Debt, domestic and foreign, has accompanied the growth narrative of Bangladesh from the beginning of its birth. It was looked upon as a natural corollary of the growth process that took hold under planning. The fact that many other countries’ growth momentum was propelled and sustained by debt gave justification of its continued use and assurance about the wholesome outcome. It was not considered as profligate as the ancient Indian sage Charbak’s adage, ‘eat in style even if you have to borrow’, purported to imply. Lack of fiscal prudence, conveyed by chronic borrowing to support non-development expenditures, did not rule the budgetary roost. Debt of every stripe, irrespective of their provenance, had both financial rationale and moral support. After the long ‘journey to the end of the night’ when Bangladesh left the days of struggle to survive and emerged as a middle income country, the policy of indebtedness has been amply vindicated. Ironically, concern, even anxiety, over indebtedness has never been more persistent and chronic than at present. What has changed now to warrant this cascading doom saying by Jeremiahs?
Apparently, there are two reasons for the recent outcry against borrowing, internally and externally. The first is the size of what is seen as ballooning domestic and foreign debt. The second is the perceived failure of the government to service and repay debt when these will be due.
Looking at the amount of borrowing from external and internal sources there is no doubt that both of these have increased, some people with a penchant for hyperbole would say, exponentially. But this is only one side of the balance sheet. Alongside this liability has also been a rise in growth in Gross Domestic Product (GDP) and earnings in current account (exports, remittance) and capital account (FDI, portfolio investment by foreigners and foreign aid/ loan). As regards internal borrowing, the growth in GDP and increase in public revenue as a percentage of GDP, even if glacial in speed, has to be taken into consideration. Like elementary borrowing by individuals, national borrowing has also to consider the creditworthiness and repaying capacity of borrowers. The record of Bangladesh in respect of debt servicing has been so robust and confidence-raising that foreign lenders, multilateral and bilateral, have unhesitantly extended both short- and long-term loans. The share of long term loan has accounted for much more than that of the former, giving a positive nod to the future economic prospects of Bangladesh.
The World Bank and International Monetary Fund (IMF) in a joint report in 2019 on debt sustainability of Bangladesh gave the country a clean bill of health. The report estimated the risk of external debt distress as low. The debt distress of domestic debt was likewise ranked as being minimal. Debt distress, of course, happens when a country defaults in interest payment on loans borrowed or repayment of the principal when it is due. According to the joint report, internal and external risk indicators were below the respective thresholds under the bench line and stress test scenarios. The report forecast that the future infrastructures projects will be financed by external borrowing but predicted that the volume would gradually decline as most of the priority projects would have been completed by the medium term. In respect of domestic debt the report suggested that reforms of national savings certificate should be made so that domestic debt market has more space to develop.
On the debt situation the joint report highlighted the fact that majority of public debt was domestic and denominated in local currency, putting less pressure on foreign currency reserves. It mentioned that 60 per cent of the public debt was domestic and more than half of it came from savings certificate and one third from sale of treasury bills. It did not make much of bank borrowing nor of the oft quoted (ad nauseam?) ‘crowding out effect’ of bank borrowing. Particular mention was made about 62 per cent of external debt coming from multilateral and 23 per cent from bilateral sources and the fact that only 5 per cent of total external debt was short term.
The macro-economic assumptions behind the findings and forecast of the report were growth of the economy along 7-8 per cent annual rate as in the recent past, steady growth of exports supporting a surplus balance of accounts and a flow of foreign loan and investment on the back of the former two. Of course, after 2020 these assumptions were in tatters, as elsewhere in the world. The covid pandemic was a great watershed, upending all that was taken for granted. As economic growth plummeted in the face of months’ long lockdowns, countries struggled to stay above water, including the high and mighty. Given the uncertainty over life and livelihood all bets were off about the recovery of economies to normal. Bangladesh, like the rest of the world, strove desperately to save lives and to keep the engine of the economy running. During these testing times growth rate plunged to little above 3 per cent, much below the vaunted 8 per cent growth rate claimed for pre- pandemic years. There was a slack in exports, while remittance, the other source of investible capital, managed to keep a semblance of yesteryears. No sooner Bangladesh had scraped through the lean and mean years of the pandemic and was poised to regain the lost ground, than the Ukraine war struck, disrupting supply chains and causing cost-push inflation across the board.
