Bangladesh leaned towards external borrowing to finance its fiscal 2021-22 fiscal deficit, taking advantage of the country’s ability to borrow more of the relatively cheap foreign borrowing.
In the first nine months of the last fiscal year, external borrowing accounted for 49.38 percent, up from 33 percent a year earlier and 37 percent in fiscal 2019-20, according to the Treasury Department’s latest quarterly debt bulletin released yesterday.
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The Ministry of Finance began issuing the Bulletin in April last year by order of the International Monetary Fund to provide quarterly updates on the country’s debt situation. After two editions, however, the Ministry of Finance put the publication on hold. The latest bulletin comes after a three quarters gap.
The country received approximately Tk 46,530 crore from external sources between July last year and March this year, which is more than the full year revenue of Tk 45,523 crore in FY 2020-21.
Yet Bangladesh’s external debt-to-GDP ratio, a metric that reliably indicates a country’s ability to repay its debts, has improved over the past fiscal year. The higher the debt-to-GDP ratio, the higher the risk of default. However, Bangladesh’s rate fell 2.6 percentage points year-on-year to 11 percent last fiscal year.
“This leaves a lot of leeway given that the foreign debt-to-GDP ratio threshold is 40 percent,” the Treasury Department said in the bulletin.
The disclosure will help allay fears of a debt crisis stemming from the government’s recent offer of financial support from development partners on the budget and balance of payments.
Debt financing in the first nine months of the past fiscal year came from concessionary financing sources, of which 53.8 percent came from bilateral lenders.
Also in FY2020-21, external funding from bilateral sources was much higher than from multilateral sources at 64 percent of funds.
According to Zahid Hussain, a former senior economist at the World Bank’s Dhaka office, bilateral loans tend to be more expensive than those from multilateral lenders and have relatively shorter maturities.
“If the proportion of bilateral debt continues to rise, as has been widely believed in recent years, external debt management could become a concern in the not too distant future,” he said, urging the Treasury Department to provide more information on the costs and maturities of the debt Foreign Debts in the Bulletin.
Various analysts and observers make different assumptions about the short- and medium-term increase in the burden of repaying foreign debt.
“The Bulletin can be most useful in helping to understand the extent to which such contemporary concerns are evidence-based,” he added.
As of March, Japan tops the list of bilateral lenders, accounting for 45 percent of such loans, followed by Russia (22 percent), China (21 percent), South Korea and India (both about 4 percent).
However, multilateral lenders still account for the lion’s share of the government’s total external debt (as of March): 61 percent.
The World Bank tops the list with 55 percent of the debt stock to multilateral sources, followed by the Asian Development Bank (39 percent), the Asian Infrastructure Investment Bank and the International Fund for Agricultural Development (both about 2 percent). Islamic Development Bank and OPEC (both about 1 percent).
Bangladesh’s external debt stock is dominated by Special Drawing Rights (SDRs), which are additional foreign exchange reserves defined and managed by the IMF.
SDRs are units of account for the IMF and not currency per se, but they represent a claim to currency held by IMF member countries and 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.
Up to 43 percent of Bangladesh’s external debt is in SDRs, followed by dollars (31 percent), yen (18 percent), yuan (4 percent), euros (2 percent) and others (2 percent).
At 62 percent, domestic debt accounts for the largest share of the total debt as of March 31. And dependence on domestic sources is gradually increasing, according to the Bulletin.
“At present, domestic debt management is a bigger challenge than external debt management,” Hussain said.
National Savings Certificates (NSCs) and banks contributed equally to domestic debt: 47 percent each.
However, the cost of borrowing from NPCs is relatively higher but has some socioeconomic implications, the bulletin said.
“At a time when liquidity in the banking system is drying up due to ongoing foreign currency sales by Bangladesh Bank, given the cap on lending rates and the inflation-based floor on individual term deposit rates, increasingly complex financial institutions will naturally seek safe havens to conduct monetary policy as their spreads compress while credit risks have increased due to ongoing repayment delays and continued macroeconomic stress,” Hussain said.
However, ongoing NSC reforms will help reduce reliance on the more expensive instrument and also bring about reforms in the domestic financial market, the bulletin said.
Nevertheless, the total debt in relation to GDP is around 32 percent and thus well below the sustainable threshold of 55 percent.