10 months ago

Debt repayment: is Bangladesh in for 'shocks'?

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Bangladesh, like other developing countries  keen to be on a higher growth path, has resorted to borrowing from foreign bi-lateral and multilateral institutions for hard currency and domestic sources for the taka component of foreign-financed projects since long. With the passage of time the volume of both have swollen, the latter almost exponentially for chronic budget deficits. As Bangladesh has graduated from low income to lower middle income country, the grant element in foreign aid has shrunk and the concessionary rate of interest is being phased out gradually by commercial rate. Buoyed by a vibrant economy posting an average annual growth rate of above 6 per cent over the last two decades, riding on the back of manufacturing exports, particularly garments (80 per cent of total)  and increasing flow of remittance by wage earners, Bangladesh has borrowed large amounts of foreign loans to finance a number of infrastructure projects, which have come to be called as 'mega'. The external debt to Gross Domestic Product (GDP) ratio has been variously estimated, ranging from 17 per cent to 21 per cent while the domestic-debt ratio has been estimated at 41 per cent approximately. For a country like Bangladesh, it is not the external debt-GDP ratio but the servicing or repayment capacity that is more important. From the point of repayment of external loans the portfolio of loans according to sources and their terms matter significantly. Like the project portfolios the sources of external borrowing by Bangladesh are also diversified, including multilateral institutions and bi-lateral authorities. For domestic borrowing the corresponding sources are commercial banks and government instruments like savings certificates.

Government's increasing reliance on domestic borrowing to finance deficit in annual budgets have come under criticism by observers and economists on a regular basis, particularly at the time of finalising annual budget. The usual arguments against deficit financing of budget have been the crowding out effect on private sector lending, impact on inflationary situation and negative effect on mobilisation of revenue earnings by government agencies. But the question of government's inability to repay domestic loan has never been a part of ongoing criticism.

With the completion of the flagship Padma Bridge and opening it to traffic, the number of mega projects now stands at 20.The Padma Bridge has been criticised for cost and time-over-runs which have inflated the total cost, according to critics. Lack of due diligence in implementation and corrupt practices have also been alleged. Apart from this routine critique, the remaining mega projects have come up for a different type of commentary, viz. the growing burden of debt servicing. After the economic melt-down of Sri Lanka and its sovereign debt default the main thrust of comments has been on being prudent in respect of external borrowing and utilising borrowed funds economically. Even though the country's balance of payment deficit  started widening  unprecedentedly since the second quarter of last fiscal, putting pressure on the Taka- Dollar exchange rate,  no one  uttered the dreaded 'D'( default) word   regarding repayment of funds borrowed from  external sources. Headwinds facing the macro economy, from inflation to widening current account deficit, have caused concern among observers and economists but not alarm. An economist belonging to a think tank has now  departed from that trend of cautionary advise and warning by pressing on the panic button that may have sent shock waves among policy makers, particularly with the use of  'shock' to drive home his point.

The virtual briefing to media made on July 21 was titled 'Twenty mega projects of Bangladesh: trends and status'. Mentioning that the successful external  financing of the mega projects was a matter of satisfaction, the economist familiar to the cognoscenti went on giving  a breakdown of the 45 packages  of loan  for the 20  mega projects according to their nature as grant (5),concessionary loan (33), half-concessionary loan (2) and commercial loan (5). He repeated his satisfaction on the mix of the loan packages, ostensibly for its diverse sources. Then he dropped the bombshell saying that he could easily visualise the 'great shock' looming over repayment of loans come 2024 and 2026. That he also included domestic borrowing for repayment  in the overall portfolio of loans became clear when he said that  50 per cent of total borrowing by government  of Bangladesh (GOB) being from banks, unless repayment was made  when due banks will face liquidity crisis. Evidently, the economist is apprehending that government will fail to repay the domestic lenders in time, particularly commercial banks. It is surprising that he does not know that no government, not to speak of Bangladesh, defaults in its  repayment to domestic banks and there is no such record in recent history. This is because a government, including GOB, has a number of options for repayment even when its fiscal space is limited by tardy progress in resource mobilisation. The sources used by the government are from revenue earnings (partially, when the total it is not sufficient as is the case now in Bangladesh), payment through treasury bills (deferred cash payment with interest), making fresh borrowing from banks and private savers (after redeeming the old loan) and printing money. This mix of instruments or administrative fiats allows a government to not only repay domestic borrower but also to go on relying on borrowing as a mode of financing its liabilities and current expenditures. The question of domestic debt default by the government, therefore, does not arise. It is surprising that the economist barked on the wrong tree or did he use it as a stalking horse?

