Evaluating various financing alternatives

Slow implementation of project results in slow disbursement of aid which leads to time and cost overrun. It impacts negatively on the balance of payments leading to increased borrowing from domestic sources. Factors creating difficulties in the speedy implementation of projects or utilisation of economic assistance are manifold. Projects are often designed without proper planning or feasibility studies. Also people engaged in the project preparation are not properly trained. In many cases, faulty design of the project leads to a revision of the Development Project Proposal (DPP)/Technical Project Proposal (TPP) even before commencement of the project. Approval process of the DPPs/TPPs also often takes longer time to start the projects. Sometimes, projects are not adequately staffed with right kind of people. Moreover, in many cases, project personnel are transferred (in case of government officials) and/or moved to another job. Procurement-related bottlenecks and challenges in land acquisition process also slow down the speed of project implementation. Besides, projects involving several sectors/organisations often suffer from lack of coordination. On the other hand, delay in approval of awarding contracts, delay in appointing consultants, delay in releasing fund and lack of coordination among co-financers, in case of multi-donors funded projects, were found to be the causes of slow disbursement.
EXTERNAL DEBT MANAGEMENT: Managing external debt is more sensitive to some extent than that of domestic debt. Domestic debt is a charge on budget and must be serviced with government revenue and/or additional domestic borrowings. Whereas external debt, in addition of meeting repayment obligation with government revenues, is also a charge on balance of payments, be serviced with foreign exchange by drawing down on the reserve. Large trade deficit, savings-investment gap, slow growth of revenue and rapid growth of public expenditures contribute to the increased external debt of the country.
PUBLIC SECTOR EXTERNAL DEBT: The external borrowing of Bangladesh consists mainly of public sector external debt. The share of private sector external borrowing is negligible. The total public sector external debt has increased from US$ 973.80 million in FY 1974-1975 to about US$ 24.91billion in FY 2012-2013 which constitutes a debt liability of 19.3 per cent of GDP (gross domestic product). The per capita debt obligation of the country rose from US$ 6.59 in 1973-74 to US$ 162.2 in FY 2012-13.
DEBT SERVICING:  A total expense for debt servicing of the government is US$ 1,091.02 million in FY 2012-2013 year. Of the total, principal repayment is US$ 895.38 million and interest is US$ 195.64 million. Of the total debt servicing amount US$ 873.09 million is paid to multilateral creditors and US$ 217.93million is paid to bilateral creditors.
Usually, external debt is mobilised from bilateral, multilateral and commercial sources.  Except a few non-concessional loans, almost all the loans received from different sources are concessional in nature. Bangladesh as a policy generally refrains from contracting commercial loan. The share of outstanding debt as on June 30, 2013 from multilateral sources is US$19.25 billion, while US$ 2.79 billion in case of bilateral sources and US$ 0.34 billion in case of suppliers' credit.
DEBT SUSTAINABILITY OF OVERALL PUBLIC SECTOR EXTERNAL DEBT: Broadly overall debt sustainability is measured by applying two aggregate sets of indicators. One is the ratio of total debt outstanding (public sector external debt) to GDP, Export of Goods and Services and Revenue Earning. The other one is the ratio of debt servicing to export of goods and services and revenue earning. Overall debt sustainability situation of Bangladesh is presented in the following figures 7 and 8.
From the above indicators it is clear that most of the indicators related to debt stock of the external debt sustainability position improved in 2012-2013 compared to the previous year. Due to a significant increase of debt servicing expenditure on account of crude oil loan, ratios of total debt service to export of goods and services and to revenue went up in FY 2012-2013 compared to that of FY 2011-2012. However, all the indicators are well below the level of threshold. According to present classification by the World Bank, Bangladesh is categorised as "less indebted" country, that is, Bangladesh is not a debt-burdened country.
FINANCING DEVELOPMENT INITIATIVES: Since independence, Bangladesh has been exploring  concessional loan from multilateral and bilateral agencies/countries. However, besides complex and time-consuming loan approval process, the concessional loans are usually tied and conditional. Moreover, Bangladesh's access to the ODA (offical development assistance) is limited compared to increased investment need for fulfilling the national development strategy. Global economic recession has also added adverse effect in mobilising foreign aid in concessional term. On the contrary, interest rates in the external borrowing markets are at historical lows and that is one of the reasons of attraction of aid receipt.
In this context, the Government is evaluating various financing alternatives in the very recent time to bridge the financing gaps. The Government has already signed agreements with Russia, European Investment Bank, France Development Agency, Exim Bank of China, etc. to borrow at market floating interest rate. For ensuring better screening of non-concessional loan, the government recently formed a high-level committee called "Standing Committee on Non-Concessional Loan" to contain debt burden in a comfort zone consistent with a prudent degree of risk.
As the economy has grown, the flow of aid as a proportion of gross domestic product (GDP) or as a percentage of investment has declined over time. In the 1970s, soon after independence, external resources financed more than 70 per cent of the country's investment, but this had fallen to less than 10 per cent in 2005 (World Bank 2007b). This reflects, on the one hand, the government's relative success in mobilising domestic resources and, on the other, the increasing vigor and ability of the private sector.
In the recent years Bangladesh has received less foreign aid, as a percentage of GDP, than either heavily-indebted poor countries (HIPCs) or other low-income countries (LICs). The data also indicate that the importance of foreign assistance to the economy, as a percentage of GDP or investment, has declined over time, though the absolute volume remains considerable.
Professor Dr. Shamsul Alam is Member, General Economics Division of Bangladesh Planning Commission. Dr. Md. Taibur Rahman, Senior Assistant Chief, has provided research support in preparing this policy brief.
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