On External Resources: Bangladesh Perspective | 2017-11-26 | daily-sun.com

On External Resources: Bangladesh Perspective

DR. MIR OBAIDUR RAHMAN     26th November, 2017 09:30:31 printer

On External Resources: Bangladesh Perspective


At the dawn of independence, external resources constituted a significant proportion of financing of our budget. But we now achieved a different perspective.



To some extent, it is the perspective of self-sustaining growth. The dependency on external financing is marginal. The manifestation is in the courage of the self-financing of Padma-bridge project. Thanks to the boldness and steadfastness of the government to spearhead such a titanic project with own financing.



All the historical transactions related to aid flow category since independence such as food aid, commodity aid and project aid is in the management of Economic Relations Division, Ministry of Finance. Previously known as External Resources Division, the wing of Foreign Aid Budget and Accounts [FABA] is very meticulous to publish in detail all the transactions and the trend related to myriad variables in aid flow. Flow of External Resources into Bangladesh is an important document prepared by FABA and published by the Economic Relations Division.



The yearly publication records the bilateral and multilateral aid flow in the category of grants and loans, status of external debt, current state of liability and status of debt servicing. An electronic version of the publication is also available at the ERD’s web site www.erd.gov.bd.  This is an excellent document, transparent by nature and provides historical data to carry research on external financing.



Bangladesh is in an excellent position in debt management. The country never failed in timely debt servicing and never rescheduled any debt obligation. The External debt to GDP is currently at 13 per cent of GDP. Debt service both in principal and interest payments now close to $1 billion is roughly 4 per cent of export earnings. The threshold levels of debt to GDP ratio and debt service payments are 40 per cent and 20 per cent respectively. Thus, on both the criteria, Bangladesh may be singled out as one of the best performers in the management of external financial flow.



There are a few discernible features in the aid flow pattern. The first is the composition of grant and loan. The share of grant at independence and after almost three decades till 2000 was fifty- fifty per cent but during the last two decades the grant element is just below 20 per cent. There were both elements of outright grant which the recipient country is never obliged to pay and the soft term loan which when calculated on the basis of present value of the repayment schedule contain 50 to 60 per cent of grant element. The share of grant and loan in FY 2015-16 stood at 15 per cent and 85 per cent respectively. Another perceptible change is in the share of total aid disbursement between the bilateral donor and multilateral institutions. At independence the share was 80 per cent and 20 per cent but the current scenario is 35 per cent and 65 per cent respectively. In many instances, the bilateral assistance is converted to grant but multilateral assistance needs to be repaid. The lower percentage of grant in the current flow is perhaps due to lower percentage of bilateral aid. The bilateral donor on occasions converted loan into outright grant. The historical predominance of commodity aid and food aid is now substituted by project aid which is now almost 100 per cent. During 2000, both commodity and food aid constituted approximately 10 per cent and the declining trend is observed from 1971-72 when commodity and food aid constituted almost 100 per cent. Surprisingly, budget support contingent on fulfilment of certain policy objectives was witnessed sparingly in 2012-13 and now it is close to zero.



Debt management crucially depends on the nature of loan such as supplier’s credit, the interest rate, gestation period of the loan, the loan repayment schedule and the designated currency of loan repayment. The repayment of loan also depends on healthy balance of payments situation because the payment needs to be financed mainly by draw down of the reserve. Moreover, certain domestic constraints such as inadequate revenue earnings may accentuate the external financing problems. Large trade and budget deficit known in literature as twin deficits could acerbate the debt servicing problem.



We are at the turning point of the journey to upgrade the status of lower middle income country to an upper middle income country. There are projects and drives to steer the economy to attain double digit growth in near future through investments in physical infrastructure projects.



There are projects such as Special Economic Zone to attract Foreign Direct Investment to create employment and to facilitate transfer of technology.  Thus, there is a genuine gap in savings and investment that may prompt borrowing from external sources. When soft loan is not available, the government may go for hard-term or commercial borrowing. Hard-term or commercial borrowing often causes instability in debt servicing when foreign reserves are below the safe level of import payments. Augmented export earnings through product diversification or an increase in the remittance flow are crucial to make buoyancy in foreign exchange reserve. The lion’s share of loan approximately 90 per cent is currently in Medium and Long Term [MLT] that provides leeway in debt servicing. MLT are concessional by nature with an average of 9 years grace period and loan repayment schedule constituting approximately 30 years. It is prudent to borrow through MLT to build the basic infrastructure essential to development. It is more appropriate to finance projects through the soft loan window of the World Bank, International Development Association than opt for commercial borrowing or opt for Suppliers’ Credit through the bilateral donors. The financing by IDA on concessional term may not be feasible on the criteria of per capita income in future or the term structure of interest rate may be high due to inadequate fund availability in IDA replenishment. The government should be cautious enough to allow external borrowing by private sector because debt management with over 90 per cent public sector borrowing is different than when short-term borrowing by private sector pervades the external financing.



The writer is a Professor of Economics, United International University.