Debt servicing cost to go up

Kazi Zahidul Hasan :
The appreciation of the US dollar against local currency will heavily impact Bangladesh economy because of its exposure to US dollar-denominated external debt and international trade transactions, economists said on Wednesday.
They said the country’s interest costs and principal repayments of foreign loans and import expenditure will rise sharply due to soaring value of the greenback against Bangladesh’s currency (Taka).
“The soaring dollar rate is driving up the value of Bangladesh’s external debt as well as the swelling cost of debt servicing,” said economist Dr Ahsan H. Mansur, adding, “The rising dollar rate has increased the country’s foreign debt to almost Tk 2.4 trillion.”
He said since most of the international transactions of Bangladesh are denominated in dollars, the economy is particularly vulnerable due to the effects of upward movement in the US currency.
Bangladesh’s external debt stock has been increasing over the years and the principal and interest repayment also increases. International Debt Statistics of the World Bank shows that in 2012, Bangladesh’s total external debt stocks was US$28.28 billion whereas principal repayment was US$1.14 billion and interest payment was US$0.25 billion. In 2021, the country’s total external debt stocks stood at $78.04 billion as it increased reliance on foreign loans for its development activities.
Economists believe that the increased external debt holds back the country’s growth as loan repayment draws a major portion of its income.
External debt is received in the stated foreign currency and normally it must be paid in that currency. In 2012, the currency composition of public and publicly guaranteed debt in USD,
Euro, SDR, Japanese Yen and other currencies was 55.10 per cent, 0.70 per cent, 17.30 per cent, 9.10 per cent and 4.80 per cent respectively. And in 2020 it was 61.90 per cent, 1.0 per cent, 11.10 per cent, 17.50 per cent and 5.70 per cent respectively in the said currencies.
“Right now, Bangladesh’s main economic problems are skyrocketing imports, soaring dollar rates, spiraling inflation and depleting foreign exchange reserves. These issues are directly linked with the ongoing commodity shock and worldwide crises. Most countries are currently suffering from these very same problems also,” said Dr Ahsan H. Mansur, also the chairman of BRAC Bank.
In this situation, he said, the government should take proper policy measures to curb unnecessary imports and narrow the spread in dollar rate in banks and open market to prevent erosion of foreign exchange reserve further and encourage remittance inflow in formal channels.
“Bangladesh’s debt as well as debt servicing cost will go up in the current fiscal year, owing to dollar appreciation,” said economist Dr Zahid Hussain, adding, “The country’s external debt to GDP ratio will remain tolerable level despite the rising cost of debt as a result of high rate of greenback.”
The country will pay US$2.78 billion foreign loan in this fiscal year (2022-23), according to finance ministry officials.
When asked, Dr Zahid said, Bangladesh sees a massive rise in import expenditure as the ongoing Russia-Ukraine war has dealt a major shock to global commodity markets and disrupted production and trade. As a result, oil, grains and energy prices in the international market go up significantly, forcing Bangladesh to spend more on merchandise import.
“An unusual surge in import bills has also led to fall of the country’s foreign exchange reserve in recent months,”he added.
Dr Zahid, a former lead economist at World Bank’s Dhaka office, mentioned that the country’s foreign exchange reserves declined to $39.77 billion as of July 20 this year– from $45.5 billion a year earlier– owing to the increasing current account and widening trade deficits and declining inflows of remittance. Stating the depleting foreign exchange reserve is ‘a warning signal for economy’, he apprehend that it may drop further in the months to come as a result of high import payment, falling inward remittance and export earnings.
He also stated that the falling reserve also led to a significant devaluation of the nation’s currency against the US dollar. Taka has been devalued by 11.38 per cent in a year. Besides, dollar price remained upward amid rising demand for import payment.
The country’s trade deficit hit a historic high of US$30.81 billion in the first 11 months of the last fiscal year (2021-22) year, according to data from the Bangladesh Bank.
The high trade deficit also registered a record current account deficit of US$17.23 billion in the first 11 months of FY22, from a deficit of US$2.78 billion a year ago.
Between July and May last fiscal year, imports increased to US$75.40 billion, up 39 per cent year-on-year when exports grew 33 per cent to US$44.58 billion.
Bangladesh’s remittance earnings declined to US$ 21.03 billion in FY22 from US$24.77 billion in fiscal year 2021-22 despite a massive surge in outflow of migrant workers.
“Remittance inflow to Bangladesh continued to slide as money transfer through unofficial channel (like hundi) might have gathered pace in the wake of high dollar rates in the ‘kerb market,’ said Dr Zahid.
On Tuesday, the greenback was traded at Tk 112 in the open market (kerb market), reaching all-time high against the local currency amid depleting foreign exchange reserves.
Amid the appreciation of the dollar and the spiraling prices of food products in global and domestic markets, the country’s inflation hit a nine-year high of 7.56 per cent in June.
“The government may face cash flow constrain to service debt on time if exports and remittances fall or import cost soars in the months to come,” said Dr Zahid.
Considering its potential risk on economy, he urged the government to be more careful in taking up projects with foreign loans. “If the mega projects are not economically viable, they may only become liabilities for the country. Besides, foreign funding sources must also be assessed cautiously so that their terms and conditions must be favourable to the country.”
He also urged the government to rein in the unnecessary import to restore stability in the foreign exchange market and keep the country’s foreign exchange reserve stable.
Both the economists are of the view that Bangladesh needs quick foreign currency inflows to meet import and debt payments amid falling foreign exchange reserves.
The government of Bangladesh has already sought a US$4.5 billion loan from International Monetary Fund (IMF) to cope with the mounting balance of payment (BOP) pressure, budgetary needs as well as measures to deal with climate change.