Management of external debt and BoP issues

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There has been a sharp increase in external borrowing by Bangladesh over the past two years. However, a lower ratio of external debt to gross domestic product (GDP) leaves a comfort zone for the country’s policymakers. Many pundits and economists also feel complacent as the debt-to-GDP ratio sits at a safe level. The latest central bank statistics show that the external debt-to-GDP ratio reached 21.80% at the end of last year, 2021, from 19.50% at the same period of 2020.

The discussion on external debt sustainability took place against the backdrop of a severe economic crisis in Sri Lanka. Policymakers dismissed the possibility of something similar in the island country of Bangladesh, citing the low level of external debt relative to GDP. There are also other strong economic indicators, and all of these indicate that Bangladesh is in a secure position. This does not mean that there will be no crisis in the near future, especially when the world economy has already started experiencing turbulence, mainly due to the Russian-Ukrainian war. Some signs of crisis are also visible in Bangladesh now, and slowly they are becoming more pronounced. Several austerity measures taken by the government prove it. It is therefore necessary to take a closer look at the external debt position.

Usually, external or gross external debt refers to money borrowed from a source outside the country and must be repaid in the currency in which it is borrowed. Thus, foreign debt is the portion of a country’s total debt that is borrowed from foreign lenders, including commercial banks, governments, or international financial institutions. The International Monetary Fund (IMF) defines gross external debt as “the stock of current, actual, and uncontingent liabilities that require payment of principal and/or interest by the debtor at one or more times in the future. and which are owed to nonresidents by residents of an economy.” When a country cannot repay its external debt on time, it faces a debt crisis, and when it cannot to repay its external debt, it is in sovereign default.

Bangladesh’s total external debt more than doubled to $90.79 billion at the end of 2021 from $41.86 billion at the end of 2016. Over the past five years since 2017, external debt has recorded double-digit growth per year, indicating a rapid increase. in foreign loans. During the review period, private external debt accounted for about a quarter of the total debt portfolio. Again, of the total external debt, 80% is long-term and the remaining 20% ​​is short-term.

The government of Bangladesh borrows from multilateral and bilateral lenders to finance the budget deficit. Again, the country’s private sector borrows commercially from international banks. Interest on private loans is much higher than on public loans. Whatever the amount of debt, it must be repaid according to the terms and conditions, and Bangladesh has never failed to repay a single installment of any external loan, which makes the country a better and stronger borrower on the international scene.

External borrowing is also needed to finance the external current account deficit, which has widened over the past two years. Foreign investment, aid and credit help finance the current account deficit reflected in the country’s external financial account. These two accounts, together with the capital account, create the overall balance of payments (BoP) account of a country. Thus, external debt is necessary to support the BoP. This is why it is essential to examine the external debt in terms of various components of the balance of payments to get a better picture and understand the sustainability of a country’s external debt.

In Bangladesh, the ratio of foreign exchange reserves to total external debt fell to 50.8% last year from 59.2% in 2020. The ratio has been declining since 2016, when it was 77.40 %. As foreign exchange reserves have been depleted at a faster pace over the past two months, the ratio has fallen further, although the latest comprehensive external debt data is not yet available. The huge pressure of settling the rising import bill is the main reason for this. Although the central bank has already taken some measures to contain imports, this may not lead to a significant drop in imports immediately. In the 11 months (July-May) of the last fiscal year (FY22), imports of goods (in terms of free on board) jumped 39%, while imports of services showed a growth of 33%. .51%. And the available foreign exchange reserve figure of $42 billion was enough to cover the cost of four and a half months of importing goods and services at the end of May. Reserves, however, have shrunk further, already falling below $40 billion, meaning they are now enough to cover around four months of imports.

To ease the pressure on reserves, the government will try to increase the inflow of external funds soon, as some foreign funds are already in the pipeline. Although the finance minister said there were no immediate plans to borrow from the International Monetary Fund (IMF), he did not rule out the possibility of doing so soon. Media reports suggest that the government has already asked the IMF to provide a $4.50 billion loan. In this regard, an IMF team has already visited the country. Therefore, it remains to be seen whether the government eventually negotiates with the IMF to borrow $4.50 billion in funds to offset the BoP deficit.

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