82% of foreign debt in 2041 to be market-based

Infographic: TBS

The share of foreign loans at floating rates in Bangladesh's total external debt will climb to over 82% in 2041 from 26% in 2020, the Economic Relations Division (ERD) and the General Economic Division (GED) forecast.

According to an ERD report, the loss of concessional elements in financial support received from official donors will also lead to increased debt servicing costs.

However, Bangladesh's scope for obtaining foreign loans will increase significantly in the coming years, thanks to a continuous increase in per capita income, the report presented by ERD Additional Secretary Md Mostafizur Rahman in a workshop last week said.

Besides, the country's graduation from the LDC (least developed country) status will also open the door for market borrowing by both the public and private sectors.

Bangladesh is set to officially graduate to the group of developing countries in 2026 and is moving forward with the goal of becoming a developed country by 2041.

As per ERD projection, Bangladesh's share of market-based foreign loans will be 42.4% in 2026, and 55.7% in 2031 when the country will become an upper middle income one as per government announcement.

Compared with the LDC scenario, the baseline graduation scenario envisages a significant increase in interest payments on public and publicly guaranteed (PPG) external debt from 0.7% of exports of goods and services to 1.2% of the same by FY41, says the report.

In recent years, Bangladesh has moved to blend financing with a mix of IDA (World Bank Group's concessional facility) and OCR (Asian Development Bank's concessional facility) with non-concessional facilities.

According to the report, after the World Bank and the Asian Development Bank (ADB), other multilateral development partners will also gradually decrease disbursal of concessional loans to Bangladesh in the coming years.

In 2041, only 4.2% of total foreign loans will come in the form of concessional loans, down from 59.4% in 2020.

Official development assistance is a key source of development finance, the ERD report says.

Although its share in Bangladesh's GDP has declined over time, ODA accounted for 1.6% of the GDP in FY20. Need for ODA in financing development remains significant given limited ability to mobilise domestic resources, the report further states.

Declining share of grant

Efforts by both private and public sectors in Bangladesh are supplemented by foreign grants in the form of technical assistance and funding through non-governmental organisations (NGOs).

There is a possibility that all these grants might diminish as Bangladesh graduates.

Currently, approximately $1 billion worth of grant is received by the country (combining public and private enterprises) from foreign sources, 70% of which are received by mainly NGOs and private enterprises.

According to ERD and GED projections, foreign grants through NGOs will fall to less than $100 million in 2031 from nearly $500 million in 2020.

Zahid Hussain, former lead economist of the World Bank's Dhaka office, said concessional loans will not reduce due to LDC graduation but they will decrease due to an increase in per capita income. And for this reason, Bangladesh will qualify for World Bank's IBRD loan from IDA blend by 2041.

While LDC graduation or World Bank IDA graduation has some challenges, it also creates opportunities, the noted economist said, adding that by qualifying for IBRD loans, Bangladesh will get greater scope for foreign financing.

"The World Bank's IDA allocations are fixed, but members can borrow much more at the IBRD. At that time, Bangladesh will get loans from the international stock market. Then there will be no hindrances to getting finance, and investment will also increase," he continued.

But whether more debt will be a burden or a strength for Bangladesh depends on the use of loans, he warned, saying, "A country gets into a debt trap by borrowing more, when growth is lower than interest rates. [In contrast,] when growth is higher than interest rates and the government keeps its budget deficit between 2.5% and 3% of GDP, then debt trap is very unlikely. For this reason, qualitative use of loans is very important."

He further said that foreign debt has to be paid in foreign currencies, which is why it is important to have a supply of foreign currencies.

"Even if the debt-to-GDP ratio is low, there may be problems in the flow of foreign exchanges. If GDP growth is good but external debt growth is not, this can be a problem, which is currently the case. LCs cannot be settled due to lack of foreign currencies."

Inward remittances play the most important role in increasing the supply of foreign exchanges, noted Zahid Hussain, adding, "Although there is a big growth in migration in Bangladesh for the last one and a half years, it will slow down at some point, then the pressure on exports to earn foreign exchange should be given the most importance to ensure the necessary benefits on exports."

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said there is nothing to worry about with market-based loans. This is because, he said, Bangladesh will not always be poor.

"Flexible loans are for poor countries. If good projects can be taken up with the loans, we will not have problems. Besides, there should be good debt management. At the same time, all kinds of measures should be taken to increase export and expatriate income."

Factors that require attention

The ERD report says an increase in floating-rate market-based loans will also come with some risk factors.

Development partners provide these flexible loans on easy terms and fixed interest rates, which have less credit risk. In terms of market-based loans, on the other hand, there is always a risk of an increase in the interest rate.

Market-based loans are taken at LIBOR or SOFR (Secured Overnight Financing Rate) and Euribor rate.

A year or two ago, the LIBOR rate was less than 1%, but the six-month LIBOR rate is around 5%, notes the ERD report. As a result, Bangladesh has to pay a lot of interest for the 6-month LIBOR loans, it adds.  

As of June this year, Bangladesh got commitment for $23.5 billion USD-based six-month LIBOR loans, with outstanding loans amounting to $11.98 billion.

The SOFR rate also has surged to more than 3.5%.

ERD officials said that market-based loans will also put the private sector under foreign debt pressure in the coming days.

The ERD report stressed focusing more on quality borrowing or proper use of loans rather than the quantity.

ERD officials said if less important projects are taken up with foreign loans, they will not yield a positive outcome.

Zahid Hussain, however, said not only quality borrowing, but also quality investment is needed. "Otherwise, foreign debt will become a burden for us."

The ERD report also emphasises lender selection process. Bilateral loans, in particular, have much more ambitious conditions for the purchase of goods or services, mentions the report, adding that authorities should be tactful in determining what type of project requires borrowing from what type of development aid agency.

Both problems and solutions are known

According to ERD data, Bangladesh's total outstanding external debt is $56.66 billion and another $45.54 billion was in the pipeline until June 2022.

Some 60% of the total loans came from multilateral organisations while the remaining 40% came from bilateral organisations.

The government received loan commitments for $17.9 billion from development partners in the fiscal year 2016-17, but such commitments gradually declined to reach $8.18 billion in FY22. The government has set a target of receiving foreign loan commitments for $6.2 billion in the current financial year.

According to the ERD data, 20% to 25% of a loan is expected to be used in one year as the average implementation period of these projects is 4-5 years.

The ERD report has identified a number of barriers to implementation of development projects, and the issues have been under discussion for over a decade.

The problems that affect project implementation include bad quality of detailed design, delay in procurement and awarding contracts, delay in DPP/ RDPP/ TPP approval, delay in land acquisition, weak contract management, weak financial management, and a lack of coordination among different agencies.

The report also mentions some solutions to the problems. Dedicated and efficient project management setup has been suggested to speed up project implementation.

According to the report, if all types of preparatory work are completed before the construction work or the main work of the project starts, there will be no more complications in the implementation. It will be possible to withdraw money at the specified time.

Preparatory work will include, feasibility study, land acquisition, design of works, and contract assignment from the beginning of the tender process. In addition to these tasks, it has been proposed to allocate project proposal formulation, preparation team office management expenses.

The ERD suggests completing all the preparatory work before going to the main project. Even the appointment of contractors for the construction work is said to be completed before the approval of the main project. After that the main project approval will be given, the report adds.

Besides, emphasis has been placed on strengthening project review capacity and timely recruitment and procurement to complete the implementation work quickly.