Excessive foreign debt erodes financial independence

In the 1970s, an American development economist visited Bangladesh. At one point, he gave a speech to the faculty members of Dhaka University. The economics department’s professors were notably present at this event. During his address, the American economist presented his views on why Bangladesh’s economic development was not progressing to the desired level. The professors in attendance listened intently to his words. At that moment, a young economics professor from Dhaka University stood up and said to the American economist, "The reason we are unable to achieve the desired level of development is because you are intervening in our economy in various ways." After a brief pause, the American economist replied to the young professor, saying, "If 80 percent of the funds for your country's development activities come from us, whose economy is it? If you were able to finance your development from domestic sources, we would not need to offer any advice." Hearing this, the young professor remained silent and sat down.

This is the reality. At a certain stage of development, foreign loans may be necessary, but becoming excessively dependent on foreign loans can never be desirable for any country. The reason is that a nation burdened with debt loses its freedom to make decisions. It has to endure constant humiliation and subjugation. As the saying goes, "The poor man's wife is everyone's sister-in-law." A resource-poor country is often subjected to various forms of ridicule. Taking loans from foreign institutions is indeed a country's right, but after taking a loan, the country is required to repay it with interest. It is the loan repayments, along with interest, that allow international development organizations to continue their lending activities. A loan is not a gift or charity; it is a right that a country earns by repaying the principal and interest. If low-income and developing countries were to stop borrowing from foreign sources, the operations of development partners could come to a halt. That is why these organizations try to tempt weaker countries into borrowing. The World Bank, the International Monetary Fund (IMF), and the Asian Development Bank (ADB) are the top three lending institutions. Among them, the World Bank and ADB impose relatively tolerable conditions when they offer loans, often applying indirect conditions. However, the conditions set by the IMF are extremely complex, and no country wants to take loans from the IMF unless it is in dire straits. The IMF primarily safeguards the interests of imperialist and capitalist nations under the guise of lending.

The IMF does not provide loans to any country without conditions. The IMF and the World Bank are the biggest supporters of free-market economies; however, they limit the concept of free-market economies to the movement of goods only. Their primary goal is to ensure that products produced in developed countries can freely enter the markets of poor and developing nations. If they were true supporters of free-market economies, why would they create barriers to the free movement of labor across the globe? If they allowed free movement of labor, there would be massive migration of workers from poor countries to developed nations, which would not align with their interests. The IMF will never undertake any action that could harm the interests of the United States or the United Kingdom.

There is a saying in our region, “A cat never touches hot rice,” meaning that the cat avoids hot rice because it knows it could burn its mouth. Development partners follow this principle when imposing conditions on loans. They do not apply the same conditions to every country. For poorer nations, the conditions attached to loans are very stringent, while for relatively developed countries, the conditions are far more flexible. They understand that if they impose harsh conditions on a strong economy, that country will simply refuse to take the loan. In the 1980s, Bangladesh became heavily dependent on foreign loans. At that time, 80 percent of the financing for the annual development program (ADP) came from foreign loans. The situation reached a point where, when constructing a latrine, the development partners would dictate which direction the door should face. They would also determine the materials to be used for implementing development projects. Under the guise of consultants, they sent their own nationals to countries like ours. A significant amount of money was spent on their salaries and allowances. One of the conditions for agricultural development loans was that consultants from their own countries had to be hired. A study revealed that many of the consultants sent to Bangladesh had minimal qualifications.

Bangladesh is an agriculture-based country. At one point, the agricultural sector contributed around 80 percent to the country's economy. However, development partners have never contributed to the development of our agricultural sector. Instead, they often worked to disrupt its progress. The farmers in Bangladesh are extremely poor and cannot afford to mechanize agriculture on their own. Therefore, the government has been providing subsidies for the agricultural sector for many years. However, the IMF has always opposed subsidies for agriculture. When the Awami League government came to power following the 1996 national elections, the IMF exerted significant pressure on the government to stop agricultural subsidies. Despite this pressure, the government ignored the IMF’s demands and continued providing subsidies for agriculture. Since then, every government in Bangladesh has continued to provide subsidies to the agricultural sector. As a result, Bangladesh has become nearly self-sufficient in food production. Despite various global crises, Bangladesh has never faced a severe food shortage. The question might arise: if Bangladesh is nearly self-sufficient in food production, why is food inflation rising? The increase in food production and ensuring an adequate food supply at relatively low prices for consumers are two entirely different matters.

