Will Bangladesh experience “shocks”?

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Bangladesh, like other developing countries keen to be on a higher growth trajectory, has long resorted to borrowing from foreign bilateral and multilateral institutions to obtain hard currency and domestic sources for the taka component. foreign-funded projects. Over time, the volume of both has ballooned, the latter almost exponentially for chronic budget deficits. As Bangladesh has moved from a low-income country to a lower-middle-income country, the grant element of foreign aid has diminished and the preferential interest rate is being phased out by the commercial rate. Driven by a dynamic economy with an average annual growth rate of more than 6% over the past two decades, supported by manufacturing exports, in particular garments (80% of the total) and increasing remittances by wage earners, Bangladesh has borrowed large amounts of foreign loans to fund a number of infrastructure projects, which are now referred to as ‘mega’. The ratio of external debt to gross domestic product (GDP) has been estimated in various ways, ranging from 17% to 21%, while the ratio of domestic debt has been estimated at around 41%. For a country like Bangladesh, it is not the external debt/GDP ratio but the capacity to service or repay that is more important. From the point of repayment of external loans, the loan portfolio according to the sources and their conditions matter significantly. Like project portfolios, Bangladesh’s external borrowing sources are also diverse, including multilateral institutions and bilateral authorities. For domestic borrowing, the corresponding sources are commercial banks and government instruments such as savings certificates.

The government’s growing reliance on domestic borrowing to finance the deficit in annual budgets has regularly come under criticism from observers and economists, especially at the time of finalizing the annual budget. The usual arguments against deficit financing of the budget have been the crowding out effect on private sector lending, the impact on the inflationary situation and the negative effect on revenue mobilization by government agencies. But the issue of the government’s inability to repay the domestic loan has never been part of ongoing criticism.

With the completion of the flagship Padma Bridge and its opening to traffic, the number of megaprojects now stands at 20. The Padma Bridge has been criticized for costs and time overruns which have inflated the total cost, according to The critics. Lack of due diligence in implementation and corrupt practices were also alleged. Apart from this routine critique, the remaining megaprojects have been subject to a different kind of commentary, viz. the growing debt service burden. After Sri Lanka’s economic collapse and sovereign debt default, the main comments focused on caution in external borrowing and the economical use of borrowed funds. Even as the country’s balance of payments deficit began to widen unprecedentedly since the second quarter of the previous fiscal year, putting pressure on the taka-dollar exchange rate, no one uttered the dreaded word “D (default) regarding repayment of funds borrowed from outside sources. The headwinds facing the macroeconomy, from inflation to a widening current account deficit, have caused concern among observers and economists, but not alarm. An economist at a think tank has now departed from this trend of cautionary advice and warnings by pressing the panic button which may have sent shockwaves through policy makers, especially with the use of the “shock” to get his point across.

The July 21 virtual media briefing was titled “Bangladesh’s Twenty Megaprojects: Trends and Status.” Mentioning that the success of the external financing of megaprojects was a matter of satisfaction, the economist familiar with connoisseurs went on to break down the 45 loan packages for the 20 megaprojects according to their nature of grant (5), concessional loan (33), semi-concessional loan (2) and commercial loan (5). He reiterated his satisfaction over the mix of loan packages, ostensibly for his various sources. Then he dropped the bombshell saying he could easily visualize the “big shock” that threatens loan repayment between 2024 and 2026. The fact that he also included domestic borrowing for repayment in the overall loan portfolio became clear when he said that 50% of the total Government of Bangladesh (GOB) borrowing from banks, unless repayment is made when due, banks will face a crisis of liquidity. Clearly, the economist fears that the government will fail to repay domestic lenders on time, especially commercial banks. It is surprising that he does not know that no government, let alone Bangladesh, defaults on national banks and there is no such record in recent history. Indeed, a government, including the GOB, has a number of repayment options even when its fiscal space is constrained by late progress in resource mobilization. The sources used by the government are revenue (in part, when the total is not enough as is currently the case in Bangladesh), payment by treasury bills (deferred cash payment with interest), new borrowing from banks and private savers (after repaying the old loan) and printing money. This combination of instruments or administrative decrees allows a government not only to repay the domestic borrower, but also to continue to borrow as a means of financing its debts and current expenditures. The question of non-payment of the domestic debt by the government therefore does not arise. It is surprising that the economist barked at the wrong tree or used it as a trail horse?

More serious is the apprehension expressed by the economist in the face of the “shocks” expected in 2024 and 2026 concerning the repayment of the external loan. Here he not only sounded the alarm, but also specified when the disaster (the shock) was going to happen. The question that will be asked in this context even by a layman is: how does he know? It only looked at external debts (outflows) that will need to be repaid, but it did not take into account the inflow of resources in the form of exports, remittances, foreign direct investment and lending from bilateral and multilateral sources during and prior to those two years he mentioned, 2024 and 2026. has not made medium-term projections, taking into account the negative forces affecting them (recession, stressed supply chain, war in Ukraine, rising oil and food prices, etc.). In fact, he didn’t even break down the loans that will come due under various projects during the year. If he carried out an exercise examining both the amount of external debt repayments (resource outflows) that will be due from one year to the next in the medium term and the likely external “benefits” (resource inflows) of the countries, its forecasts might have some credibility, even if the projection was tentative. Lacking, if not to say, academic rigor in the analysis, or even elementary argument, his forecast of the “shocks” that await the economy in 2024 and 2026 is highly speculative, almost bordering on infantile alarmism. It is also very irresponsible due to the seriousness of the subject.

The key questions to be asked in the context of short to medium term external debt repayment are: (1) Bangladesh’s exports, which exceeded $50 billion in FY22, will to maintain momentum, weather the impending recession in the United States and Europe, two of its main export destinations, and what is the plausible trajectory for export earnings in the short to medium term? (2) Is the recent decline in employee remittances to $21 billion from $24 billion last year a temporary hiccup ready to be corrected automatically or does it call for a major policy change like the devaluation of the taka against the dollar which will boost not only remittances but also exports? Allied to this is the question: what can be the trade-off between these benefits and increased import bills? (3) What increase can be expected in the volume of lending by multilateral institutions systematically each year in the form of budget support, import financing, etc.? ?

The answer to the above questions, based on past history and current reality, will provide the basis for making tentative projections on the inflow of hard currency resources that can be used for debt servicing, among other needs. No one expects these projections to be entirely accurate and watertight, but at least there will be a basis for making a forecast on the country’s ability to service its external debts when they fall due in a year. on the other. In the absence of these calculations and projections, the virtual media briefing was not only an exercise in futility, but also a very blatant example of empirical economic analysis. This does little credit to the economist and the think tank to which he belongs.

The Economist’s recommendation in his virtual press briefing on postponing non-high priority projects is reasonable and pragmatic. But is it wise to start talking about rescheduling the repayment of loans already used before even being certain that there will be over-indebtedness? Reimbursement of restructuring is an option of last resort when there is a “clear and present danger” in servicing the debt, which does not currently appear to be the case. Discussion of restructuring is not only premature at this point, it will send the wrong signal to our lenders, lowering the country’s credit rating. No sane person can think of such drastic action when the situation is anything but dire.

Warning is always good because it helps to be forewarned. But the situation must be ripe for that. This applies to external debt as well as to other issues of economic management.

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