Resources accumulation needed to pay back debt

Enayet Karim: One of the main goals of the government’s medium and long term development plan is to establish Bangladesh as a developed country by 2041. To achieve this goal, it is essential to increase investment in the development sectors. Foreign aid or loans are essential in current financial management to meet the investment needs as per the development goals considering the limitation of resource supply from domestic sources.
And the foreign debt of a country is the loan that country takes from different countries, foreign banks and financial institutions, international organizations and private institutions. Bangladesh usually borrows from the World Bank, International Monetary Fund, Asian Development Bank and foreign commercial banks.
According to data released by the World Bank’s South Asia Development Update, private investment in emerging market and developing economies, countries and regions in South Asia is very low compared to public investment. Farmers are moving away from agriculture to non-agricultural sectors due to climate change impacts. However, not so much employment was created in the non-agricultural sector. Employment generation is interdependent with macroeconomic conditions. This includes increasing foreign direct investment and creating a positive business environment.
If we look at the debt crisis during the OPEC period in the eighties, Latin America was in danger of short-term loans, which were given to them very cheaply. As a result, they once went into debt crisis. The same thing happened in Sri Lanka. Most of Sri Lanka’s debt is short-term. They are in crisis without increasing export income. At the same time, many African countries also faced the same problem. But it is true that such loans are increasing now. Since our exports are better than many African countries, we do not have much of a crisis in this area.
Economists say that most of the infrastructure projects in Bangladesh are cost overruns. Most of these have implemented with borrowed funds resulting in inflationary increases in project costs. The question is how do we repay the debt? Our export earnings are not that significant. Where Vietnam’s export income is more than $300 billion annually, how can we surpass the country with an export income of $300 billion with an export of $45 billion. Because Bangladesh’s debt service obligations are also increasing which is forcing the government to continuously take new loans to repay the debt amid insufficient revenue collection.
According to the United Nations Global Crisis Response Group, developing countries have taken on foreign debt much faster than developed countries. This has become a cause of concern in many developing countries. Many people are under debt pressure, many have defaulted. Developing countries’ public debt was 35 percent of GDP in 2010, rising to 60 percent in 2021. Among them, the foreign debt of the countries increased from 19 to 29 percent during the same period. Among these foreign loans, private sector loans have also increased. At the same time, credit to the private sector increased from 47 to 62 percent.
According to data published by research firm Sanem, the country’s growth has been going through fluctuations for several years. Investment in this is not as expected. As investment is low, the country’s growth is increasing without employment. The question is how growth increases without employment? Yes, public investment has played a major role in Bangladesh’s higher economic growth over the past years. The private sector can play a greater role in creating new sustainable employment for the ever-growing labor force entering the job market. But in that case the desired investment is not happening. As a result, where everyone is talking about decent jobs, job opportunities are far from increasing, job assurance has become a big challenge.
Bangladesh’s revenue-GDP ratio is one of the lowest in the world. Are we worried about the ability to carry debt and the ability to repay the debt? Because at the end of the day domestic resource accumulation is important which has to be considered for repayment of both domestic and foreign debt. We see capital formation in other countries through initial savings of people, but in Bangladesh it is not being implemented properly. Domestic and foreign debt is increasing the government’s liability.
Many claim that debt has increased due to Covid-19, Russia-Ukraine war and instability in the Middle East, but economists believe that the real reason is different. In 2018-2019, 26 percent of the revenue collected by the government was spent on debt repayment. But this rate has now risen to 34 percent, where 28 percent is going to domestic debt repayment and 5.5 percent is going to foreign debt.
According to the Economic Relations Department’s (ERD) update report, Bangladesh paid $105.4 million to development partners as interest only in the nine months of the fiscal year July-March 2024. Reliance on market-based loans has increased the cost of interest payments. Again, due to the increase in interest payments, the foreign debt payment has increased to $257 million in the 9 months (July-March) of the fiscal year 2023-24. It was $174 million in the same period of last financial year.
So, what are the reasons for concern about foreign debt? The answer is relative. According to the World Bank, IMF, credit rating agency Moody’s or Standard & Poor’s, the credit rating of Bangladesh has decreased. Private sector investment has been stuck at 23.4 to 23.8 percent of GDP for over a decade. So, domestic resource accumulation should be increased very quickly. There is no other option.
According to sources, the public and private foreign debt of Bangladesh was $98.9 billion in June 2023, which exceeded $100 billion in September of the same year. At present the foreign debt-GDP ratio of 21.6 percent is relatively not high. However, it is very important to have the ability to repay the loan. Our ratio of concessional loans is decreasing, while the share of concessional and market-based loans is increasing. Loan terms are also getting stricter. External debt and debt service obligations are of some concern to us, especially when GDP is compared to revenue, exports, remittances and foreign exchange reserves.
At various times, the country’s debt to GDP ratio has been highlighted and it is said that Bangladesh still has the opportunity to take more foreign loans. Economists feel that calculating the ratio of foreign debt to GDP in a country like Bangladesh is meaningless because the tax-GDP ratio of Bangladesh is only 8 percent. One of the additional risks in foreign loans is currency depreciation. For example, in 2015, $100 billion was borrowed when this loan was taken when the price of Tk 80 against one dollar. That is, the Bangladesh government has taken a loan of Tk 80 thousand crores in domestic money. But a few years after taking the loan, Bangladesh fell into a balance of payments crisis. Due to insufficient supply of currency in the market, one dollar became equal to Tk 120 within a few days. Then the debt and interest burden of the Bangladesh government increased by 50 percent. In such a context, the debt and interest liability of the government becomes much higher. That is why, in the case of foreign loans, one has to keep a close eye on the dollar rate, balance of payments, reserves, exports, remittances, etc.
We have foreign debt repayment capacity. But we must ensure that we can achieve maximum utility by using all these loans, which are paid with public tax money.