Most countries around the world are rich in natural resources, but due to poor management, they cannot change their nation’s fate simply by extracting and utilizing those resources. Extracting natural resources and creating new products require skills. Even more importantly, it requires capital. Raising the necessary capital is the biggest challenge. Countries that can source the necessary resources internally are able to achieve economic and social development. However, countries like Bangladesh, despite their vast potential, cannot raise the necessary resources from internal sources. Bangladesh’s tax-to-GDP ratio is just 7.5 percent. For a developing country like Bangladesh, the tax-to-GDP ratio should ideally be around 23-24 percent. Since the amount of resources raised from internal sources is very low, we have to rely on foreign loans for development financing. Bangladesh had not taken any loans from the IMF for at least 10 years before it approved a loan of 470 crore USD from the IMF. As a result, the IMF was unable to impose any tough conditions on us during that period. However, after the latest loan, the IMF now has an opportunity to exert influence over Bangladesh.

Recently, the National Board of Revenue (NBR) has significantly increased taxes on over a hundred products. As a result, the prices of these products will rise, which will further exacerbate the already high inflation in the country. However, the economic advisor has stated that the increased taxes on these products will not lead to higher inflation. If the economy were functioning according to his guidance, there would be little to say. There is not a single economist in the country who would argue that increasing taxes on various products at this time is reasonable. Instead of raising tax rates, the tax net should have been expanded. As part of the conditions for the IMF-approved loan, the IMF has recommended increasing tax collection. Therefore, the government is now showing the IMF that we have taken steps to increase revenue through tax hikes.

In countries like ours, the emphasis is placed on relying on foreign loans for development financing rather than domestic resources. The reason for this is that collecting resources internally is a difficult task, and it can lead to public hardship. Therefore, the government tries to meet development financing needs by borrowing from foreign sources. Another harmful trend can also be observed. Rather than focusing on collecting resources from domestic sources, there is a tendency to import relevant products from abroad. For example, Bangladesh is rich in natural gas resources, with proven reserves sufficient to meet demand for the next 12-13 years. However, if new gas fields are not explored and gas extraction is not initiated, the country could face a crisis. Yet, instead of exploring new gas fields, the tendency is to import liquefied natural gas (LNG) at a high price. Additionally, although the maritime boundary has been defined through international arbitration, no efforts have been made to explore oil and gas in the area. Importing fuel from abroad opens up opportunities for commissions to be pocketed by certain groups.

Recently, Bangladesh has taken a significant amount of foreign loans, much of which has been used in non-productive sectors. These loans have been allocated for infrastructure development. Economists argue that the current level of foreign debt in Bangladesh is still within manageable limits. However, Bangladesh's foreign debt has surpassed 100.64 billion USD or 10,064 crore USD, which amounts to approximately 11 trillion Bangladeshi Taka (11,007,040 crore Taka). In the fiscal year 2015-2016, Bangladesh’s foreign debt stood at 4117 crore USD, and it has now more than doubled. Along with the rising debt, the pressure of repaying these loans has also increased. In the fiscal year 2013-2014, Bangladesh had to pay 1.29 billion USD in interest and principal on foreign debt. By the fiscal year 2023-2024, this payment had risen to 3.28 billion USD. In the current fiscal year (2024-2025), Bangladesh will need to pay 4.02 billion USD in interest and principal, and by the 2029-2030 fiscal year, the repayment will increase to 5.15 billion USD. Over the past decade, the use of foreign loans in government development projects has increased by two and a half times. Since most of the loans have been spent on infrastructure development, they will not contribute to increasing production in the real sector. In the future, a time will come when new loans will need to be taken simply to repay the principal and interest on foreign debt.

In the last 15 years, Bangladesh’s road infrastructure has improved significantly. However, one shudders to think about the cost the nation has had to pay for these improvements. The cost of building a one-kilometer four-lane road in Bangladesh is four times higher than in India.

Currently, China is the fourth-largest lender to Bangladesh. Those who understand the magnitude of Chinese loans are aware of the potential consequences. China offers loans under very easy conditions, trapping countries in debt. The outcome of such loans is clearly demonstrated by the case of Sri Lanka. Therefore, caution must be exercised when taking foreign loans.

MA Khaleque: Retired banker and writer on economic affairs.