Delay in crawling peg to encourage people to keep forex abroad: CPD

Highlights:

• Local currency should be deprecated at a more accelerated pace to bring more competitiveness in export
• Loans with single source procurement conditionalities should be carefully scrutinised 
• Short term trade credit for import may be negotiated with major importers to ease pressure on reserves 
• Individual loan burden in Bangladesh is Tk 1.5 lakh, which has increased by 50% in just three years
• The cost of mega infrastructure projects financed through foreign loans are being by 20-50%

The Bangladesh Bank should quickly spell out how it will operationalise crawling peg modality as delays may incentivise keeping foreign currency abroad, Mustafizur Rahman, distinguished fellow of Centre for Policy Dialogue (CPD), said yesterday.

Local currency should be depreciated at a more accelerated pace to bring more competitiveness in export, he said at a dialogue titled "Bangladesh's External Public Borrowings and Debt Servicing Capacity: Are There Reasons for Concern?"

Besides, once the market aligns the dollar, the fiscal burden of the Tk11,000 crore subsidy provided by the government and banks will be eliminated, Mustafiz added at the event organised by the CPD and The Asia Foundation.

"If we calculate our debt servicing record, external debt-to-GDP, we are quite comfortable. However, external borrowing and debt servicing liability are increasing in recent years, which is a cause of concern," he added. 

Pointing out that the government had approached the International Monetary Fund for a loan of $4.7 billion, he said it indicated that "we are now concerned with external borrowing".

The economist said external debt now has two dimensions: external and internal.

External factors include global economic and financial shocks, adverse impact of the Covid pandemic, negative fallouts of Russia-Ukraine war, depressed global demand for goods and services.

The internal factors are weak management of external debt and borrowings. 

Borrowings that did not generate expected returns had impact on debt servicing, low domestic resource mobilisation, currency fluctuation, unfavourable terms of and conditionalities of lending, changed composition of borrowings and high exposure to sovereign bond market, and financial market fluctuations, he explained.

'Explore new source of funding'

Mustafizur Rahman said significant changes have taken place in both debt portfolio and terms of loan over the recent past. 

The changes include a shift from concessional to non-concessional, commercial term loans, shift from predominantly multilateral to bilateral loan, suppliers' credit, growing share of flexible interest rate loans (LIBOR/SOFR plus), and more stringent term loans, shorter grace and maturity period.

Rahman stressed the need for transparent and accountable spending of external borrowings, advocating for careful consideration between fixed and flexible term loans. 

Besides, loans with single source procurement conditionalities should be carefully scrutinised to assess their implications and good value for money, he said.

Bangladesh boosts reserves primarily through exports and remittances, limiting its revenue options and impacting its ability to service debts, he added. 

He noted that the Revenue-GDP ratio, which rose from 9% to 14% during the 7th Five Year Plan (2015-2020), has now dropped below 9% in 2024, indicating an unsustainable trend. 

Additionally, outstanding sovereign debt has tripled since FY11, with debt servicing increasing 2.6 times, outpacing revenue growth, he added. 

With many loans for major projects abroad entering the repayment phase, interest and principal payments are escalating rapidly.

"Bangladesh's public and private foreign debt stood at $98.9 billion in June 2023, surpassing $100 billion in September of the same year."

To alleviate these pressures, he suggested repaying a portion of external debt in cash and forming a union like the Asian Clearing Union (ACU), said the economist. Negotiating short-term trade credits with major importers such as India and China could also provide relief, particularly for debt servicing purposes.

Dr Mashiur Rahman, economic advisor to the prime minister, was the chief guest at the programme chaired by CPD Executive Director Dr Fahmida Khatun. Salehuddin Ahmed, former governor of Bangladesh Bank and Kamran T Rahman, president of MCCI, were panellists.

Cautions and suggestions 

Stressing the importance of effective foreign loan utilisation, Salehuddin Ahmed advocated for project-based loans over budget support or balance of payment support loans. He advised minimising suppliers' credits and bilateral loans, and prioritising multilateral loans.

Rehman Sobhan, chairman of the CPD, pointed to Sri Lanka's situation as a cautionary tale, where reliance on short-term loans became unsustainable due to declining exports. While Bangladesh isn't in a critical state yet, Sobhan expressed concern about the rising trend of short-term loans in the country.

Professor Sobhan also addressed the high costs associated with Bangladesh's mega infrastructure projects financed through foreign loans. He said the cost of these projects are being inflated by 20-50%.

Debapriya Bhattacharya, a distinguished fellow at the CPD, criticised the prevailing "denial" attitude among policymakers, who sometimes dismiss the analysis and predictions of economists. 

Bhattacharya noted the absence of clear data on private sector loans and said much of the government debt comes from within the country. He underlined the importance of understanding Bangladesh's debt situation by examining both internal and external factors.

The economist said, "The per capita debt, including both domestic and external components, is around $850, translating to a significant individual loan burden of Tk1.5 lakh, which has increased by 50% in just three years."

Mashiur Rahman, prime minister's economic advisor, said Bangladesh needs to aim for higher returns on investments, targeting efficiencies to achieve returns of Tk11.5 to Tk12 instead of just Tk1 on a Tk10 investment. 

Rahman urged the need for a balanced approach, combining currency depreciation with investments in production capacity to drive export growth. 

While acknowledging the potential of foreign loans and aid to bridge the savings-investment gap, he urged the need for focusing on factors like project selection, implementation quality, and overall effectiveness.