Debt buildup weighs on Bangladesh economy

[bluesky]

Debt buildup weighs on Bangladesh economy

Bangladesh's external-debt stock ratcheted up by over $10.0 billion in a year to US$67.75 billion in 2020, and as much might have been added up in 2021. The nearly 19-per cent debt buildup for Bangladesh in 2020--the year entirely overshadowed by the disruptive coronavirus pandemic-is evident from

thefinancialexpress.com.bd

Debt buildup weighs on Bangladesh economy​

JASIM UDDIN HAROON | Published: January 30, 2022 08:37:09 | Updated: January 30, 2022 23:33:19

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Bangladesh's external-debt stock ratcheted up by over $10.0 billion in a year to US$67.75 billion in 2020, and as much might have been added up in 2021.

The nearly 19-per cent debt buildup for Bangladesh in 2020--the year entirely overshadowed by the disruptive coronavirus pandemic-is evident from "International Debt Statistics of 2022", a flagship publication of the World Bank, released recently.

External-debt stock on a nation comprises public-and publicly-guaranteed long-term external debts, private non-guaranteed long-term external debts, use of IMF credits, and short-term external debts, including interest arrears on long-term ones.

The report also shows that the repayment of the principal by private sector remained much lower in the year under review over a year earlier. The private sector non-guaranteed debt repayment was $1.5 billion, down by more than 54 per cent year on year.

Economists view that the rising trend in the external-debt buildup is a matter of concern, especially because of the lingering coronavirus pandemic as the country's private sector has been in troubles amid resurgence in infection with the highly contagious new covid-19 variant ---Omicron.

They hint that in 2021 more $10 billion external debt might have been added up to the stocks as there were more multilateral and bilateral debts. Bangladesh received both budgetary and covid-related supports from overseas lenders in 2021.

They say that the onus of debt servicing, in the final analysis, lies on the shoulders of government in case of repayment failure on part of the private sector.

Dr Zahid Hussain, former lead economist at the WB, says: "Apparently, we are safe. But if the corporate fails to repay, who will take the responsibility?"

Citing the case of Padma Bank, formerly Farmers Bank, he says it was rescued by the state-owned banks following directives of the government although the government banks are not in good position in terms of their financial health.

"Although the private corporate loans are not guaranteed by the government, but the government cannot avoid such a liability at the final stage when those become overdue," the economist told the FE.

Dr Hussain, turning to valuation side of the debt burden, says the currency weakening has an adverse impact on the debt stocks. When the foreign currency becomes stronger against the local currency, BDT, the debt stock goes up ballooning.

Dr Ahsan H. Mansur, executive director at the Policy Research Institute of Bangladesh (PRI), told the FE: "The rise in the debt stock has mixed impact on the economy."

He notes that the debt stock-to-export ratio has increased to 174 per cent. "This is not a good sign…". It was 124 per cent in 2019.

He says this has led to rise in the external debt stock- to -gross national income or GNI to 20 per cent. It was 18 per cent in 2019.

Dr Mansur feels the reserve-to-debt stock equation that surged to 62 per cent is a good one as it means that reserves are still better than the external-debt stock.

The verified WB report, released two weeks back, said that Bangladesh's total long-term debt stock was $54.65 billion in the year under review while the short- term over $10.99 billion. Use of IMF credits, also part of the total debt, was just $2.11 billion.

However, a government publication styled debt bulletin shows that the country's external debt stock in fiscal year 2021 was Tk 4203580 million or around $49 billion.

jasimharoon@yahoo.com

 

[bluesky]

Dr Ahsan H. Mansur, executive director at the Policy Research Institute of Bangladesh (PRI), told the FE: "The rise in the debt stock has mixed impact on the economy."

He notes that the debt stock-to-export ratio has increased to 174 per cent. "This is not a good sign…". It was 124 per cent in 2019.

Dr. Ahsan, please don't yet worry about this foreign debt at 174% of the export earnings. This happened because last year another $10 billion debt was added.

When this year, 2022, another $10 billion or more is added because of the maturity of other debts, the ratio will rise to 203% or more if the export earnings do not rise.

If this $10 addition continues for another three years the debt to export ratio will become 292% in 2025.

So what? The GoB claims it is developing the infrastructure of the country with foreign money. No wonder, a time is coming in around 2025 when BD will be borrowing only to pay back the arrears.

