Home ›› 16 Dec 2022 ›› Special Supplement
Bangladesh, as it emerged from the blooded liberation war in 1971, from the beginning, has been regarded as a test case for development by economists, policymakers, and program administrators of donor countries and international financial institutions. Interest in the area predated political independence, as East Pakistan represented the world’s most extreme case of population growth outstripping resources. Because Pakistan was a single country, project design and approval processes occurred at the national level. West Pakistan, also poor, appropriated most commodity aid, capital, and technical and project assistance. The people of East Pakistan considered the attention they received to be inadequate and inequitable.
In October 1974, the Bangladesh Aid Group was established under the aegis of the World Bank, with twenty-six participating governments and institutions. Aid to Bangladesh has remained at a high level since the consortium came into existence, although with substantial fluctuations in new commitments from year to year. In the 1980s, the value of food aid declined to around 11 to 18 percent of new aid commitments, most of it given on a grant basis. Commodity aid--about 25 percent of aid preferred by the largest donors because their funds are put to work in well-defined ways that can be related to policy objectives. From the beginning, the Bangladesh government commitments to Bangladesh -- included key items for increasing productivity, such as fertilizer, cement, steel, pumps, and other equipment. Project assistance accounted for more than 50 percent of new commitments. This form of aid was has been unable to use project funds at the same rate as they are authorized. As a result, a pipeline of authorized but undisbursed project funds has grown bigger every year.
Because much of the funding for the development budget in the mid-1980s was financed by external donors, the Bangladesh government had to attract financing for high-priority sectors and projects. Coordination was carried on at all times between the government and individual donors, but the keynote each year was a meeting organized by the World Bank as leader of the Bangladesh Aid Group. The World Bank has taken the lead in addressing some of the most deep-seated structural constraints in Bangladesh’s economy by providing productive employment for those without assets, promoting economic opportunities for women, and addressing the social and economic inadequacies of education, health, nutrition, and population programs. The Asian Development Bank has been the second largest donor, about half of the Asian Development Bank’s financing has gone to agriculture and agro-industry. ADB has also supported transportation projects (development and improvement of feeder roads between local markets and primary roads, inland waterways, and railroads) and social welfare schemes for population control, health, and education. The United Nations Development Programme operated its own development projects and coordinated the activities of other United Nations (UN) agencies with programs in Bangladesh, including the World Food Programme, World Health Organization, United Nations Industrial Development Organization, and United Nations Fund for Population Activities. Typically, these agencies provided technical assistance and training. They often functioned as catalysts by doing analytical and policy development work alongside Bangladesh government authorities, preparing the ground for well-conceived programs requiring capital expenditures to be financed by other donors or even by the Bangladesh treasury. The United States was the most important donor until the early 1980s when Japanese aid reached similar levels. As Bangladesh has been hospitable to foreign assistance, in addition to the programs of Britain, Japan, and West Germany, significant aid programs were initiated by Canada, Sweden, Finland, the Netherlands, Switzerland, Australia, and others, in which each country concentrated on areas where it possessed special expertise.
A high intensity of domestic credit expansion in the government sector resulted in a rising level of government borrowing from both the banking system and the public through the use of savings instruments. The 1974 New Investment Policy restored certain rights to private and foreign investors. In December 1975, the Revised Investment Policy allowed greater private sector activity and authorized joint ventures with public sector corporations in a number of previously reserved areas, provided that the government retained 51 percent ownership. The Dhaka Stock Exchange was reactivated in 1976, and the Bangladesh Investment Corporation was established the same year to provide financing for bridge construction and underwriting facilities to the private sector. Investment ceilings for private industry were abolished in 1978. Then, in 1980, the government delineated a more liberal attitude toward foreign direct investment in the Foreign Private Investment (Promotion and Protection) Act. Yet the growth of investment nonetheless remained slow, and industry was still dominated by public. The government transferred 650 industrial enterprises to private hands, leaving only 160 under public ownership. Subsequent governments announced comprehensive revision of industrial policies , setting out objectives and strategies to accelerate the pace of industrialization. The policy also emphasized private and foreign investment in high technology, export-oriented, and labor-intensive industries. The revised policy increased the number of sectors open to private investment, liberalized the tariff structure, reduced quantitative import restrictions, and furthered privatization of state-managed enterprises.
