IMF Targets: To avoid debt distress, our financing must come from long-term and least-cost sources

In the 2014-15 fiscal year, Bangladesh implemented its first Medium-Term Debt Management Strategy (MTDS) with a three-year timeframe. A second MTDS was deemed necessary to bring it up-to-date. The current MTDS was completed using debt data as of June 2020, but where and when applicable, it also made use of the most recent macroeconomic indicators and statistics. 

Both foreign and domestic lenders provide loans to the government. MTDS serves as a strategic guideline for loan acceptance and its subsequent management. The primary objective here is to maintain debt sustainability and servicing. The interest on our loans is a significant hardship right now — to cover the interest, we are paying slightly more than Tk1 for every Tk 4 of our revenues. 

The first step is to stop things from getting worse, so the interest rate does not increase, and the maturities don't shrink. The second is to look for options to do better on these. 

Our annual interest expense is primarily attributed to loans obtained from domestic sources. Savings certificates are among the most costly domestic loan sources. One of the two requirements set forth by the IMF for raising public spending is that the amount drawn from the savings certificate cannot exceed one-fourth of all domestic financing. The government must devise a plan to get there. 

We already have a comprehensive debt management plan in place; however, it must be updated for 2025–2027. It will serve as a roadmap for the next three years of loan management, outlining how much will come from domestic sources, how much will be paid by grants and loans from abroad, as well as how much will be issued in treasury bills and bonds. 

There are several short and long-term debt instruments. For example, for treasury bills, the duration can be 90 days, 360 days, two years, five years, 10 years, 20 years, etc. Which ones should be prioritised right away, which ones should wait, and what more course corrections will be required down the road — a debt strategy layout all these. 

The major guidelines for creating a debt management strategy are to maintain interest costs within tolerable limits and take out new loans just as much as one can afford. 

If you compare the government's past borrowing activity, both domestically and internationally, to the developed debt management strategy, you won't find a perfect match. The actual money received through the issuance of financial instruments is based on what I can get from the market, not always on what was planned. 

Let's say the government is launching a new initiative for which it needs funding. It contacts the ADB or World Bank, but they decline to lend money for these kinds of initiatives. The government then goes bilateral. One party agrees to lend money on the proviso that we must hire the contractor or project materials from them for that project. These circumstances feel like trappings. The money I'm borrowing is mine; I'll pay back the loan plus interest. I should have the option to procure competitively. 

When these extra strings are attached, competitive procurement tendering is ruled out. Even then, we accept the terms of the loan to get the funding even though it is not necessarily congruent with the debt management plan in any manner. The strategy must anticipate such contingencies and find pathways for avoiding them.   

Debt is one way to finance projects, but you must keep in mind that it is a double-edged sword: while it can be beneficial, it can also be disastrous. Whether or how you align your financial interests with the cost, maturity, and other terms of your loan will determine how it works. Moreover, how you use that money will determine whether or not you gain the capacity to pay back the principal and interest. 

There is a need for investments in infrastructure, energy, education, health, social security and the green transition. In light of this, we have several objectives related to sustainable development goals, such as the need to eradicate extreme poverty, guarantee the standard of health and education, choose environmentally-friendly green development, and leave no one behind. 

Being one of the world's most climate-vulnerable nations, Bangladesh highlights the importance of adapting to climate change. Although we cannot alter the climate, we may seek to lessen its negative effects on coastal regions, agriculture, extreme weather, and temperature changes — all of which are closely related to productivity. To deal with various circumstances, we require different investments. The investment and its financing plan needs to take all these into account. 

To finance the deficit between our own savings and investments, we have two options: domestic and foreign sources. There is also a trade-off here, because if you sell some treasury bills or savings certificates to get some money, it could crowd out private investment. Foreign debt is subject to exchange rate and foreign currency liquidity risks.

The government must choose a hybrid approach, drawing on both foreign and local resources, because dollars or foreign exchange are needed for a variety of investment areas. Additionally, the pressure on our dollar market will not mount if we get external financing, preferably from longer term concessional sources. If, after doing our best, we still don't have enough, we pursue alternative, more costly, but still desirable, sources to meet our investment priorities. 

This will keep our debt levels in check for the future and help us avoid distress. After the pandemic, the majority of low-income nations are currently experiencing severe debt distress. The goal of the debt management plan is to prevent us from getting into that predicament. 

Sketch: TBS

The author is the former lead economist at the World Bank, Dhaka Office.