Another Pakistan or SL is in the coming.

 

[mb444]

BD debts are absolutely nowhere near any of our neighbours. However it is good that the issue is being discussed now.

What you have highlighted is merely one indicator. So if our debt is higher than what we sell abroad it is obviously a bad thing. But our exports also only represents 15% of the economy. The debt that has been taken on allowed the home market to grow and BD is one of a few countries that has grown during the pandemic year. You need to see the bigger picture.

Also every element of BD debt is for capital expenditure primarily infastructure. PK, SL borrows for revenue expenditure. Completely different scenario.

Debt is an issue and BD needs to adopt some golden rules like debt cannot exceed 45% of GDP to anchor long term fiscal policy positions.

 

[Tom-tom]

BD debts are absolutely nowhere near any of our neighbours. However it is good that the issue is being discussed now.

What you have highlighted is merely one indicator. So if our debt is higher than what we sell abroad it is obviously a bad thing. But our exports also only represents 15% of the economy. The debt that has been taken on allowed the home market to grow and BD is one of a few countries that has grown during the pandemic year. You need to see the bigger picture.

Also every element of BD debt is for capital expenditure primarily infastructure. PK, SL borrows for revenue expenditure. Completely different scenario.

Debt is an issue and BD needs to adopt some golden rules like debt cannot exceed 45% of GDP to anchor long term fiscal policy positions.

As Bangladesh exist ldc status, will the same level of foreign aid be available? Or will Bangladesh have to seek funding through loans? Exiting ldc status don't the loans become more expensive?

 

[mb444]

As Bangladesh exist ldc status, will the same level of foreign aid be available? Or will Bangladesh have to seek funding through loans? Exiting ldc status don't the loans become more expensive?

Leaving the LDC status would mean loans become cheaper not more expensive. Here we also need to separate out public and private sector.

GoB obtains loans from international institutions for capital expenditure. LDC status is irrelevant, its all about geo strategy. Becoming a DC will help gaining more finance not less.

For the private sector being an LDC is a serious issue. They can not raise finance, being a DC will help but will require some fiscal policy restructuring by BD.

Becoming a DC offers immense advantage, if it did not you would see countries lining up to become a LDC.

 

[bluesky]

BD debts are absolutely nowhere near any of our neighbours. However it is good that the issue is being discussed now.

What you have highlighted is merely one indicator. So if our debt is higher than what we sell abroad it is obviously a bad thing. But our exports also only represents 15% of the economy. The debt that has been taken on allowed the home market to grow and BD is one of a few countries that has grown during the pandemic year. You need to see the bigger picture.

Also every element of BD debt is for capital expenditure primarily infastructure. PK, SL borrows for revenue expenditure. Completely different scenario.

Debt is an issue and BD needs to adopt some golden rules like debt cannot exceed 45% of GDP to anchor long term fiscal policy positions.

A debtor country should only talk of its own debts without comparing them to others. Like Hasina Bibi, you are saying only hollow and pointless arguments as if foreign borrowings are a blessing to an underdeveloped country.

Within a few years, the country's foreign debts will surpass $97 billion. This is what FM Mustafa has told himself. In comparison, our total exports are only $33.6 billion.

In that case, the ratio between foreign loans and exports will become more than 240%. So, where is the money to make repayment of the loans?

 

[mb444]

A debtor country should only talk of its own debts without comparing them to others. Like Hasina Bibi, you are saying only hollow and pointless arguments as if foreign borrowings are a blessing to an underdeveloped country.

Within a few years, the country's foreign debts will surpass $97 billion. This is what FM Mustafa has told himself. In comparison, our total exports are only $33.6 billion.

In that case, the ratio between foreign loans and exports will become more than 240%. So, where is the money to make repayment of the loans?

As normal you are mixing things up. There are different types of debts and different perscriptions for them.

Public sector debt is financed via tax revenue. The export earning of private sector is not available to the government to pay for public sector borrowings. BoB converts taka for dollar from the reverves and makes repayment. Export is only 15% of the economy, the remaining 85% generates the wealth to pay for debt. There is no direct link between export and debt that you think exists. GoB is borrowing for capital expenditure that is increasing both export and the rest of economy.

Private sector debt is not secured against GoB assets. GoB will become a guarantor of last resort if there is a public interest to do so but these private dealing has very little to do with the government.

