May 06, 2022, 11:00 a.m.

Last modification: 06 May 2022, 14:29

Illustration: TBS

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Illustration: TBS

As of June 2021, Bangladesh’s outstanding foreign loans stood at $50.87 billion, while there is another $48 billion outstanding.

The country is set to spend more than $2 billion on servicing its external debt starting next fiscal year, with grace periods for many such loans ending in the current fiscal year.

The repayment burden will increase as foreign-funded megaprojects such as the Rooppur nuclear power station and the Padma Bridge rail link see the start of principal payments alongside interest over the next four years.

In addition, interest payments from new loan agreements will increase the loan repayment burden.

Bangladesh will face maximum pressure in fiscal years 27, 28 and 29 as debt repayments will reach at least $2.5 billion in the three fiscal years. Such an upward trend will continue through FY33, according to a report by the Economic Relations Division (ERD).

In an interview with The Business Standard, former BIDS Managing Director Mustafa K Mujeri said Bangladesh’s increase in foreign lending can be worrying if the country cannot properly use the borrowed money. Dr. Mujeri is currently Executive Director of the Institute for Inclusive Finance and Development (InM).

Dr. Mustafa K Mujeri is a former Managing Director of BIDS. Illustration: TBS

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Dr. Mustafa K Mujeri is a former Managing Director of BIDS.  Illustration: TBS

Dr. Mustafa K Mujeri is a former Managing Director of BIDS. Illustration: TBS

Foreign loans increased from 12,870 Tk crores in FY 2015-16 at Tk 97,740 crore in FY 2021-22. Money spent on debt repayment also increased from Tk 7,080 crore to Tk 14,450 crore during this period. Could such an increase in foreign lending become risky for the stability of Bangladesh’s economy in the future?

A country like ours has the need to borrow abroad because we have a shortage of resources to invest. We don’t have the capital. Therefore, foreign aid is absolutely necessary for our economic development. Above all, our infrastructures are costly and the possibilities of financing them from our own resources are limited. External borrowing is therefore considered essential to the development of countries like ours. If we use borrowed money wisely, the benefits will outweigh the costs of the project. That’s the argument.

In recent years, there has been an increase in borrowing because we had capital-intensive megaprojects at that time. They are mainly financed by external loans. This is why there is such an increase in foreign loans. But we are still safe in terms of the internationally accepted amount of borrowing relative to GDP.

However, we have to repay the amount with interest within a stipulated period. If our ability to repay does not increase, we will have trouble with interest. If we cannot use the large amounts borrowed in the productive sectors, this could be worrying.

Most of our projects, whether large or small, are over cost. This means that the costs become several times higher than the expected costs. All of our recent megaprojects have significantly exceeded the initial cost estimate. One of the main reasons for escalating costs is that they have exceeded the duration of the project.

So How can these project implementation delays impact the repayment of foreign loans?

If we don’t repay the loans according to the repayment schedule, it has a negative impact on our credit ratings. So far, Bangladesh has repaid the loans on time. But if borrowings increase in an unusual way, or if we cannot take advantage of them, they will turn into burdens. So we will have to think about how much we use the loans.

So far, as LDCs, we have received concessional loans – at a very low interest rate. But now that we are a lower middle income country and will soon be graduating from LDCs, we will get less concessional loans. Interest rates will skyrocket. And as a result, the interest burden will also deteriorate.

While foreign lending has already increased significantly, there is still $40 billion in foreign aid pledges in the pipeline, according to a finance division secretary. Are our government’s revenues growing as lending grows? What is your observation?

Tax revenue is one of the main sources of government revenue. But unfortunately, the tax-to-GDP ratio is very low in our country compared to other countries. For example, our tax collection is only around 10-12% of our GDP while a country like Nepal has a tax collection of around 17-18%. But their per capita income is lower than ours.

As our tax collection is lower, we depend on borrowing. And in addition to foreign loans, we borrow – bank or non-bank – also on the local market. This means that our external and internal borrowing increases. And our internal borrowing interest rates are higher than external borrowings.

Our reliance on borrowing is increasing because we have failed to increase our tax collection.

Investment demand is currently increasing in Bangladesh. With this, the demand for foreign currencies also increases. Do you think the increase in lending can put pressure on foreign exchange reserves and the exchange rate?

If our borrowing increases and our macroeconomic stability is disrupted, there is also a negative impact on the currency. These are all interdependent. So, if our national economy is unbalanced, it also creates an impact on the external balance.

If the pressure increases on the currencies, or if our foreign exchange reserve decreases, if there is an imbalance or deficit in the current account, its impact is also felt on our foreign exchange market. This means that our exchange rates are under pressure and are depreciating against the dollar as a result.

So when we repay the loans, we will have to repay in dollars; we will have to buy the dollar at a high rate. The more our national currency depreciates, the more it devalues ​​and the lending burden will continue to skyrocket.

At the same time, the interest rate will also increase in real time. Since the indicators of our macroeconomics are interconnected, if a problem infects one indicator, it will affect all the others.

Speaking of megaprojects, let’s talk about Sri Lanka. The foreign loans induced by the megaprojects would have played a role in their current situation. What can Bangladesh learn from this island nation?

The current situation in Sri Lanka is not the creation of a single day. They arrived here over a period of time. It’s like an explosion now. We never expect Bangladesh, or any country, to face a Sri Lankan crisis.

We have to learn from Sri Lanka because its economy was indeed strong a few years ago. They were better than us in most indicators, including social, economic and humanitarian indicators. It was a stable economy. We have to look at how this strong economy fell into such a crisis.

No matter how strong an economy is, if it is not administered effectively and policies and management are not aligned with each other, a stable economy can quickly turn into a weak and volatile economy. . This is the lesson, applicable not only to Bangladesh but rather to all other countries.

During the economic crisis of 2008, an economy like that of the United States also experienced difficulties. Thus, every country should take seriously the fact that, regardless of the size of an economy, bad policies can lead to disaster.