Govt’s Suitable Alternative Source of Fund

Some media reports indicate that Bangladesh’s government is looking for alternative sources of funds to reduce dependence on bank borrowing. The government is reportedly seeking to make a financing mix from the issuance of sovereign debt and direct borrowing from multilateral organisations. It is planning to issue sovereign bonds in the international market with the objective of raising funds from $500 million to $1 billion by December in target markets in China, Hong Kong, Japan and the USA. Historically, the government in our country undertakes a deficit budget, funding of which mostly relies on bank borrowing. In addition to the national budget, the government is required to carry out many development programmes, including building infrastructural facilities for which long-term funding is inevitably needed. So, the government is always in deficit of funds, but there is no reliable long-term funding source.

The present government is probably passing through a difficult situation to mobilise adequate funds for meeting the budgetary gap and continuing to finance development programmes for some obvious reasons. Firstly, the budget deficit is estimated to be 2.43 lakh crore, of which Tk1.12 lakh crore will be sourced from bank borrowing. Secondly, the government will require an additional Tk1 lakh 5 thousand crore over the next three years to implement a new pay scale. Thirdly, the country's banking section is not in a strong position to support the government's substantial borrowing. Fourthly, private sector investment is not growing at all, and even the country’s business community has been suffering due to the paucity of working capital arising out of the bank’s tight lending policy, which will further aggravate if the government's borrowing from the bank continues.

In general, the government is required to mobilise two types of funds, of which one is in domestic currency while the other is in foreign currency. Besides, the government also requires funding of multiple tenors, viz., short-term, mid-term and long-term financing. Mobilising funds in domestic currency is much easier than in foreign currency. Regardless of currency and tenor, securing finance is convenient when the economy is in favourable terms, while arranging funds becomes difficult when the economy is in a downturn. Default risk also widely varies between domestic funds and foreign funds, as the former risk is easily manageable, while the latter risk is extremely high. 

When the government is persistently in a budget deficit, bank borrowing should be avoided, and an alternative cheap source of funds should be explored. Bank finance has several limitations, because the interest rate on bank loans is very high, which results in excessively high financial expenses. Because of the government's enormous borrowing, private sector investment is adversely impacted, which causes a negative impact on the economy. Besides, the government's excessive borrowing from banks always leaves the bank in the adverse liquidity condition. On the other hand, the government can easily mobilise domestic funds by issuing sovereign bonds at a relatively lower cost provided the country has an efficient secondary bond market. Some may question why people will invest in government bonds at a lower rate when the interest rate on bank deposits is much higher. If the bond is traded in the secondary bond market, people will invest at a lower rate in speculation of gaining over the trading of bonds in the market. In fact, a bond has two features, i.e., interest and yield, which are equally important for investment in a bond. There is an inverse relationship between interest rate and yield on bond. Unfortunately, there is no secondary bond market in our country, so the government cannot explore that option. However, time has come to establish a secondary bond market and make it a source of borrowing funds not only for the government but also for other eligible business corporations. Until a bond market is established, the government may consider issuing sovereign bonds for large-scale investors, particularly big corporate houses and wealthy people.

For foreign currency funding, the government has two options, of which one is issuing sovereign bonds in foreign currency among the international investors, while the other is borrowing from multilateral organisations such as World Bank (WB), the International Monetary Fund (IMF), and the Asian Development Bank (ADB). These are the most suitable sources of funding because the interest rate is very low and the tenor is also very long. But the problem is that these are not free-flow funds, as some conditions are tied with the funding agreement. In many cases, these funds are linked with some specific programmes or projects, so the government can hardly utilise this type of fund as per their requirement. Nevertheless, the government can go for securing funds from multilateral organisations provided fewer conditions are applied and there is a restructuring option in the lending agreement.

Another alternative option for the government is to issue sovereign bonds among the international private investors, which the government is now considering. However, this type of funding always carries the highest level of risk, because in our country, the source of earning foreign currency is not stable at all.  Moreover, annual import volume is higher than export volume, which always leaves the country in deficit of foreign currency, which is met by foreign remittance sent by expatriate Bangladeshi people, which is not certain at all. In this situation, mobilising funds through the issuance of sovereign bonds in foreign currency among the international private investors would be a risky option. So, the government should carefully evaluate this option prior to proceeding. However, the government may substitute this option by introducing a special type of foreign bond designed for innumerable expatriate Bangladeshis, to whom the bond will be sold in foreign currency but be redeemed in local currency, so the government will not be exposed to foreign currency risk. 

If appropriate measures are taken, several billion dollar funds can be mobilised by issuing a special type of foreign currency bond among expatriate Bangladeshis. I have elaborated on this issue in my previous articles, so there is nothing much to explain here.