Dealing with government debts

To be in debt is nothing wrong with a business or even an entire economy, because that is how capitalist economy runs. If a bank has no borrower to lend money, it will fail, because interests accruing on the loans extended to a borrower or borrowers are a bank's income from which it pays interests to its depositors. In a word, without lenders including banks, modern-day business and economy are inconceivable. So, from that point of view, the fact that Bangladesh has run up huge debts is nothing surprising. Also, it should not be a problem until the engine of the economy is full steam ahead earning enough to pay its debts. But according to the Bangladesh Bank (BB), till June 2023, the country's accumulated foreign debts stood at US$99 billion. According to an estimate, with the expansion of the economic activities in the last 14 years since 2009, the volume of debts has also increased by 332 per cent. In the past three years, this increment is about 33.6 per cent. Is it worrying? There are theories about up to what extent a debt should not be concerning. The International Monetary Fund (IMF), for instance, views that if the national debt to the Gross Domestic Product (GDP) ratio is below 55 per cent, then it is at a safe level. From that standpoint, the ratio of Bangladesh's total internal and external debts to the GDP is estimated to be below 35 per cent. On that basis, the government believes, the national debt till now is at a comfortable level. However, some economists are at variance with this view. They say that comparison of a national debt or loan should be done with the revenue income, not GDP. In that case, as the revenue department, the National Board of Revenue (NBR), is hard put to meet its annual revenue collection target, that is concerning for the government so far as addressing its loan liabilities are concerned.
In the current fiscal year (FY 2023-24), the government is leant to have set a target of collecting revenue amounting to Tk5.0 trillion. Of this amount, the NBR will have to earn Tk4.3 trillion and the rest Tk0.7 trillion would be mobilised from other sources. But considering the record of revenue earning of the previous fiscal FY 2022-23, the target of earning Tk 3.7 trillion fell short by Tk45 billion. The revenue growth calculated at 8.12 per cent was considered the lowest in a decade. This is undoubtedly of concern as it reduces the government's ability to service its debts. In this situation, to avoid defaulting on its debt, different suggestions are coming from experts. Some say the government should cut expenditures, while others say, it should increase income. Implementation of either option has its costs. Cutting expenditures would lead to slowing down growth. Any effort to increase income means to allow the economic activities to run flat out. But with falling foreign exchange reserves, reduced inflow of remittance dollars, earning from exports facing challenges, foreign companies remaining shy about investing in the country, how can one expect to run the economy full throttle? Another option is taking new loans from lenders to repay older ones, which is also called refinancing. But this does not help servicing the debts at all. In fact, it is a system of buying time before a debt is finally repaid. So, for servicing its outstanding debts, the best option before the government is to redouble its efforts to increase revenue income and at the same time rationalise expenditures. Of course, combating corruption, especially in the revenue department, in the administration in general and all other sectors of the economy is the royal road to plug the holes in the administration and thereby reduce expenditures rendering the system efficient.
Now, who are the country's major lenders and what are the types of debts owed to them by the country?
The central bank's latest report on the foreign direct investment and external debt January-June 2023, says that of the US$98.94 billion as of June 2023, long-term loan was close to 84 per cent (actually, about 83.79 per cent), while the rest of about 16.21 per cent accounted for short-term loans. Of the international lenders, the top ones include the World Bank (WB), the Asian Development Bank (ADB), Japan, China, Russia and India. But the rates of interest charged by all these multilateral and bilateral lenders are more or less around 2.0 per cent. The problem is, of those, bilateral loans from, for instance, China and Russia are short-term with a repayment time between 10 and 15 years excluding grace period. This makes the size of the instalments for short-term loans bigger than the long-term ones. But the long-term loans from the WB or the ADB, excluding grace period, take 30 to 32 years to repay. As one estimate goes, 1.0 billion worth of short-term loan to be repaid in 10 years (not counting the grace period) from China, for instance, the principal amount to be paid annually would come to US$100 million. But if the same loan was taken from a long-term multilateral lender like the WB, the repayment instalment would be US$33.3 million annually. So, before undertaking development projects, this aspect of the project loans should be taken into consideration. Especially, short-term loans should better be avoided when it comes to projects with low return on investment.

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