A B Siddique :
Bangladesh’s foreign debt repayment amount will reach 5.15 billion dollars by 2029-30. According to experts, this amount is within safe limits.
As a result, as the next emerging economy, like Pakistan or Sri Lanka, Bangladesh is also going to fall into economic crisis – this fear has been removed.
The forecast was prepared by the Economic Relations Department (ERD) between May and June as part of Rocker’s Medium Term Debt Management Strategy (MTDS).
This agency of the government manages the foreign debt repayment program. An amount of 2.78 billion dollars will be repaid against foreign debt in the current financial year. Payments last year were $2.45 billion.
As per the forecast, the disbursements will continue to increase continuously and will reach a peak in FY 2029-30.
The repayment amount will be reduced continuously from the following year onwards. For example, in the fiscal year 2034-35, the debt repayment amount will be 4.45 billion dollars. Similarly, the ratio of the country’s foreign debt to GDP will also continue to decrease.
According to the International Monetary Fund’s (IMF) Sustainable Debt Review Report released in March, this ratio will decrease from 18.1 percent in 2021-22 to 13.4 percent in 2031-32.
In the report, the IMF commented, ‘Bangladesh is at low risk in terms of external and overall debt burden.’ Increasing foreign financing is one of the 4 strategies outlined in the government’s MTDS.
The MTDS has been finalized this month. As part of this strategy, 36 percent of the country’s overall financing needs will be met through loans at reduced interest rates.
The possibility of issuing international bonds in the latest MTDS has been ruled out.
Note that such bonds can be identified as a major reason behind the continuous deterioration of Sri Lanka’s debt situation. Zahid Hossain, the former top economist of the World Bank’s Dhaka office, said, “Bangladesh’s foreign debt to GDP ratio is so low that even if the cost of debt (interest rate) increases, the possibility of this burden going beyond the tolerable level is minimal.”
However, external factors such as the Russia-Ukraine war may pose some risks. In such a situation, the price of daily commodities may increase in the world market and the foreign exchange reserves of Bangladesh may decrease and the current account deficit may occur. “The possibility of such a situation cannot be ruled out,” added Zahid Hossain.
He also said that in the future, if the two main sources of Bangladesh’s foreign exchange, exports and remittances decrease for any reason or if the amount of imports increases, there will be pressure on the government.
As a result, repaying the loan on time can be troublesome. To avoid such problems, Zahid Hossain advised the government to be careful in selecting foreign-funded projects.
“We have to select projects that will have a visible positive impact on the economy. These may be to save production, export earnings or import costs.
There should be concrete contribution in this field and it should also have commercial utility’, added Zahid. This experienced economist thinks that it should be noted whether all the conditions are in favor of the country in terms of foreign funds According to ERD’s projection, Bangladesh’s market-based share of external debt will be 42.4% in 2026; And according to the government’s announcement, when the country becomes an upper middle income country in 2031, it will be 55.7%.
According to projections by the Economic Relations Department (ERD) and the General Economics Department (GED), market-based debt in Bangladesh’s total external financing will increase to more than 82 percent in 2041 from 26 percent in 2020.
At the same time as financing from formal donors reduces flexible debt, debt repayment costs will increase.
As Bangladesh’s per capita income continues to rise, opportunities for foreign loans will increase significantly in the coming years.
In addition, LDCs transition from Qatar or LDC graduation will open up market borrowing for the public and private sectors.
Bangladesh will officially become a developing country in 2026, moving forward with the goal of becoming a developed country by 2041. According to ERD’s projection, Bangladesh’s market-based share of external debt will be 42.4% in 2026; And according to the government’s announcement, when the country becomes an upper middle income country in 2031, it will be 55.7%. According to the report, the current government-guaranteed loans will have an interest rate of 0.7 percent of total exports if LDCs do not graduate.
On the other hand, graduation is projected to be 1.2 percent by 2041. In recent years Bangladesh has moved towards mixed financing through IDA (World Bank Flexible/Concessional Credit Facility) and OCR (Asian Development Bank Flexible/Concessional Credit Facility) as well as rigid loans.
According to the report, after the World Bank and ADB, other multilateral development partners will gradually reduce the non-flexible loan concessions for Bangladesh.
Flexible loans will account for only 4.2 percent of total external debt in 2041, up from 59.4 percent in 2020.
Official Development Assistance (ODA) is an important source of development financing, the ERD report says.
Although its share in Bangladesh’s GDP has declined over time, it was 1.6 percent of GDP in FY2020.
Given the constraints on local resource mobilization, there is still a significant need for ODA to finance development projects.
In addition to the efforts of Bangladesh’s public and private sectors, technical assistance and foreign donations through non-governmental organizations (NGOs) play a supportive role.
All these grants are likely to decrease in the context of LDC graduation in Bangladesh.
At present, the country receives 1 billion dollars in grants from foreign sources (including government and private sectors), 70 percent of which is again received by NGOs and private enterprises.
According to ERD and GED projections, foreign aid through NGOs will come in at less than $100 million in 2031, which was around $500 million in 2020.
Zahid Hossain, former chief economist at the World Bank’s Dhaka office, said flexible credit will not decrease due to LDC graduation. It will decrease due to increase in per capita income.
And because of this, Bangladesh will qualify for World Bank’s IBRD loan from IDA Blend (mixed credit facility) by 2041.
Market-based lending will also increase risk, the ERD report said. Development partners provide flexible loans with easy terms and fixed interest rates. It is less risky. On the other hand, market-based loans carry the risk of rising interest rates.
Market based loans are taken at LIBOR (LIBOR) or SOFR (SOFR) and Euribor rates. According to the report, Libor rate was less than 1 percent a year or two ago.
Now the 6-month LIBOR rate is around 5 percent. As a result, Bangladesh has to pay a lot of interest for the 6-month Libor loan. Development projects have 6-month-based Libor loan commitments totaling $23.5 billion as of June 2022, with outstanding loans amounting to $11.98 billion.
So far, the rate is now more than 3.5 percent. ERD officials said that market-based loans in the private sector will increase pressure on foreign loans in the coming days. Highlighting the current state of external debt – the ERD report emphasized quality borrowing rather than large amounts of borrowing.
If less important projects are taken up with foreign loans, the benefit will not come. For this reason, emphasis has been given on standardized borrowing. Not only should you take a quality loan, you should also invest it in a quality way.
‘Otherwise – foreign debt will become a burden for us’. The ERD report, however, emphasized the lender selection process. In particular, bilateral loans – have much more ambitious conditions for the purchase of goods or services.
There is also a need to be strategic about what kind of projects – what kind of development aid agencies need to borrow – but there is no strategy for the government. Only the project is going on with the loan against it, which may cause major problems for the government in the near future.
(The writer is a journalist.)
