Seven risks may emerge if sovereign bond issued now

Nazmul Ahsan The country's macro-economic management might face a daunting challenge, with fiscal risks getting tougher to address, if the government issues sovereign bond to help mitigate its problems about balance of payment (BoP), a policy paper of the Ministry of Finance (MoF) has said. Seven major economic and fiscal risks, as identified in the policy paper, might emerge if the proposed bond is issued at this stage. Finance Minister AMA Muhith on November 3 last said the government was considering a move for introduction of a sovereign bond to help ease pressure on foreign currency reserve. Highlighting the risks, the paper said a currency mismatch between liability and income of the government may be evident, with increase in its debt servicing cost due to depreciation of Taka against US dollar. The paper also pointed to some negative impact arising out fluctuations in foreign exchange rate, changes in the rates of interest amid any possible severe liquidity problem in the international markets and the fear of becoming a debt-burdened country in the process of selling the sovereign bond and paying high interest rates on it. Furthermore, the paper said a multiple of negative impacts may be witnessed in the domestic fiscal management as the revenue department would be compelled to enhance income to meet the cost of debt servicing, particularly for making interest payments regularly, on account the proposed sovereign bond. The risks may adversely effect the country's medium-term debt sustainability and the medium-term macro-economic framework, the policy paper added. "The entire macro-economic management might be at risk with unsustainability arising in the debt management of the country as the debt liability of the bond- issuing country will increase for issuing sovereign bond," the policy paper of the MoF noted. The paper, however, noted, a positive environment is now prevailing in the country for the government to issue the proposed bond and attract foreign buyers as international credit rating agencies, Moody's Investors Service and Standard & Poor's, in April this year retained their rating on Bangladesh, putting it at Ba3 for the successive second year. On the other hand, expressing some strong reservation over the issuance of sovereign bond, the policy paper said the current ratings by international agencies might not be retained in the future due to the on-going troubles in the local and international economies. Although the policy paper was broadly in disfavour of against issuing the proposed bond, it put great emphasis on finding out alternative ways to source foreign fund immediately. "It is urgent to find out alternative sources for the required funds for the country by December this year amid slow growth in remittance, sluggish trend about utilising foreign aid, and the growing demand for fund by local investors to help achieve the targeted economic growth," the paper said. When asked, a high official at the MoF said the policy paper on sovereign bond contains preliminary highlights only. He said the Finance Division under the MoF is working on preparing a complete report on the pros and cons of the proposed bond. Sources in the ministry said the top officials concerned have, meanwhile, held discussions with the Bangladesh wings of the global banks like those of Standard Chartered Bank and Citi Bank NA on every aspect relating to issuing of the proposed bond. The officials concerned will a hold meeting with the local functionaries of HSBC tomorrow (Wednesday) on the issue. The foreign banks concerned are interested in becoming Issue Manager, Lead Manager or Book Runner of the proposed sovereign bond, after being approved and appointed by the government, a source said. Generally, the government of a country having a somewhat unstable economy tends to denominate its bonds in the currency of another country having a more stable economy. The bond is issued by a national government of a country and denominated in a foreign currency that it chooses. Experts said, sovereign bonds are issued in a relatively strong international currency and they can be sold to the other countries and foreign investors. It is very common that when a country needs a large amount of fund to support its spending programme, particularly for development purposes, it can borrow money from other countries by issuing sovereign bonds. It has to pay the accrued interest on such borrowed funds in the form of sovereign bonds within a specific period and the principal amount is repaid usually at their maturity.