Foreign loans: ‘If our repayment capacity doesn’t increase, we will get in trouble with the interests’
As of June 2021, Bangladesh's outstanding foreign loans stood at $50.87 billion, while there is $48 billion more in the pipeline.
The country is poised to spend more than $2 billion on servicing its foreign debt from the next fiscal year, with grace periods of many such loans ending in the current fiscal year.
The repayment burden will get heavier when foreign-funded megaprojects, such as Rooppur Nuclear Power Plant and Padma Bridge Rail Link, see the start of principal payments alongside interests within the next four years.
Moreover, interest payments of new loan deals will increase the loan payback load.
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Bangladesh will have to deal with maximum pressure in FY27, FY28 and FY29 as its debt repayments will reach at least $2.5 billion during the three fiscal years. Such an upward trend will continue till FY33, according to a report by the Economic Relations Division (ERD).
In an interview with The Business Standard, former BIDS Director General Mustafa K Mujeri said the increasing foreign loans of Bangladesh can be worrisome if the country cannot properly utilise the borrowed money. Dr Mujeri is currently the Executive Director of the Institute for Inclusive Finance and Development (InM).
Foreign loans increased from Tk12,870 crores in FY 2015-16 to Tk97,740 crores in FY 2021-22. Money spent on debt repayment also increased from Tk7,080 crores to Tk14,450 crores during this time. Could such a jump in foreign loans become risky for Bangladesh's economy's stability in future?
A country like ours has the necessity of foreign borrowing because we have a scarcity of investible resources. We don't have the capital. As a result, external assistance is absolutely necessary for our economic development. Especially, our infrastructures are costly and the scope to finance them from our own resources is limited. So foreign borrowing is regarded as indispensable for the development of countries like ours. If we utilise the borrowed money judiciously, the benefits will outweigh the project costs. This is the argument.
In recent years, there has been a rising borrowing because we had some mega projects during this time that are very capital intensive. They are mostly funded by foreign borrowings. That is why there is such a jump in foreign loans. But we are still safe in terms of the internationally accepted borrowing amount in comparison to the GDP.
However, we have to repay the amount with interest within a stipulated time frame. If our repayment capacity doesn't increase, we will get in trouble with the interests. If we cannot utilise the large borrowed amounts in productive sectors, that could be worrisome.
Most of our projects – irrespective of mega and smaller projects – overrun costs. It means the costs become many times more than the expected costs. All our recent megaprojects far exceeded the original cost estimation. One of the biggest reasons for cost escalation is that they overran project duration.
So how can these project implementation delays impact the repayment of foreign loans?
If we don't repay the loans in accordance with the repayment schedule, it negatively impacts our credit ratings. Up until now, Bangladesh has repaid the loans on time. But if the borrowing increases unusually, or if we cannot reap benefits from them, they will turn into burdens. So we will have to think about how much we are utilising the loans.
As an LDC so far, we have received concessional loans – at a very low-interest rate. But now that we are a lower middle-income country, and soon we are graduating from the LDC, we will get fewer concessional loans. Interest rates will spike. And consequently, the burden of interest will also deteriorate.
While foreign loans have drastically increased already, there are another $40 billion in foreign assistance pledges in the pipeline according to a finance division secretary. Is our government revenue increasing keeping up with the increasing loans? What is your observation?
The tax revenues are one of the key sources of government revenues. But sadly, the tax-GDP ratio is very low in our country in comparison to other countries. For example, our tax collection stands only around 10-12% of our GDP whereas a country like Nepal's tax collection is around 17-18%. But their per capita income is lower than ours.
As our tax collection is lower – we depend on borrowing. And besides foreign loans, we are borrowing – banks or non-bank – from the local market as well. It means both our external and internal borrowing are increasing. And our internal borrowing interest rates are higher than the external borrowings.
Our dependence on borrowing is growing because we failed to increase our tax collection.
Investment demand is increasing in Bangladesh now. With this, the demand for foreign currency is also increasing. Do you think that the rising loans can put pressure on foreign exchange reserves and the exchange rate?
If our borrowing increases and our macroeconomic stability is disrupted, an adverse impact falls on the foreign exchange as well. These are all interrelated. So if our domestic economy is unbalanced, it creates an impact on external balance as well.
If the pressure increases on foreign currency, or if our foreign exchange reserve decreases, if there is disequilibrium or deficit in the current account balance, its impact is felt on our foreign currency market as well. It means our exchange rates get pressurised and depreciate to the dollar consequently.
So when we will repay the loans, we will have to repay in dollars; we will have to buy the dollar at an expensive rate. The more our domestic currency depreciates, the more it gets devalued, and the burden of loans will keep soaring.
At the same time, the interest rate will also increase in real-time. Since the indicators of our macroeconomics are interconnected with one another, if one problem infects one indicator, it will reflect on all the others.
Speaking of megaprojects, let ud talk about Sri Lanka. The megaproject induced foreign loans are said to have played a role in their current predicament. What can Bangladesh learn from this island nation?
Sri Lanka's current circumstances are not the creation of a single day. They have reached here over a certain period of time. It is like an explosion now. We never hope that Bangladesh, or any country, faces a Sri Lanka style crisis.
We have to learn from Sri Lanka because their economy was indeed a strong one even a few years ago. They were better than us in most indicators including social, economic and humanitarian indicators. It was a stable economy. We have to look at how this strong economy has fallen into such a crisis.
No matter how strong an economy is, if this is not administered efficiently if the policies and management are not attuned to one another, a stable economy can quickly turn into a weak and explosive one. That is the lesson, applicable not only to Bangladesh but rather to all other countries.
During the 2008 economic crisis, an economy like the United States also got in trouble. So every country should take it seriously that no matter how big an economy is, bad policies can lead it to a disaster.
