Home ›› 07 Aug 2022 ›› Editorial
The term national debt or public debt is used synonymously but the more appropriate word is sovereign debt as the debt belongs to a country. A country can borrow from two sources, the domestic source which is denominated in local currency, and the external or foreign source which is denominated in hard currency or in Special Drawing’s Rights [SDR]. It is not a wise option to borrow to meet current consumption but to invest in social and physical infrastructure that accelerates growth and development. The rationale for borrowing is encapsulated in the concept of well-illustrated Two-Gap Model -- an extension of the simple Harrod- Domar growth model. Indeed, two-gap model helps us to identify the difference between the domestic debt and the external gap.
Domestic debt is incurred in financing investments that cannot be met by public savings-hidden in the regular budget deficit of many countries of the world. This is known as the savings and investment gap. The other is the foreign exchange gap that helps to finance import and capital transfers that we cannot pay from the export earnings.
Sovereign debt in Bangladesh constitutes both domestic debt and external debt. The external debt of about 78 billion now constitutes about 17 percent of GDP, and over 80 per cent are medium and long-term loans although the threshold level of debt to GDP is 55 per cent. Debt distress is painful when a country borrows on a short-term basis but uses the fund for long-term finance.
One of the principal reasons for the Asian financial crisis is the gross mismatch between short-term borrowing and using the fund for long-term projects. However, there is a concern on the issue of sustainability of foreign debt in Bangladesh in the backdrop of the economic crisis in Sri Lanka. It is important to look into various aspects of external debt, the nature and characteristics of external debt, the purpose of borrowing, and the historical trend of the debt servicing burden.
Historically, Bangladesh as a Least Developed Country could not opt for commercial borrowing and enjoyed the privileges to borrow from multilateral donors such as the World Bank [WB], Asian Development Bank [ADB], and Islamic Development Bank [IDB]. The International Development Association, the soft loan window of the WB, and the Asian Development Fund, the soft loan subsidiary of the Asian Development Bank were the principal financiers till 2014 when the outstanding debt was USD 27 billion approximately 13 percent of GDP.
The borrowing was concessionary in two aspects; the grace period and the very low servicing cost of the loan. Indeed, when you convert the streams of installment payments into their current value, you could easily observe a grant element of about 60 percent. Indeed, prudent use of funds given by the IDA and ADF helped many OECD countries in their graduation process.
However, with the phasing out of the graduation process, Bangladesh would not be eligible to get concessionary assistance from the soft loan windows and also loses the privilege from several bilateral donors; the loan in many bilateral cases was converted into a grant at the request of Bangladesh and through the mutual arrangement. The Debt Relief Grant Assistance [DRGA] from Japan till December 24, 1997, is an example. However, loans from multilateral donors need to be repaid as per the payment schedule.
Bangladesh upgraded to a lower middle-income country in 2014 and witnessed a change in its structure of foreign financing; the scope of mobilization of foreign assistance in the concessional term is slimming. Indeed, the major development partners such as WB, ADB, or bilateral donor Japan have already adjusted their financial terms and eligibility criteria either by reducing the grace period or by increasing interest rate, but still below the commercial borrowing.
Rooppur Nuclear Power Plant deal of USD 12.65 billion with Russia was signed in 2015 with more stringent conditions such as the interest rate tied with LIBOR [London Interbank Offered Rate] plus 1.75 per cent though with a cap of 4 percent and a commitment fee of 0.5 percent. The repayment period is 28 years including a 10-year grace period. The non-concessional loans from ADB constitute a service charge of about 4 percent, with a repayment period of 20 years. However, there is a trend shift in terms of the composition of the multi-lateral and bi-lateral sources. The share was about 5 percent in FY17 but now it is over 15 per cent.
The extent of external indebtedness after the graduating into a developing country and on the eve of graduation may indicate the status of debt sustainability and dexterity in debt management. The ratio of external debt stock to GDP in FY17 was 11 per cent against the minimum 55 per cent ceiling position. The debt servicing with principal and interest constitutes 2.23 percent vis-a-vis the threshold limit of 20 per cent. The pressure on external debt could exceed the tethering band as Bangladesh commit more to the non-concessional loan from bilateral source to finance mega projects.
An amount of USD 14 billion in non-concessional loans was mobilized in FY17 which stood at 80 per cent of the total loans committed. There are a few mega projects in the transport and communication network and in the power sectors at the implementation stage whose successful completion could boost the GDP growth by about 4 percent but the delay could cost the economy in economic return. It is not an exaggeration to assume that at the current level of the external debt situation, Bangladesh’s total debt is sustainable as the difference between the threshold level and the current GDP -debt ratio is above the required margin achieved through cautious borrowing, costs of average time to maturity in years and debt-maturity in 1-year as a percentage of the total are within the permissible range. When we look into the interest rate structure, it is always desirable to borrow at a fixed interest rate because variable interest rates could be burdensome in many instances. “Recently, few loans have been mobilized at variable interest rates. All that is required is to keep a close eye on the issue of interest rate risk in the coming years.
The overall global external environment is very crucial in debt sustainability. Bangladesh could enjoy a comfortable position in reserve holdings and preserve the sanctity of excellent external debt management if the payment for fuel and food and disruption in supply chain management owing to the Ukraine-Russia war did not drain foreign currency reserves. The risk and vulnerability of non-concessional loans are embedded in three parameters; loan repayment structure, instability in LIBOR (London Interbank Offer Rate), and the volatility of the exchange rate. Bangladesh is in a comfortable position to tame and contain the vulnerability associated with these three parameters.
The writer is an Executive Member, Directing Staff, Development and Economics Division, Bangladesh Public Administration Training Center at Savar, Dhaka. He can be contacted at mirobaidurr7@ gmail.com
