STRATEGIES TO FOLLOW: On the back of such a situation, we need to ponder over some critical issues. Many garment factories are slowing down production or ceasing operations completely, and hundreds of RMG orders are getting cancelled since last year.  Europe and US, Bangladesh's top two export destinations, are on the verge of a recession. Is it possible for Bangladesh to sustain the export growth it saw in FY22 with US$ 52.08 billion?

From what it looks like, the global economic downturn won't wane off magically soon. That's why experts suggest going slow and seeing off the crisis period. Not taking up any further megaproject before debt servicing becomes bearable is a wise way to go, while any new project has to be thoroughly scrutinised whether it would attract enough private and export-oriented investments.

CONTRACTIONARY MONETARY POLICY: One of the top strategies for debt servicing without much hassle can be a contractionary monetary policy to fight inflation at home. Usually, interest rates are increased to handle certain economic indicators like inflation, exchange rate, and balance of payment. BB should increase the interest rate to a level that will reduce money supply effectively to check demand-pull inflation. However, this might lead to a layoff frenzy in labour-intensive industries, which the government can tackle through alternative measures like industry-specific tax incentives for increased efficiency.

ENCOURAGING MORE REMITTANCE: Although Bangladesh saw a dip in remittance inflow last year (US$ 21.56 billion) than in 2021 (US$ 22.07), the record number of (11.25 lakh) outbound workers should push the inflow this year significantly, provided that Bangladesh continues tightened monitoring of illegal channels of sending money in. While a single exchange rate has helped the cause, BB can consider a floating exchange rate by depreciating the taka against the dollar to attract an increased dollar inflow. However, this is a limited and short-term strategy.

IMPORT DEPENDENCE FOR ESSENTIAL GOODS: Although experts have stressed the importance of food and energy security for a long time, now is the time to ponder over it properly. While food accounts for 9 per cent of our total imports, fuel oil eats up 11 per cent. Gradually moving towards green energy can save a significant amount of money while emphasising staple production can save huge chunks from staples like rice and wheat imports.

EXPORT DIVERSIFICATION: Export diversification is not something that can be achieved overnight. It has been discussed for decades, yet few measures have been taken. If the current export decline in RMG is taken as a lesson, the Bangladesh government has multifaceted challenges to work on: product diversification, bureaucratic complexity that slows mobilisation, inadequate infrastructure for new industries, logistic issues, energy problems, insufficient FDI, lack of skilled labour force, etc.

ATTRACTING FDI: Reiterating the importance of Foreign Direct Investment (FDI) in this situation is not needed at all. Economy diversification, controlling corruption and going with business-friendly regulations will automatically attract FDI. Fostering collaborative partnerships with countries, improving financial access for foreign investors, building up a startup-friendly ecosystem and creating an entrepreneurial mindset among local people, regulating business atmosphere, etc. are primary to-dos for the government to bring foreign investments.

POWER SECTOR WASTE AND AUSTERITY: Apart from these, stopping the waste of money in the power sector is imperative. Increasing the prices of electricity frequently amid growing inflation and an unstable commodity market while giving away Tk 93,000 crore to private power generators in the name of capacity charge makes no sense. Above all, austerity measures that are in place should be monitored and implemented thoroughly. Austerity should include checking unproductive and meaningless governmental costs for even the smallest of things, like officials touring foreign countries for nothing.

NOT THE TIME TO CONSIDER RESTRUCTURING: Lastly, the time to consider restructuring debt servicing hasn't yet arrived. It is the last resort when it is certain that the economy won't be able to absorb the burden of the increasing amount of debt to be repaid yearly. This discussion is still premature and can impact Bangladesh's credit ratings, leading to struggles in securing future loans.

Bangladesh hasn't faced such a situation in a long time; after riding on the back of high GDP growth for a decade, it seems like a sudden shock. Declining global demand for RMG at the forefront, combined with negative remittance growth, volatility of the local currency, fall of forex reserve, increased trade deficit, and inflation, has shaken the country's economic confidence.

However, Bangladesh's economy is on a solid ground. For the government and the fellow citizens of the country alike, panicking is not the way, but going slow, for now, can uplift the nation to a new dawn of a tension-free economy.

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