Foreign debt reached at an alarming level

Dr. Salehuddin Ahmed: Foreign debt has emerged as a major liability reaching $100 billion. Paying off this debt will not be easy. At the current level of reserves and in the future if the reserves do not increase, foreign direct investment or FDI, remittances do not increase, it will be difficult for us to repay that debt. The challenge for Bangladesh is that we have not defaulted on any debt so far. As neighboring Pakistan defaulted several times, the IMF came to the rescue. Last year Sri Lanka announced they would default, unable to repay the money. As such, the position of Bangladesh is good so far.
Bangladesh is still in a credible position with lenders. But if the amount of debt increased at the rate that it increased earlier, maybe we would not have to worry so much. But in the last 10 years the amount of debt has increased a lot.
That is a concern. If it had grown the way it had grown before, there would have been no need to worry so much. It has increased manifold in 10 years. As such it will be difficult to repay. Another thing to note is that both the loan principal and interest have increased.
A significant portion of our loans are bilateral and hard loans, not soft loans. For example, loans given by Asian Development Bank (ADB), World Bank, IMF and Islamic Development Bank are soft loans, whose interest rates are very low. Interest rates on soft loans range from 1 percent to 1.25 percent. Soft loans have longer grace period and repayment period (sometimes 20-25 years). But we have taken many loans from different countries and commercial sources, which are bilateral loans. Interest on public and private loans taken from various sources is also high. Most of these are short and medium term. Now the immediate challenge for us is to mature the short-term loans. Many loans will have to start repayment from 2026. Loans taken in various mega projects including Rooppur, Padma Setu have to be repaid. It will appear as a big challenge for us.
The question may arise as to how much this huge amount of foreign debt was justified. As of August 2021, we had about $48 billion in reserves. In this situation, we got a loan of $4.7 billion from the IMF.
First of all, whether the loan we have taken is reasonable. In the case of taking any domestic or foreign loan, it should be kept in mind whether it is effective or necessary. You should take foreign loans only if it is absolutely necessary or authorized. If not, work in local currency. Foreign loans should not be taken unless necessary. Second, effectiveness; Whether it is being used properly. Loans are ineffective if they are not utilized properly. Many loans taken in the private sector are not used properly, many people are smuggling the loans. Bank defaults due to non-payment. Same is the case with foreign loans. As we can see, foreign debt is largely government debt. The government is spending a lot of money. It’s a waste of money. And most importantly, projects are not completed on time. Five-year project takes 10 years to complete. It increases the cost many times. Padma Bridge was necessary, but how long did it take to complete and how much did the cost increase? Where the expenditure was supposed to be Tk 10, the expenditure was Tk 30. As working hours are longer, our interest costs are also increasing. And there is a lot of wastage and corruption in such large projects. That is why proper use should be given importance. First, set priorities. You have to get out of this kind of thinking when you get a loan. Multilateral and bilateral sources would like to lend, but I have to look at the need. Take the loan only if you feel the need. We do not see such thoughts about taking foreign loans here.
Another concern of our external debt is the high interest rate. Considering the current situation, we should not take bilateral loans, hard loans at all. If you take a loan from a country, you have to meet different conditions with that country. The issue of IMF loans is helping balance of payments deficits. Borrowing from the IMF is fine as we have a current account deficit, more imports than exports, declining remittance flows. It’s not a big loan either, $4.7 billion. But when multilateral agencies lend, it gives a positive signal. Other lenders think that because the IMF is lending, it means that the country’s financial fundamentals are fairly sound. Because the IMF gives loans with various conditions, others think that lending there is safe. Maybe JICA, ADB, World Bank will come forward with their loans due to IMF lending. A European country might think that since the IMF and the World Bank have given loans, they can invest there. Others look to these international lenders because they offer loans after thorough analysis. Credit from IMF is therefore positive for us. Because others follow the IMF-World Bank. But it can also play a role in attracting loans and investments from the private sector.
Recently S&P, Moody’s and Fitch downgraded the credit rating. Our credibility with international investors may be eroded. This has caused a lot of confidence in sovereign credit ratings. In all three ratings, our position is downward and the outlook is not positive. Foreign investors, however, follow credit ratings. This credit rating is also self-evident, not a revelation like religious texts. They are also wrong, it is an indicator. Do not rely on it completely. A slight reduction in credit rating would not be so bad. Everyone trusts these three indicators. FDI in our country is already low. Apart from the index, we do not have an investment friendly environment. There are deficiencies in regulatory bodies, transparency of institutions, accountability, corruption, quick decision-making. We are in a fragile state as the investment climate has not improved with credit quality down. The IMF’s debt is only looking at the financial side but its scope is much wider. That is because they are emphasizing on governance, transparency, accountability, whether money is being spent properly. Not only the banks that give loans by looking at transactions, foreign reserves, but also by looking at the condition of the institutions that are behind it. They are looking not only at the financial and external aspects of lending, but also at the internal management.
Recently our foreign exchange reserves have come down to $19 billion. But in 2021 it was $48 billion. Our downward trend, many people fear, can it be difficult to get the next installment? But I think getting the second installment won’t be a big problem. In the meantime, the IMF has looked into and talked to various stakeholders. They have given several conditions, such as asking us to focus on reforming the banking sector and revenue collection. Personally, I think the second installment of the IMF will come. You pay the first installment, withhold the second-that can’t happen. But there is fear if Bangladesh gets the second installment and thinks ‘we got it’. Do not suffer from complacency. I have said this before, if they continue to give loans like this without conditions, we will not get much profit. We have to carry out many reforms of our own. Just what the IMF is saying should be done-not so. If we don’t make the necessary reforms in the financial sector, we will be in danger, IMF loans or not. Getting the second installment will help us a bit but not solve all the problems.
Dr. Salehuddin Ahmed: Ninth Governor of Bangladesh Bank