Little borrowing options yet govt has to look for money

With domestic revenue, exports and remittance dipping alarmingly, the government will be required to borrow heavily to bankroll the next budget aimed at helping businesses, widening social coverage and improving the health system.

The government has exhausted its limit of bank borrowing in the first half of the current fiscal year, much before the impact of the coronavirus pandemic being felt.

The only option remaining open is to borrow from abroad, mainly low interest IDA loans from global lenders.

Bangladesh has already sought around $3.5 billion from multilateral and bilateral development partners as budget support and emergency health response.

Economists feel that Bangladesh, with its public debt-GDP (Gross Domestic Product) still low, has the scope to borrow more from external sources since the country has a good track record in repaying external loans.

Suspension of debt repayment, announced by G20 nations last month, will help Bangladesh spend the amount kept aside to pay loan instalments, in meeting emergency health and economic stimulus needs.

However, the country's debt servicing liability will go up in the next year as the deferred amount will add to regular yearly instalments. 

Officials at the Economic Relations Division (ERD) claim that the country has more foreign borrowing capacity.

Bangladesh's current stock of foreign debt is 13.9 percent while the country can borrow up to 40 percent of its gross domestic production – a tolerable level called by the International Monetary Fund.        

Bangladesh received $3,486 million in external loans over the first eight months to February of the current fiscal year and repaid $1,100 million during the period.

In the current and next two fiscal years, Bangladesh will have to repay $6,050 million to development partners in principal and interest amounts. The amount due for the current fiscal is $1,850 million, including $310 million for bilateral lenders. 

Finance ministry officials said Bangladesh's bilateral creditors include Japan, China, Russia, India, Saudi Arabia, US, UK, France and Germany – which are G20 nations. 

The World Bank this week announced that Bangladesh is eligible for a one-year debt repayment moratorium offered by G20 nations last month. The offer is effective from May 1. 

No such offer was so far made by multilateral lenders like the World Bank, IMF and ADB, which account for the bulk of Bangladesh's external debt.

Bangladesh is a good borrower

Bangladesh's strong position in foreign debt management has also been reflected in a recent survey by The Economist. 

The influential financial magazine found Bangladesh better placed among emerging economies in terms of four indicators of financial strength: public debt, foreign debt (both public and private) and borrowing costs and stock of foreign-exchange reserves. 

Of 66 economies examined, Bangladesh ranked 9th ahead of China, Vietnam, India, Pakistan and Sri Lanka. The survey findings appeared in a report, headlined "Which emerging markets are in most financial peril?" in the May 2 edition of the weekly.

Bangladesh has been bracketed with the countries having robust financial strength measured in four counts. 

The magazine tried to assess the potential sources of peril of emerging economies at a time when the pandemic wreaks havoc on economies and public finances.

It says, Covid-19 hurts emerging economies in at least three ways: by locking down their populations, damaging their export earnings and deterring foreign capital.

To weather the crisis, emerging economies may need at least $2.5trn from foreign sources or their own reserves, IMF estimates. 

Bangladesh has also placed its initial demands to global lenders including WB and IMF.

Less vulnerable to global volatility

Former lead economist of the World Bank's Dhaka office Zahid Hussain thinks Bangladesh will not be at risk from external debt right at this moment since the debt to GDP ratio is still very low. 

Even if both the government and private loan increases to meet additional funding needs from the pandemic, it won't surpass the thresholds, he said. 

The flow of foreign debt is very insignificant compared to government debt (from domestic sources), he pointed out. 

Bangladesh is less vulnerable to any global financial market volatility compared to emerging markets like Venezuela, Lebanon and Zambia, which are in trouble with repayments against foreign dollar bonds bearing high yields. Defaulting on foreign bonds may result in credit ratings cut, making external loans harder. 

From this end, Bangladesh seems to be in a safe zone as it does not have any dollar bond. Only one bond issued at London Stock Exchange is taka-denominated as the country prefers to borrow in its own currency like Botswana as surveyed by The Economist. 

Bangladesh's private sector can borrow from the international market on a limited scale only with approval from the central bank for export-import trades. 

Lower private sector loans from abroad also shield Bangladesh from shocks like the 1997 Asian financial crisis. Mongolia's public debt looks manageable, but its foreign debt (public and private) is almost twice its GDP, putting the Asian country at the bottom of The Economist's chart. 

"We borrow mainly from institutional lenders like the World Bank, Asian Development Bank, Islamic Development Bank, and bilateral sources. We do not take loans for international capital markets. So our foreign debt is less," Zahid Hussain said.

Bangladesh is entitled to soft loan from the International Development Association (IDA) of the World Bank. ADB also has similar criteria for poor countries.

Multilateral lending agencies have created funds to help poorer economies fight the Covid-19 fallout.  "This loan is being approved quickly and the terms of the loan are also very simple," he said, stressing that Bangladesh should try its best to avail of the fund as much as possible to bankroll its budget. 

"Within three years after the coronavirus situation, we can go back to the previous momentum of growth if we can utilise the loan properly and make sure that money is not smuggled out of the country," said the economist.

Former ERD secretary Monowar Ahmed said Bangladesh is still in a good position in debt repayment. "But how the post-Covid-19 situation will look cannot be said before critical assessment," he said.

Former governor of Bangladesh bank Dr Salehuddin Ahmed believes that additional borrowing for Covid-19 economic shocks would not put Bangladesh into any debt sustainability risk. 

"Bangladesh never defaulted on foreign loan repayment. Our debt liability is still far less than countries like Pakistan," he said. 

Instead of borrowing more from the domestic banking sector, the government needs to seek soft loans from global institutions to meet higher spending needs to help the economy recover from the pandemic impact, the former central bank chief said.

"Bangladesh needs to go for a low-cost external fund even if it raises the debt-GDP ratio to some extent. To keep debt liability in check, unnecessary projects must be trimmed from ADP (Annual Development Programme) and corruption and money outflow must be controlled," he said.  

He cautioned against further borrowing from bilateral sources like China and India. "It won't be wise for Bangladesh to issue international bonds which bear yields for every three or six months," he added.