As a result of the double whammy of the pandemic and the war in Ukraine prices of almost all food and non food items sharply rose, hiking inflation to above 9 per cent now. The more serious consequence of the global economic turmoil has been worsening the current account balance ($ 7.95 billion in FY22) that impacted on the exchange rate and foreign exchange reserves. While continued domestic borrowing by the government exacerbated the inflationary situation, the sudden demand for foreign exchange to meet import bills started depleting the foreign exchange reserve which has come down from $ 48 billion dollars a year ago to $23.7 billion as of 13 July, according to the latest report of Bangladesh Bank. As the foreign exchange market became highly volatile , depreciating the value of Taka (from Tk93 in June 2022 to Tk108 in May, 2023) and foreign exchange reserves shrunk precipitously, the Moody’ s credit rating agency downgraded Bangladesh’s ranking by one notch, from BA3 to B1, not as bad as Sri Lanka.
The sceptics of Bangladesh’ recent growth performance and critical observers immediately saw a chink in the armour and came down heavily on the government for its alleged fiscal profligacy, particularly indiscriminate external borrowing to finance mega projects. This knee-jerk reaction is most unfair, to say the least. Who could have the pre-science of knowing what was going to happen after the unforeseen calamity of the pandemic in 2020 and the outbreak of war in February, 2022? It is very facile to sit on judgement with the advantage of hindsight now and talk of dire consequences of policy decisions made earlier. Of course, the policy makers, being no less intelligent than the critics, would have been parsimonious about external borrowing if they had any inkling of what was lying ahead, two Black Swans landing, one after another. But they did not have any crystal ball in front of them and they are mere mortals used to reality of the mundane variety. They can be berated, even castigated, in the harshest fashion, if they were found indulging in fiscal irresponsibility and showing policy ineptitude after the two major shocks struck the economy, making it vulnerable on many fronts, further indebtedness included. There being no such misdemeanour or act of malfeasance on their part, it behoves honest observers and analysts to come up with suggestions of what needs to and can be done to keep the emergent problem from becoming a crisis. What is needed now are both fire-fighters and builders to forge ahead with whatever wherewithal the country can muster and not volunteers with wrecker’s ball.
Figures can be quoted by the sceptics, showing that external borrowing ballooned to $ 96.25 billion up to September of FY23 from $90.79 billion during last fiscal. lt may also be mentioned that this figure is a far cry from $45.91 in FY16-17. Figures from Bangladesh Bank source shows, they can quote chapter and verse, that from 2016-17 up to 2020-21 external borrowing rose approximately by $10 billion annually, but during 2021-22 it rose by $15 billion. Even this more than average increase is not a quantum jump.
But the moot point at present, as always, about foreign debt is not the size but the capacity for debt servicing and repayment of principal amount. The biggest drain on foreign exchange reserves was the burgeoning deficit in import bill payments. With drastic control on import of non-essentials the balance of payments has now been brought down to $4.38 billion (FY23) from $12.96 billion during FY22. With continuing control the deficit in current account deficit is likely to shrink further. The other major obligation to spend foreign exchange reserves is on account of debt servicing and debt repayment. According to the Ministry of Finance source, Bangladesh paid $ 2.4 billion in external debt in FY22 which will be $2.78 during FY23.The amount will rise to a maximum of $ 4.02 during FY25 (The Financial Express, 17 February). Assuming that the current global economic turmoil persists for two more years, Bangladesh can see it through comfortably for imports and debt servicing with the annual earnings from export of garments ($40 billion annually on average), remittance ($ 28 billion annually on average) , other exports ( $20 billion on average) and receipts from aid and loan from bilateral and multilateral sources ($10b). This estimate is for the near term which has pre-occupied the minds of sceptical observers, who see doom and gloom just around the corner. In the medium term when the global crisis will peter out, the economy is destined to turn a corner, given its record of resilience and earn much more on current account and receive a greater volume in capital account as Foreign Direct Investment (FDI) and portfolio investment. Then, more than now, external borrowing to finance major infrastructure projects will not be looked upon as reckless and overly risky.
As regards domestic borrowing, no question can arise over debt default as the government can always turn to Bangladesh Bank for borrowing to repay debt to banks and individual savers. The caution to be exercised here is regarding the cost to government in terms of repayment liability impinging on its revenue income and the adverse impact on price levels. Though an easy option, bank (central and commercial) borrowing should be wound down gradually and when this is unavoidable the brunt should be borne by the individual savers enticing them with high returns.
To conclude, Bangladesh is not over leveraged now, nor is it likely to be in future. This, of course, assumes policy makers will be sane and prudent and will not allow megalomania to overwhelm their decisions, nor are they swayed by temptations of earthly kind. If it is a heroic assumption, as economists love to say, then all bets are off.
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