Public debt management concern keeps growing

In recent times, the composition of loans from domestic sources to finance the budget deficit has emerged as a key area of concern in government debt management.

The government has borrowed over Tk70,000 crore from the banking system during the current fiscal year. Alarmingly, the entire loan has been obtained from the central bank, effectively monetising the economy. This approach contradicts the government's objective of reducing inflation and requires rectification in the upcoming budget.

Over the past few months, our foreign exchange reserves have been rapidly depleted, leading to a dire shortage of dollars. To address this crisis, it is imperative to prioritise the implementation of projects and programs supported by foreign assistance, as well as the collection of budget support.

Fortunately, the government has received some assistance from reputable organisations such as the World Bank, IMF, and the ADB this year, with ongoing negotiations for additional support. 

Increasing foreign aid will alleviate the pressure on foreign exchange reserves while facilitating accelerated government investment. To achieve this goal, it is essential to reduce the reliance on internal sources to meet the budget deficit.

According to the latest available data, foreign aid, including project aid and budget support, is estimated to exceed Tk1 lakh crore, aiming to bridge the Tk2.60 lakh crore deficit in the budget for the next financial year. Consequently, approximately two-thirds of the deficit will still be covered by domestic sources. 

However, reducing the size of savings certificates will amplify reliance on the banking sector, making it challenging to address macroeconomic issues if all funds are obtained from the central bank, as witnessed in the current financial year, instead of borrowing from commercial banks.

Increasing domestic financing runs counter to the objective of reducing inflation from over 9% to 6.5%. If the monetisation trend continues through central bank borrowing, inflation is likely to surge further in the future.

Although our external debt has increased since the onset of the Covid-19 crisis, the debt-GDP ratio has only experienced a slight uptick. This is primarily due to a significant portion of our foreign debt still being acquired through concessional financing. Loans from multinational development agencies feature relatively low-interest rates, and Bangladesh possesses ample opportunities to secure such loans. As long as foreign loans are directed towards the appropriate sectors, there is no immediate cause for concern.

At present, the government must prioritise mobilising more foreign aid, particularly cash support, in order to alleviate the pressure of budget financing. In addition to alleviating strain on foreign exchange reserves, foreign aid can also contribute to mitigating pressure on the exchange rate.

To achieve this, the government must implement necessary reforms across various sectors. This entails streamlining processes at every stage, including project processing, approval, procurement, and implementation.

The acceleration of implementation will undoubtedly attract foreign aid. Failure to expedite these processes may result in reduced assistance from foreign sources.

The increase in domestic debt has led to a growing interest burden. The additional interest associated with savings certificates plays a significant role in this burden. Consequently, there has been a shift towards obtaining more loans from banks by reducing the sale of savings certificates. However, relying solely on the central bank for additional loans while excluding commercial banks is not a prudent approach.

To ensure a balanced budget financing, the overall budget deficit target must align with the inflation target. Currently, the budget deficit is projected to grow at a higher rate than inflation. By prioritising government expenditure and exerting control over the deficit, the dependence on debt can be reduced.

Efforts should be made to efficiently utilise a substantial portion of the nearly $50 billion foreign aid in the pipeline to augment the use of foreign debt in financing the budget deficit. Consequently, there must be a concerted effort to reduce dependence on the central bank, particularly in terms of domestic credit, especially bank credit.