Sovereign debt of Bangladesh: Where do we stand?

Illustration: TBS

Sovereign debt comprises government borrowing from both external and internal sources. In Bangladesh, domestic borrowing encompasses borrowing through issuing government bonds and bills and through saving instruments, popularly known as Sanchaya Patra. 

In contrast, foreign sovereign (public) borrowing covers borrowing from multilateral agencies, bilateral agencies and commercial borrowing. We also have some foreign borrowing by the private sector, which is pertinent to USD liquidity risks. 

Foreign public borrowing is long-term in nature, whereas foreign private borrowing is short-term in nature. For the next five-year horizon, we have a repayment obligation of $4-6 billion yearly for sovereign foreign long-term borrowing. 

Many economists believe that national or sovereign debt should be considered in the context of GDP, often in terms of the "Debt to GDP" ratio. However, I believe this notion should be viewed from a different perspective since GDP refers to the size of the economy, which does not necessarily indicate the debt repayment capability of a country. 

Repayment capability is directly linked with government revenue and liquidity. Pakistan and the Philippines have similar "Debt to GDP" ratios, but Pakistan is facing a severe economic crisis, whereas the Philippines is cruising its economic vehicle safely. This shows the "Debt to GDP" ratio needs to be supplemented by other factors, such as "Debt to Revenue Earning" for total debt as well as domestic debt and "Debt to FX reserve" for foreign debt, etc. 

We are at a critical stage regarding the issue of foreign debt, especially considering many ongoing and upcoming development projects. 

Bangladesh has an FX reserve of $30 billion. In contrast, it has a foreign debt of $100 billion, comprising public debt of $75 billion and private debt of $25 billion, trailing towards the borderline regarding Foreign Debt to FX reserve ratio. 

The recent currency devaluation by 30% over the last 16 months has made the situation more volatile. 

If the ratio of our Foreign Debt to FX Reserve, which is 3.3 times, is compared with peer countries like Vietnam (1.6 times), the Philippines (less than 1) or Indonesia (1.6 times), the picture appears bleak. We are certainly better than Pakistan and Sri Lanka regarding external debt management, but not as good as to be complacent.     

The recent sovereign default of Sri Lanka is an eye-opener for neighbouring countries and other emerging countries worldwide. It showed how a country with a $4,000+ per capita GDP and a nearly 100% literacy rate collapsed because of extravagant vanity projects and populist policies, like major tax cuts. Mismanagement of fundamental macroeconomic parameters, like high debt to GDP, high debt to tax revenue and massive foreign currency loans amidst plummeting foreign currency reserve, was a classic economic-suicidal case. 

Bangladesh pays an annual interest of  $8 billion for domestic debt of $75 billion, which is about 20% of the annual tax and non-tax revenue and the most oversized item in the budget. 

A developing country like ours should continue with a deficit budget to maintain the growth momentum. What can be the ideal deficit number is a debatable issue, but the current budget deficit is running at 5.8% of GDP. Ideally, this deficit will be financed by either foreign or domestic borrowing. 

As mentioned above, additional foreign borrowing is an issue under the challenging FX reserve situation. On the other hand, additional domestic borrowing will take a toll on our already high-interest cost. 

So, what is the way out?  

Bangladesh's economy has been growing and is expected to grow as far as GDP size or per capita GDP is concerned. However, if we want to develop a sustainable and resilient economy, all our underlying economic parameters should be healthy – GDP is just one of them. 

One of the key macroeconomic challenges ahead of us is the low tax revenue to GDP ratio, which is hovering around 7.5%. The same ratio in India, China, Vietnam and the Philippines are 11%, 15%, 18% and 18% respectively. Most developing countries of our size and level have this ratio of 10%-18%. 

Our country's revenue-to-GDP ratio may be aggravated further, given that two-thirds of our revenue comes from VAT and customs duty. Under the ongoing complex international trade scenario, increasing revenue from customs duty and import-related VAT will be daunting.   

Given these multifaceted challenges, we need to stick to the basics. Two points are pertinent here. 

First, we must be cautious about drawing down any further sovereign foreign loan until the FX reserve returns to a satisfactory level – say for example, $40 billion – even if that means deferring some development projects.  Second, we need to think "outside the box" to improve the Tax to GDP ratio over a period of time. 

Of many suggestions, broader coverage of personal tax, the culture of giving proper corporate tax, and a pragmatic wealth tax as opposed to the current one seem better solutions. 

Zabid Iqbal is an economic and financial analyst. He can be reached at [email protected].

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.