External debt flows to remain crucial

The direction the external debt flows next year will prove to be crucial. But before we even get into that discussion, we have to first keep in mind that the current account deficit will not decrease much next year.

Even if it falls slightly, the size of the deficit will still be high.

Even if prices fall in the global market, the volatility will remain. Therefore, if commodity prices fall and other conditions are good, our deficit may be $14 billion instead of $18 billion. We would still need this amount of foreign financing to maintain the forex reserves at a safe level. 

This huge amount of financing will not come through foreign direct investment, portfolio investment and equity financing. We must turn towards foreign debt to manage the current account balance. This loan can come from both the public and private sectors. Most of our long-term debt is from the public sector.

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The recent balance of payment data shows that the current account deficit has widened compared to the same period last year. Deficit is also seen in the financial account.

Earlier, net financing was slightly lower than the current account deficit. However, due to the surplus in the financial account, the deficit was reduced slightly.

But in the first quarter of the current fiscal, negative flow was also seen in the financial account. As such, the outflow of foreign loans is more than the inflow, which is bleeding out the economy at a faster rate. 

Due to this reason, not only does the current account deficit need forex reserves, but the financial account deficit and the net debt flow deficit needs dollar support.

For this, even if our current account deficit is reduced to $14 billion, another $12-14 billion will be required to meet the net financial account deficit. The big question, thus, is what is the possibility of this money coming in. 

A major part of foreign loans comes for project implementation. The projection in this regard is in the national budget. After reviewing the data of the first few months, it can be said that the rate of project implementation will not be more than before.

Apart from this, the government has received commitments of $250 million to $500 million in budget support from the Asian Development Bank and the Asian Infrastructure Investment Bank. The World Bank will also make $250 million available.

This will be accompanied by $750 million in the first tranche of the International Monetary Fund. A total of $1.5 billion in budget support has been guaranteed, which may increase slightly.

The area of uncertainty is that the private sector has $18-19 billion of short-term foreign debt which will be repaid within a year. It has to be seen how much rollover of these loans is possible. Some loan rollovers are under negotiation.

If not, there will be a big pressure on the financial account of the private sector to pay off foreign loans. In that case, if the deficit increases further, the pressure on reserves and exchange rate will be more intense.

With a deficit of $14 billion in the financial account, there is a possibility of getting foreign loans of $5-$6 billion for the implementation of our projects. And with budget support, the amount of net aid can stand at $7-$7.5 billion.

With that out of the way, where will the other half of the money come from? Where will the repayments of private sector loans come from if those are not rolled over? So, it is difficult to say now where the overall deficit will stand.

In this situation, all kinds of measures should be taken to increase foreign exchange inflow to reduce the pressure on the reserves. 

At the same time, there is no alternative to leaving the exchange rate entirely in the hands of the market.

Due to exchange rate fluctuations, $500 million dollars per month, or $6 billion annually, come into the country in expatriate income flowing through informal channels. If this amount can be diverted annually to formal channels without keeping this difference, a large part of the deficit will be met.

Many people are taking more time in export proceeds repatriation due to exchange rate fluctuation. Export income is also coming through informal channels. So the best initiative is to completely liberalise the exchange rate. At the same time, the ceiling of the interest rate should also be left to the market.

Initiatives should be taken under the framework of monetary policy to deal with the deficit of the financial account. It is not possible to deal with this pressure through fiscal policy and government budget.

However, leaving the exchange rate does not give immediate results. In this case, austerity must be ensured to hold on to the foreign currency. Initiatives should be taken to implement the initiatives which are helpful to increase the supply of foreign currency.

If a project is implemented with foreign loans, the government can save some money. Again the supply of dollars may increase. We have more than $48 billion in foreign aid commitments in our pipeline. As many projects can be implemented, the amount will be released. At the same time, the development programme of the government will also move ahead. However, there hasn't been any practical example of using foreign aid to implement projects. 

TBS Senior Correspondent Jahidul Islam talked with Dr Zahid Hussain