 

[bluesky]

As normal you are mixing things up. There are different types of debts and different perscriptions for them.

Public sector debt is financed via tax revenue. The export earning of private sector is not available to the government to pay for public sector borrowings. BoB converts taka for dollar from the reverves and makes repayment. Export is only 15% of the economy, the remaining 85% generates the wealth to pay for debt. There is no direct link between export and debt that you think exists. GoB is borrowing for capital expenditure that is increasing both export and the rest of economy.

Private sector debt is not secured against GoB assets. GoB will become a guarantor of last resort if there is a public interest to do so but these private dealing has very little to do with the government.

You are mixing internal debt with foreign debt. External debts must be repaid with dollars and when the ratio is very high, a country cannot pay back the debts.

No free lunch in the world. BD has to try for heavy industrialization. Industries produce wealth of a nation.

 

[bluesky]

The verified WB report, released two weeks back, said that Bangladesh's total long-term debt stock was $54.65 billion in the year under review while the short- term over $10.99 billion. Use of IMF credits, also part of the total debt, was just $2.11 billion.

People should read and understand the meaning the paragraph above instead of putting a rosy picture on the debt issue. BD is on the path towards Pakistan and SL.

 

[nang2]

"Although the private corporate loans are not guaranteed by the government, but the government cannot avoid such a liability at the final stage when those become overdue," the economist told the FE.

However, the economist only made this statement without offering why, as if it is something a matter of fact without dispute. Is Bangladesh a country where the government is responsible for everything?

 

[mb444]

You are mixing internal debt with foreign debt. External debts must be repaid with dollars and when the ratio is very high, a country cannot pay back the debts.

No free lunch in the world. BD has to try for heavy industrialization. Industries produce wealth of a nation.

I am not mixing anything up at all. Foreign debt from IMF and such like how do you think they are dispursed? BD get them in dollars, BoB converts it into taka from spending in country. Rest it will use to pay foreign companies if they are used in that way.

BD reserves are taka being held in foreign currency.

BD public sector debt is payed from tax money raised. Ratio is on an upward trend and I share your concern.

However debt has nothing to do with export as you claimed in earlier post. You are correct to raise concern however BD has good amount of foreign currency coming in through expats as well as exports. BDs reserves are healthy and growing. Covid is an unprecedented event and every country has increased public spending and sometimes these have been meet through borrowing. BDs borrowing is more or less exclusively for capital investments that will increase economic activities.

I believe BD will manage the debt appropriately as we have always done. I expect the debt ratio to start falling back in a couple of years as the overall economy expands.

 

[mb444]

People should read and understand the meaning the paragraph above instead of putting a rosy picture on the debt issue. BD is on the path towards Pakistan and SL.

What do you understand by this..... BD short term liability is only $11bn meaning it is due in 1-5 years. BD last year spent around 2bn in debt servicing out of a budget of $71bn. I do not see how you see this as an issue. Even if it goes to $3bn its managable.

BD economy is expanding as so does its capacity to service debt. Has BD ever come even close to defaulting? Our fiscal policy is uber conservative. GoB has taken a risk to go for infastructure development because there is a need for it. I think these investments will come good and the returns will pay off the debt.

 

[bluesky]

However, the economist only made this statement without offering why, as if it is something a matter of fact without dispute. Is Bangladesh a country where the government is responsible for everything?

Private borrowing is different. But, the govt is borrowing in two hands for which it itself is responsible. A densely populated country such as BD needs fast industrialization to step into self-propelled development in other sectors.

But the GoB has chosen to borrow money to build a few infrastructures. This is not called development.

 

[nang2]

Private borrowing is different. But, the govt is borrowing in two hands for which it itself is responsible. A densely populated country such as BD needs fast industrialization to step into self-propelled development in other sectors.

But the GoB has chosen to borrow money to build a few infrastructures. This is not called development.

I was wondering about why the govt is responsible for private borrowing, not about govt borrowing.

 

[mb444]

Private borrowing is different. But, the govt is borrowing in two hands for which it itself is responsible. A densely populated country such as BD needs fast industrialization to step into self-propelled development in other sectors.

But the GoB has chosen to borrow money to build a few infrastructures. This is not called development.

Govenment can not build industries, it can only build infastructure and support private sector through policy incentives.

These infastructure development will catalyse economic growth and industrialisation. This is economics 101.