Nearly $25.45b govt debt kept out of calculation: Debapriya

The size of government liabilities that the government is showing is at least $25.45 billion lower than what actually is as some key components have been taken out of calculation, thinks Dr Debapriya Bhattacharya, distinguished fellow at the Centre for Policy Dialogue (CPD).

Both domestic and foreign debts amount to $131.14 billion as per the government, but if debt of public entities, government's contingent liabilities, other off-budget financing, intragovernmental debt, and private debt with sovereign guarantee are calculated, the government loans will stand at $156.59 billion, he said.

At the same time, the liabilities will reach 44.1% of GDP from the existing 34.7%, he noted in a conversation with the media on Monday.

No actual data is also available on the amount of loans guaranteed by the government. If such loans are taken into account, the total amount of liabilities may increase further, he continued.

The economist was presenting a keynote titled "Deconstructing Public Debt of Bangladesh: Trends, Status and Outlook".

Debapriya said the situation of government debts and repayments is still at a tolerable level, but the tendency to borrow more from the domestic sector, taking out high interest commercial loans from foreign sources and a rise in interest rates on loans from various donor countries and institutions, minimising grace and repayment periods might expose Bangladesh's loan management to risks.

He further said the amount of bilateral debts is increasing a lot owing to a fall in multilateral loans in Bangladesh. Interest rates of loans offered by Russia, China and India are also high like traditional lenders, such as Europe, the United States, Canada and Australia, charge. 

About $19 billion in loans are coming from India, Japan and Russia for high-value projects. Two such projects are being implemented on a $3.69 billion supplier credit from China. In total, $6.78 billion worth of projects have been taken up through supplier credit, Debopriya noted. 

Bangladesh is likely to face a major pressure to repay supplier credits in the next two or three years, he said.

Repayments of supplier credits – at least $10.5 billion – are yet to start. The repayment implications for macroeconomy will become evident from 2024-25 onward. 

He also remarked that at that time there would be no more comfortable situation in repaying foreign loans.

Reasons behind worldwide debt crises

Analysing the debt crisis that arose recently in several countries, including Greece, Ghana, Zimbabwe, Pakistan and Sri Lanka, Dr Debapriya said, inadequate domestic resources and external grants are the main reasons behind the crisis. 

He also identified the deteriorating current account and balance of payment, fall in external financial flows, including export revenue, remittance income, foreign direct, income on assets overseas as another major reason.

"Imprudent external borrowing would create significant challenges on the way of debt sustainability," he said, adding, changes in debt composition, currency mismatch, high-interest rate and shorter maturity period, failure to generate expected return on investment and escalation of project cost would accelerate the crisis.

He also said that public debt management is not concern alone for the fiscal or monetary authorities. Joint initiatives are required to prevent the country from debt crises.

Safe limit of public debt

Total stock of public debt of Bangladesh amounted to $131.14 billion, which is about 34.7% of the GDP in 2020, lowest in South Asia, while it was 112.2% in Sri Lanka and 120.7% in Bhutan, he said, quoting IMF data.

He said there is no safe limit of public debts compared with the GDP or other indicators. Some countries, such as Japan and the USA, never defaulted on repayments having debt stock above the size of their GDP. But some countries having debt about 40-50% of the GDP fall in crises.

"A World Bank study suggests that a debt to GDP ratio above the threshold of 77% may lead to adverse impact on the economy. But this varies from country to country; a ratio exceeding 100% does not necessarily indicate a bankrupt or insolvent country," he said.

There is little theoretical or empirical support for setting a public debt target at some particular level. More important factor is the pace of fiscal consolidation, which is not too slow to give markets concern but not too fast to derail the recovery effort. 

Maybe, a country's tax collection is increasing and in line with this, government expenditure is going up, so are budget deficits and debts. In this case, there is nothing of great concern, Debopriya said.

He called for ensuring balanced debt management rather than finding a secure percentage of government debts.

Concern over private external loans

Expressing his concern over the sharp rising trend of private credit growth from the external sector, Dr Debapriya said such loans reached $18.69 billion, while it increased by $4.6 billion in FY21 alone.

He said the share of external private loans reached 5.26% of the GDP, which was only 1.8% in FY03 and 1.4% in FY13.

He said the government should assess the private sector's external loan in terms of interest rate, repayment period and other indicators. 

Taking part in the discussion, CPD Distinguished Fellow Mustafizur Rahman said although private sector foreign loans did not require government guarantees, the government faced an impact in case the borrowers went into defaulters. "Such incidents bring about a fall in credit rating, which ultimately creates a pressure on currency exchange rates." 

The private sector foreign loans were little even 10 years ago, he said, which grew rapidly. "So, we need a detailed assessment."

Govt loans increase in election years

In election years, the tendency of the government to take loans increased, said Debapriya, noting that it happened before and after the last two national elections. 

"Thus, the electoral cycle is an important indicator for the interpretation of Bangladesh's debt situation," he said and urged the government to take a wise decision in the next. 

In response to a question, Debapriya said; "If there is a deficit in the democratic process, the government tries to hide that by showing its visible economic projects."

How the future look likes

Inadequate domestic resources would create significant challenges in the field of public debt management, Dr Debapriya said adding, total revenue-to-GDP ratio was at 9.4% in FY21, the lowest among all South Asian nations. 

Bangladesh with a population of 164 million has just 7.4 million people with Tax Identification Number (TIN), only 2.3 million of whom gave returns in FY22. Total Debt servicing liabilities remained above 25% of revenue expenditure, at 26.7% in FY21, due to lower revenue generation.

Identifying the weakening of the external balance as another challenge, he said the current account deficit reached $12.8 billion negative in the first eight months of the current fiscal against a $0.83 billion surplus a year back.

Balance of payment deficit stood at negative $2.5 billion in the last nine months, while being at a surplus of $6.9 billion in FY21 correspondingly.

Net FDI inflows have not picked up over the years, falling to 0.71% of GDP in FY21 from 1.29% in FY19. Disbursement of foreign assistance remained below 1.7% of GDP.

The external sector put pressure on forex reserves that reduced to less than $42 billion equivalent to five months of imports.

Nature of external borrowing

Although the World Bank Debt Sustainability Analysis puts Bangladesh at low risk of external and public debt distress, Dr Debapriya identified some concerns over the change in the pattern of the public borrowing.

He said the government needs to include domestic debt in the stress test. Also, private sector external debt has been on an increasing trend. Outstanding foreign debts in FY21 amounted to $60.15 billion, up by $9 billion from the previous year.

Fall of multilateral sources, increased borrowing from bilateral creditors to finance megaprojects. Even borrowing from the World Bank, ADB and Japan have become less concessional. 

External debt composition changed towards shorter grace and repayment period, and higher interest loans.

At the end of the FY20, the amount of foreign assistance in the pipeline has increased to $49.64 billion, which indicates low utilisation of concessional and semi-concessional finance.