In 1987 an amendment to the Bangladesh Industrial Enterprises (Nationalisation) Ordinance was adopted, providing the legal basis for plans to sell up to 49 percent of government shares in remaining nationalized enterprises. An export processing zone was established officially at the port city of Chittagong in 1980, actually begin functioning in March 1983, when a program of inducements was offered to investors opening up enterprises. In addition to the broad policies encouraging foreign investment, Bangladesh has entered into bilateral investment treaties which included such assurances as unrestricted currency transfers, compensation for expropriation, dispute settlement procedures, and taxation treatment. In addition, Bangladesh has signed agreements for the avoidance of double taxation with 32 countries.
Even with a reasonably attractive framework in place, the flow of private capital to Bangladesh has been slow. Estimates from the Organization for Economic Cooperation and Development foreign direct investment in Bangladesh averaged very insignificant. The largest amounts of foreign private investment are from Asian countries--Japan foremost, with smaller amounts from South Korea, Singapore, Taiwan, and Hong Kong--and from Britain and other countries in Western Europe.
External Debt in Bangladesh increased to 95.9 USD Billion in June 2022 from 26.31 USD Billion in 2016. External Debt in Bangladesh averaged 20.88 USD Billion from 2001 until 2017, reaching an all time high of 95.9 USD Billion in June 2022 and a record low of 16.17 USD Billion in 2002. Debt servicing crossed 2.01 US $ Billion in 2020-21 and in 2021-22 US $1.41 billion is paid as the principal and 468.36 US $ million as interest to MLT outstanding loan.
Bangladesh is relying heavily on public debt to meet the budget deficit since its independence. In this paper, the objective is to find out whether the government of Bangladesh is excessively borrowing from the public sources and thus negatively affecting the economy of the country. For this purpose GDP growth rate, manufacturing sector growth rate, investment as percentage of GDP and Export as percentage of GDP have been selected for judging the impact of public debt burden (DB) on these variables. The study period is 1980-81 to 2011-12. Augmented Dickey-Fuller test has been used to diagnose whether the time series data are non-stationary. Then on the basis of the result of Johansen co-integration test, Vector Autoregressive (VAR) model has been used to find out the long term association between each set of variables. But, the result shows that in Bangladesh, there is no long term association of DB with any of the above mentioned economic indicators. Thus, it can be said that public debt burden has no positive or negative impact on the economic growth of Bangladesh.
An analysis of the trends in foreign loans availed by the local private companies between 2011 and 2021 reveals that the total number of foreign loans has increased dramatically over the years from a total 24 loans in 2011 to 342 loans in 2021). Similarly, the corresponding monetary value of the foreign loans also increased from a total of USD 909.3 million to USD 1,494.3 million, exhibiting a growth of almost 63 per cent over the aforementioned timeframe. Reliance of the local companies to avail loans from the Off-shore Banking Units (OBUs) of the local banks also evinced a persistent rise between 2011 and 2021. The share of number of loans extended by the OBUs, in the total number of foreign loans, has gradually increased, from 29.2 per cent in 2011 to 71.5 per cent in 2021.In view of the above, as further analyses reveal, it was the RMG sector which dominated the scenario. In terms of the sectoral breakdown, the RMG sector accounted for 60.2 percent of the total number of foreign loans, followed by the power sector with a share of 11.4 per cent.
Furthermore, hard loans have been identified based on the methodology suggested by Organisation for Economic Co-operation and Development (OECD, 2013). It was observed that, the number of hard term loans from the foreign sources has jumped significantly since 2016. The average maturity period has exhibited a fluctuating trend and increased from 5.2 years to 5.5 years between 2011 and 2017. In contrast, the average interest rate payable on the borrowed funds reveals a generally declining trend–from 4.6 per cent in 2011 to 3.6 per cent in 2017.
Increasing number of hard term loans in recent years, alongside increasing average interest rates,imply higher payment obligations in foreign currency over the coming years. Additionally, depreciation of BDT in the recent past against the USD will put further pressure on debt servicing Liabilities. In this changing scenario, the current policy of allowing foreign loans, on a case by case basis, should be re-evaluated. This is also justified on account of falling interest rate in the domestic market and the need to bring back good investors within the fold of domestic financial system.
The writer is retired Secretary and Former Chairman, NBR
