Medium-term debt strategy

Any individual borrower would naturally explore all options to secure funds, considered the least expensive and affordable at ease in terms of repayment, to meet his or her resource gap. The same principle stands valid even for a government that invariably needs funds to finance the fiscal deficits from time to time. However, the size of the annual public borrowings that a government needs, does not always remain the same because of the variations in the budgetary resource gap. In the case of Bangladesh, successive governments have been particularly serious about keeping the budget deficit within the range of 5.0 per cent of the country's gross domestic product (GDP).

As a borrower, the government however does not have that much of flexibility that an individual borrower enjoys; some factors that do have a bearing on the country's overall economic management are of particular relevance to public debt servicing that includes both payments of interest or other service charges as well as amortization. The government has so far remained largely dependent on domestic sources, mainly banks, for funds to meet the fiscal deficit. According to a report published in this paper Monday last, such dependence is around 60 per cent. Treasury bills and bonds and savings tools are such widely used sources of mopping up domestic funds by the government. This debt strategy, however, is becoming quite expensive and entailing a heavy load on the national budget because of relatively higher costs of funds. As of now, the government has to earmark the second highest amount in its annual revenue expenditure budget for making payments on account of interest charges on debts, local and foreign.

Against this backdrop, the ministry of finance (MoF) has reportedly decided to revise its debt strategy, styled as the medium-term debt strategy (MTDS). This is designed to borrow more from foreign sources. Such borrowings, as the concerned official circles consider, would help lower both costs of funds and risks involving public debt portfolio. It does hardly need any mention that cost of soft loans, coming usually from usual multilateral and bilateral sources, involves not a very large amount of money. But the average volume of such loans that are made available annually by such lenders is not adequate to meet the overall budget deficit. It is unlikely that the inflow of such loans would record any remarkable rise in the short-and medium-terms. Under such circumstances, the government would have to borrow more from the relatively high-interest bearing commercial loans or suppliers' credit.   

Yet the external commercial or non-concessional borrowings until now may have proved to be rewarding for the government because of the interest rate factor. However, there are downsides. The higher inflow of such funds might fuel inflationary pressure that has so far remained under control. Moreover, the current foreign exchange reserve, though estimated to be at its highest-ever level in size, is not that large enough to gamble with it. The overall import recorded an 11 per cent rise in the first four months of the current fiscal. Any further surge in imports might lead to depletion of the reserve, if earnings from exports and remittance by the overseas Bangladeshis, do not show a matching rise. It will therefore be prudent for the government to strike a balance between borrowings from both domestic and external sources.