The external debt situation is now more comfortable

Bangladesh has turned to external borrowing to finance its fiscal deficit in the 2021-22 financial year, taking advantage of the country’s ability to absorb more relatively cheap foreign loans.

In the first nine months of the previous fiscal year, the proportion of external borrowing was 49.38%, compared to 33% in the previous year and 37% in the 2019-20 financial year, according to the latest quarterly bulletin. on the debt of the Ministry of Finance, which was revealed yesterday. .

The Ministry of Finance started issuing the International Monetary Fund Prescription Bulletin from April last year to inform quarterly about the country’s debt situation. However, after two editions, the Ministry of Finance suspended publication. The latest bulletin comes after a gap of three quarters.

The country received about 46,530 crore taka from external sources between July last year and March this year, which is more than the 2020-21 fiscal year revenue of 45,523 crore taka.

And yet, Bangladesh’s external debt-to-GDP ratio, a measure that reliably indicates a country’s ability to repay what it owes, has improved over the past fiscal year. The higher the debt-to-GDP ratio, the higher the risk of default. Bangladesh’s ratio, however, declined by 2.6 percentage points year-on-year to 11% in the prior year.

“This leaves plenty of room for maneuver since the threshold for the external debt-to-GDP ratio is 40 percent,” the finance ministry said in the bulletin.

Disclosure will go some way to allay fears of debt overhang stemming from the government’s recent attempt to secure financial assistance from development partners under budget support and balance of payments.

External borrowing in the first nine months of the previous fiscal year came from concessional sources of financing, of which 53.8% came from bilateral lenders.

Also in FY 2020-21, external funding from bilateral sources was much higher than multilateral sources, accounting for 64% of funds.

Bilateral loans tend to be more expensive than those from multilateral lenders and with a relatively shorter maturity, according to Zahid Hussain, former senior economist at the World Bank’s Dhaka office.

“If the share of bilateral debt continues to rise, as has been widely assumed in recent years, external debt management could become a concern in the not too distant future,” he said, while urging the Ministry of Finance to provide more information on the situation. external debt costs and maturities in the bulletin.

Different analysts and observers make different assumptions about the increasing burden of external debt repayment in the short and medium term.

“The newsletter can be more useful if it helps to understand the extent to which these contemporary concerns are based on evidence,” he added.

In March, Japan topped the list of bilateral lenders, accounting for 45% of such loans, followed by Russia (22%), China (21%), South Korea and India (each about 4%).

However, multilateral lenders still account for the lion’s share of the government’s total external debt in March: 61%.

The World Bank tops the list, accounting for 55% of outstanding debt to multilateral sources, followed by the Asian Development Bank (39%), the Asian Infrastructure Investment Bank and the International Development Fund. Agricultural Development (about 2% each), the Islamic Development Bank and OPEC (about 1% each).

Bangladesh’s outstanding external debt is dominated by Special Drawing Rights (SDRs), which are additional foreign exchange reserves set and maintained by the IMF.

SDRs are units of account for the IMF and not a currency per se, but they represent a claim on the currency held by IMF member countries for which they can be exchanged.

The value of the SDR is calculated from a weighted basket of major currencies, including the US dollar, euro, Japanese yen, Chinese yuan and British pound.

No less than 43% of Bangladesh’s outstanding external debt is denominated in SDRs, followed by the dollar (31%), the yen (18%), the yuan (4%), the euro (2%) and others (2%).

Domestic debt constitutes the major part of the total outstanding debt as of March 31: 62%. And reliance on domestic sources is gradually increasing, according to the bulletin.

“Right now, domestic debt management is more of a challenge than external debt management,” Hussain said.

National Savings Certificates (NSC) and banks contributed equally to the stock of domestic debt: 47% each.

But the cost of borrowing from NSCs is relatively higher, but it has socio-economic implications, the bulletin says.

“At a time when the liquidity of the banking system is drying up due to sustained sales of foreign exchange by the Bangladesh Bank, the conduct of monetary policy will become increasingly complex given the ceiling on the lending rate and the floor based on Individual Term Deposit Rate Inflation Financial institutions will naturally seek safe havens as their spreads narrow as credit risks have increased due to continued redemption forbearance and ongoing macroeconomic stresses,” said Hussain.

However, the ongoing reforms of the NSC will help reduce reliance on the most expensive instrument and will also lead to reforms in the domestic financial market, according to the bulletin.

Yet the total debt to GDP ratio is around 32%, well below the sustainable threshold of 55%.

Shirlene J. Manley