More serious is the apprehension expressed by the economist regarding the 'shocks' waiting to happen in 2024 and 2026 regarding repayment of external loan. Here he has not only rung the alarm bell but has been specific about when the disaster (shock) is going to strike. The question that will be asked in this context even by a lay person is: how does he know? He has only looked at the external debts (outflows) that will be due for repayment but he has not taken into account the inflow of resources in the form of exports, remittances, direct foreign investments and loans from bi-lateral and multilateral sources during and before those two years mentioned by him, 2024 and 2026. He has not looked at the trend or actual volumes of earnings year on year under these heads and make projections for them in the medium term, factoring in the negative forces impacting on them (global recession, stressed supply chain, the war in Ukraine, rise in oil and food prices etc.). In fact, he has not even broken down the loans that will become due for repayment under various projects year-wise. If he carried out an exercise looking at both the amount of repayments of external debt (outflow of resources) that will be due year to year in the medium  term and the likely external  'earnings' (inflow of resources) of the  country, his forecast might have some credibility, even if the projection was tentative. Lacking not to speak of academic rigour in the analysis, even elementary argument, his forecast about 'shocks' waiting for the economy in 2024 and 2026 is highly speculative, verging almost on infantile scare mongering. It is also very irresponsible because of the gravity of the subject.

The key questions to be asked in the context of external debt repayment in the near and medium term are: (1) Will Bangladesh exports, that crossed US$50 billion last fiscal year (FY22), be able to maintain the momentum, weathering the impending recession in the US and Europe, two of its major export destinations and what is the plausible trajectory of export earnings in the near and medium term? (2) Is the recent dip in remittance by wage earners to $21 billion, down from $24 billion last year, a temporary hiccup ready for  automatic correction  or does it call for a major policy change like devaluation of taka against dollar that will boost not only remittance but also exports? Allied to this is the question: what can be the trade-off of these benefits against increase in import bills? (3) What increase can be expected in the volume of loans given by multi-lateral institutions as a matter of course annually as budgetary support, import financing etc?

The answer to the above questions, based on past records and present reality, will provide the basis for making tentative projections about inflow of resources in hard currency that can be used for debt servicing, among other needs. No one expects these projections to be fully accurate and watertight but at least there will be a basis for  making a forecast about the capacity of the country to service its external debts when they become due year on year. In the absence of these calculations and projections the virtual media briefing was not only an exercise in futility but also a very egregious example of empirical economic analysis. It does little credit to the economist and the think- tank that he belongs to.

The recommendation by the economist in his virtual media briefing about postponing projects not having high priority is reasonable and pragmatic. But is it wise to start talking about rescheduling the repayment of loans already utilised even before we are certain that there is going to be debt distress? Restructuring repayment is an option of last resort when there is ' clear and present danger' in debt servicing, which does not appear to be the case now. Discussion of restructuring is not only premature at this stage, it will send wrong signal to our lenders, lowering down  the country's credit rating. No sensible person can think of such a drastic action when the situation is anything but dire.

Forewarning is always good because it helps to be forearmed. But the situation has to be ripe for that. It holds true in respect of external debt as it does regarding other issues of economic management.


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