Debt servicing now a fresh cause for worry

Concern over the government's domestic borrowing is already there. Added to it is an abrupt rise in external debt, which will put Bangladesh's economy under new pressure from rising external debt servicing requirements.

The country's repayment of foreign loan and interest in the first half of the current fiscal year approached $845million, up from $747million in the same period a year ago, according to preliminary data from the Economic Relations Division's Foreign Aid Budget and Accounts Wing.

In the current fiscal year, the government has kept aside $1.85 billion for external debt servicing – $1.2 billion in principal and $570million in interest. The amount was $1.59 billion in the last fiscal year.

External debt to GDP ratio has been on the rise—from 12.8 percent two years back to 14.7 percent in 2018-19—far below the risk ceiling of 40 percent, Economic Relations Division data showed.

External debt has been on the rise, reaching close to $38.5 billion in June-end last year, up from $26 billion three years back.

Last year, the International Monetary Fund said Bangladesh had a low risk of external debt distress and had the scope to borrow more to finance large infrastructures. 

But rapid growth of short-term loans in the foreign debt portfolio is an early indicator of potential vulnerability, the Bangladesh Bank said in an earlier financial stability assessment report.

Economists and research organisations like the Centre for Policy Dialogue on several occasions have warned that Bangladesh, though not yet in a position that points to a debt trap, could face debt-servicing pressure if foreign loans for big projects are not negotiated with extra caution.

They have expressed worries about Chinese loans as countries like Sri Lanka and Pakistan have run into trouble with China-funded projects and loan repayments.

China pledged $21.5 billion for 27 infrastructure projects during President Xi Jinping's visit to Dhaka in 2016, but disbursement has so far been around six percent of the country's foreign debt—not a level to worry about.

Economic Relations Division officials are upbeat about Bangladesh's history of never defaulting on foreign loans and its status as a less-indebted country.

Md Mostafizur Rahman, joint secretary of the division, said disbursement increased during the last two to three years and that is why repayments have gone up.

He sees nothing unusual in the rising trend in external debt servicing.  

From fiscal year 2012-13 to fiscal year 2016-17, the release of foreign assistance was from $3 billion to $3.5 billion. 

In the following fiscal year, Bangladesh set a new record in the use of foreign assistance. The release of foreign funds amounted to $6.16 billion, rising to $6.21 billion in fiscal year 2018-19.

"A number of agreements relating to big projects have been signed and disbursement has also started. So repayment is also rising," Mostafizur told The Business Standard.

Up to October, growth of disbursement was slower than repayment, slowing down project implementation as yet more than a third of annual development outlay is expected from external sources.

Inefficient public spending raises doubts over expected returns from huge infrastructure projects.

Domestic borrowing of the government, from banks in particular, has ballooned.

In the current fiscal year, the government set aside Tk57,068 crore or 18.2 percent of its operating budget for interest payments of domestic and foreign loans.

If both domestic and external debts are put together, the repayment of principal and interest amounts would account for above 33 percent of GDP.

"Compared to other countries, including India and Pakistan, the debt-GDP ratio is not yet a cause for worry. But it could be a reason for stress on the economy in the near future," said Dr Atiur Rahman, former governor of the Bangladesh Bank.

"There is a debate on what should be the optimal ratio of debt to GDP ratio. The issue is where you are using the debt—to make bridges or to buy tanks as in Pakistan," says Dr Biru Paksha Paul, who has served the Bangladesh Bank as chief economist.

He felt that not much thought had been given to undertaking the multi-billion dollar nuclear power project, which led to a shooting up of external debt and raised the risk of debt servicing stress.

"We need electricity, but the pattern and modality of the Rooppur plant cannot be justified. We hurried into it when the world has started abandoning nuclear electricity plants," said the economist.

Big projects have brought fortunes for countries like Singapore because they implemented them efficiently, he said.

"Our public project management is one of the worst because we lack efficiency. So, there is a fear that we may head for bigger debt servicing without the expected fruits from big projects," cautioned Dr Paul, currently a professor at State University of New York.