Borrowing overseas: Quo vadis?

A section of the business community has been demanding free access to global financial markets in order to borrow funds at global interest rates. Such demand became strident when the global rates tumbled to near zero in the wake of the recent financial crisis in the developed countries. Since the domestic interest rates were very high relative to the global rates, business people perceived large savings to be made on borrowing at low interest rates in developed countries. Bangladesh Bank (BB) yielded to their demand and permitted selective external borrowing. By 2013, the Board of Investment (BoI) had approved US$4.8 billion of private foreign loans.
Of late some economic experts have gone further to suggest that the government should also borrow funds from global financial institutions at the current low interest rates to fund its development projects. Since the government has been borrowing funds from overseas from the very inception of the country, this would appear to be a mundane suggestion. The difference lies in the nature of source and the cost of credit. So far the government has borrowed funds mostly from multilateral organisations and aid agencies of developed country governments at concessional rates. The new suggestion is to borrow funds from private financial institutions overseas at market rates.
There is nothing wrong with borrowing funds from any source if it is profitable or welfare-improving. If the government runs a budget deficit and it has no choice but to borrow funds, it is expected that it will borrow funds in a manner that incurs the minimum cost or delivers the maximum benefit. Does borrowing overseas from private financial institutions satisfy this condition?
Nationally, Bangladesh is a net saver for nearly one and half decades (except fiscal year or, FY 2011-12) implying that it earns more than it spends and consequently runs current account surpluses. The net saving of the nation shows up in an increase in the international reserves of BB. They are usually lent out to the rich countries, especially USA, at very low returns because they are held in the form of central bank deposits and treasury bills which carry near zero interest rates since the global recession. Hence, the US$29 billion that we have in reserves yield very little return, knocking off one of the main sources of income of BB. If the reserves had earned 5.0 per cent interest, BB would have made US$1.45 billion just on its reserves.
With so much idle funds held in international reserves and domestic commercial banks awash with liquidity, it is not at all clear why the government needs to borrow overseas. If it needs, say, US$10 billion in foreign exchange to fund some development projects and borrows the same from BB paying it the rate at which they are parked overseas, BB will not lose anything but the government will save about 5.0 per cent in London inter-bank offered rate (LIBOR)-plus rate of the commercial lenders. This will amount to a saving of nearly US$0.5 billion per year in interest payments. BB will be left with US$19 billion in international reserves which are more than adequate as a buffer for import payments.
If the government were to borrow the funds overseas it would have to pay an interest charge periodically and retire the full loan amount in a few years. Since these payments will have to be made in foreign exchange they will have to be paid from BB reserves. Hence the stock of reserves will eventually decline by the amount of interest payments and the loan amount. Therefore, whether the government borrows the fund from overseas or from BB, the reserves will decline. The point is they will decline more if the funds are borrowed from the overseas private financial market.
The situation is quite similar to the decision of the household that wants to buy an apartment (read development project). It has a time deposit (similar to reserves) of Tk20 million earning a low 6.0 per cent interest. It can purchase a residential apartment for Tk20 million by either liquidating the deposit to pay upfront (similar to borrowing from BB), or take out a home loan of Tk20 million at a high interest rate of 10 per cent (similar to external borrowing).
Assuming that there are no tax or other advantages in borrowing from a financial institution, the household continues to earn Tk1.2 million per year on its deposits; but it has to pay Tk2 million in interest on the loan to the financial institution if it opts for borrowing. If the loan has to be paid in full at one go after 10 years, the household would have paid Tk20 million in interest and another Tk20 million in repaying the original loan amount. When these are paid the household would have paid Tk8.0 million more than it would have paid if it had bought the apartment with its deposit. It will not be rational for the household to choose borrowing over self-financing.
 (More on Page 4. e-mail: Mohammad Taslim [email protected])