Debt, while essential for development finance, can become a burden if not managed appropriately. The management of debt is influenced by both internal and external factors. Internal factors are typically within the control of the nation, while external factors are beyond the debtor country's control. For instance, events like COVID-19, climate change, or trade disruptions have pushed many countries into debt distress, despite their effective internal debt management. This underscores the crucial role of international cooperation in addressing debt distress and making development finance more sustainable and less costly.
Last week, these issues were discussed and debated at an international event in Geneva organised by UN Conference on Trade and Development (UNCTAD). It was the 14th session of the International Debt Management Conference, where participants stressed data-driven solutions to overcome debt distress. They also underscored the necessity of proper negotiation to make debt effective. Debt negotiation is part of management that generally depends on the recipient's capacity and the debt provider's intention.
UNCTAD formally launched the updated version of its Debt Management and Financial Analysis System - DMFAS 7 at the conference. For over four decades, the system has supported over 61 countries in public debt management, transparency and good governance. The latest version aligns with current technologies and office requirements, particularly in terms of coverage and reporting. Underlining the importance of the system, Rebeca Grynspan, Secretary-General of UNCTAD, said: "Before you can even begin negotiations, you need precise answers to key questions: What debts do we have? With whom? When do they mature? At what interest? Without these answers - without accurate, easy-to-navigate debt data - you cannot make informed decisions. You cannot negotiate rightly and effectively with creditors. You cannot make strategic choices. All you can do is reacting to the constraints of the fast-paced, high-stress, high-stakes environments that characterise debt negotiations. This is why DMFAS is not just software. It is an instrument of economic sovereignty."
UNCTAD statistics, revealed at the conference, also showed that developing nations have sunk deeper into a debt-driven development crisis. Their external debt has quadrupled in two decades to a record US$11.4 trillion in 2023, which is equivalent to 99 per cent of their export earnings. In other words, developing countries' real gain from exports is minimal due to servicing the growing debt burden. UNCTAD statistics also showed that in 2023, developing nations paid $847 billion in net interest, which was an increase of 26 per cent from 2021. It added that the countries also borrowed internationally at rates two to four times higher than the United States (US) and six to 12 times higher than Germany. This means that the cost of borrowing is higher for developing nations, forcing them to compromise development finance.
The governments in developing countries, including Bangladesh, are used to prioritise debt repayment obligations over public services and investments. Default in debt servicing is considered a serious drawback of a nation in the global financial system, as opposed to poverty and hunger. For this reason, governments try their best to maintain the repayment schedules at the cost of underfunding some development requirements. According to UNCTAD: "When governments must prioritise debt repayments over public services and investments,, people pay the price. Schools are underfunded, hospitals lack supplies and infrastructure crumbles." The net result is that countries default on their development by avoiding default on their debt. That's why the conference called for urgent reforms to 'ensure debt serves as a tool for progress, rather than a barrier.'
As part of reform, efficient and fruitful negotiation is critical to reducing the undue debt burden and skipping unnecessary development projects. Bangladesh is a case in this connection. During the decade and a half of the Hasina regime, the country borrowed a good amount of money from external sources. A part of the debt is being used to finance either less-priority or needless projects. Many of these projects were small in size and required small financing. Together, however, they created an undue debt burden. From project design to debt financing, there was an ill motive to misappropriate funds.
Some economists have termed a part of the external borrowing by the ousted regime of Hasina as odious debt and demanded the suspension of repayments of any such loan. They also argued that the interim government should examine the total debt status and identify the odious portion. Theoretically, odious debt is a term 'applied to a predecessor government's debt that a successor government wishes to repudiate on ostensibly moral grounds.' The main argument is that the previous regime misappropriated the money it borrowed, so the current regime should not be held responsible for the previous regime's misdeeds. As the lenders extended the loans despite being aware of the fact that the oppressive regime would use it for the non-productive sector to pillage the fund, they also needed to bear part of the responsibility of the debt. Thus, the lenders have no moral right to get back the loans as these were financed for corruption and repression, violating human rights.
Though it sounds logical, the concept of an odious loan is not well recognised by international law. So, it is difficult to bargain with lenders for non-repayment or swap the loans as prescribed by many. Nevertheless, it is not impossible to determine the portion of odious debt, and the interim government needs to do the exercise. Once done, the next phase should be to talk to the lenders.
The country's external debt to GDP ratio reached 22.60 per cent at the end of fiscal year 2023-24 (FY24) from 15.50 per cent in FY16. Per head debt also increased to US$605 from $258 during the period under review. Again, the ratio of forex reserve to external debt declined from 73.70 per cent in FY16 to 21 per cent in FY24. All these indicate an alarming situation of the country's external debt, mainly due to mismanagement. In this situation, the government needs to review the recommendations of the UNCTAD conference and implement those applicable to Bangladesh.
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