Govt decides to go slow about floating sovereign bond

Government move for fundraising by floating sovereign bonds has lost gear purportedly for available cheaper money from different alternative sources besides idle dollars in its own coffers.
Economists and experts termed the 'go-slow' policy of the government 'appropriate' as they find no reason to seek high-cost funds when low-cost money is available aplenty.
"Presently there is no dearth of foreign funds rather our foreign-currency reserves are quiet healthy. Besides, a process is on to float a billion-dollar worth of taka bond. We did not cancel the decision to float sovereign bond, but there is no hurry," finance secretary Mahbub Ahmed told the FE.
The government in 2011 made the plan to raise $500 million from the international money market through floating sovereign bonds to ease pressure on the balance-of- payments (BoP) situation. Thereafter, the central bank in December 2011 submitted to the ministry of finance (MoF) the nitty-gritty of the floating of costly sovereign bonds.
Later in September 2014, another committee of experts, headed by deputy governor of Bangladesh Bank SK Sur Chowdhury, submitted another report to the MoF. It strongly discouraged borrowing the high-cost foreign funds by floating sovereign bonds, anticipating its possible wide-ranging impacts on the country's economy.
The finance secretary said a team headed by additional secretary of the MoF Nazmus Sakib is examining the issue of floating sovereign bond, the rate of interest, and its impact on the economy since Bangladesh has no previous experience of such offshore borrowing.
Elaborating on the floating of taka-denominated bond Mr Ahmed said the International Finance Corporation (IFC) will collect $1.0 billion from the international market and convert it to taka to lend the money to private infrastructure projects and Public-Private Partnership (PPP) initiatives.
Officials said the government is considering floating $1.0 billion bond on Singapore Exchange to raise funds for financing power-sector mega-projects. Estimation shows that some $35 billion will be needed by 2040 for setting up power plants to meet the growing electricity needs of the country.
They said the government had already assured of providing guarantee, if necessary, for taking foreign credits for any PPP initiatives for infrastructure projects.
A senior finance official said country's foreign-currency reserves have already crossed $27-billion mark-good enough to finance several giant infrastructure projects after meeting import bills.
He said migrant workers, during the last couple of years, had sent around $15 billion as remittance per annum. The remittances give a good strength to the country's economy.
The official said some $19 billion in foreign assistance remained unutilised in the pipeline for a lack of capacity. Besides, country's banking sector is struggling with Tk 1.25 trillion as idle money.
New sources of foreign funding are also emerging day by day. The Chinese government has already announced that from now on it will provide soft loans for any future project to Bangladesh, he pointed out.
Besides, he said, the Asian Infrastructure Investment Bank (AIIB) is getting prepared to make low-cost loans available for infrastructural development in Asia, from where Bangladesh is supposed to get necessary funds.
"In this situation there is no necessity of raising only $500 million through issuing sovereign bonds," he said.
When contacted, chairman of Policy Research Institute (PRI) Dr Zaidi Sattar hailed government's careful stance on issuing dollar-denominated sovereign bonds.
"After weighing the pros and cons of issuing dollar-denominated sovereign bonds, first for Bangladesh, a cautious but pragmatic stance of the government is most appropriate, even for a modest $500-million bond, which is much less than the $1 billion that was considered two years ago," he said.
Mr Sattar said the benefits of money to be colleted by selling bonds must be carefully weighed against costs.
"Even though Bangladesh's credit rating has held steady on the back of solid macroeconomic foundations, it is still not investment-grade, and a sovereign bond will fetch 'junk bond' status with interest rates possibly around 6.0 per cent, much higher than the roughly 1.4 per cent the country pays on its external debt outstanding, made up predominantly of concessional loans."
On a note of caution, he said the sobering experience of several sub-Saharan African countries which raised some $8.0 billion five years ago should be an eye-opener, as that of Sri Lanka.
"The latter, which entered the international bond market in 2007, had to follow with more rounds committing $4.5 billion of bonds just to service its debt. That is a highly alarming scenario."
Mr Sattar pointed out that Bangladesh's persistent current-account surplus (in 10 of the past 15 years) and accumulating foreign-exchange reserves point to a state of under-investment with current resources.
"So the need for extra high-cost dollars cannot be that urgent, not to mention the fact that infusion of $500 million will put undue appreciation pressure on the exchange rate to make Bangladesh Bank's job of ensuring exchange-rate stability more difficult."
The economic policy analyst also said as a least developed country, Bangladesh is now the largest recipient of soft loans from IDA, the concessional arm of the World Bank, on grounds of its inability to raise funds from financial markets. "Floating a sovereign bond would trigger a process of graduation from IDA that Bangladesh might not be prepared for as yet."
The PRI chief also said the advent of AIIB, of which Bangladesh is a founding member, adds a new source of funds for infrastructure investment that clearly relieves the pressure to pursue high-cost debt (such as sovereign bonds) at this time.
Prof MA Taslim of economics department of Dhaka University also supports the government's go-slow policy on sovereign bond issuance when the country's balance-of-payments account stands in a healthy position.
"We don't need to borrow paying such high rate of interest since we have excess reserve of foreign currency. We have to make comparison of cost of such borrowing," he said.
A sum of $500 million is not a big money for a country like Bangladesh which has $27 billion in reserves. "Bangladesh's economy presently is not in that position when the government had opted to float bonds for getting only $500 million."
However, Mr Taslim said the government can do that only if it wants to make presence on the global bond market.
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