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100 billion dollar foreign loan

We need to be more cautious about borrowing foreign loans

M A  Khaleque

M A Khaleque

Sun, 24 Mar 24

After gaining independence, an American development economist visited Bangladesh and delivered a speech to Dhaka University's faculty, addressing the sluggish pace of the country's economic development. In the midst of his presentation, a young professor from Dhaka University boldly asserted, "Our development is stymied by unnecessary interference in our economy from external sources like yours." Upon hearing this critique, the American professor paused before responding with a stark observation: "Consider that 80 percent of your nation's economy relies on debt from countries like ours." This revelation left the young professor speechless for the remainder of the discussion, underscoring the harsh reality of Bangladesh's economic dependency.

No country willingly seeks out debt, yet borrowing becomes a necessity for many nations. Economists in developing countries often argue that borrowing is not a mere privilege but a right, as it enables access to vital capital that can drive economic growth. However, it's crucial to recognise that debt is not a form of charity; it comes with the obligation to repay the borrowed amount along with interest.

While countries have the legal responsibility to honor their debt obligations, the reality is complex. Despite this obligation, the terms of loans provided by development partners are rarely unconditional. Instead, they often come with strings attached, such as policy reforms or project requirements, which can restrict a country's autonomy in utilising loan funds.

Although borrowing may be necessary for countries in the early stages of development, excessive reliance on debt can lead to dependency, posing significant risks to economic stability and sovereignty. Thus, efforts to mitigate debt dependence are essential.

It's crucial to acknowledge that development partners are often willing to lend, as rejecting foreign loans could curtail a country's activities. Generally, nations with robust economies enjoy more favorable lending terms. Conversely, poorer countries, left with no alternative but to borrow, face stricter conditions. These terms often impinge on the borrowing country's autonomy, interfering with its decision-making freedom.

Following Bangladesh's independence, the country received substantial loans and financial aid from various international sources. Initially, these loans were offered on lenient terms, but over time, lending conditions grew increasingly stringent. Loans from development partners like the World Bank and the International Monetary Fund (IMF) always come with conditions, with IMF conditions being notably stricter than those of the World Bank. These conditions are typically designed to safeguard the interests of capitalist nations.

While local loans entail certain precautions, borrowing from foreign sources often lacks stringent accountability measures. Consequently, there is a prevalent inclination among government officials, particularly influential bureaucrats, to favor foreign loans. They prioritise importing liquefied natural gas at inflated prices over domestic gas exploration and extraction, as importing goods or services through foreign credit presents an opportunity for commissions. This class of officials regularly benefits from commissions associated with foreign loans and consequently lobbies in favor of their acquisition.

Former Foreign Minister Dr. AK Abdul Momen recently disclosed in an interview that during his tenure, he instructed the Consul General to investigate Bangladeshi nationals owning houses in Canada's Begumpara area, which was a topic of significant discussion at the time. Surprisingly, the Consul General provided a list containing 28 individuals, comprising 4 politicians and 24 government officials from various institutions. This revelation challenged Dr. Momen's previous assumption that only politicians owned properties in Begumpara.

Dr. Momen's remarks shed light on a segment of bureaucrats and politicians in Bangladesh who exhibit a keen interest in securing foreign loans, regardless of necessity. The underlying motives driving their enthusiasm for foreign loans are evident and require no further explanation.

Bangladesh's low revenue collection rate necessitates borrowing from abroad to fund development activities. However, there's often a lack of consideration regarding how and where the loan funds are utilised, leading to potential misuse. The escalating foreign debt of Bangladesh is a cause for concern. According to the latest report from Bangladesh Bank, the country's foreign debt stands at 100 billion US dollars or 10 thousand crore US dollars, marking an unprecedented level. As of last December, the combined public and private foreign debt totaled 100.64 billion US dollars or 10. 64 billion US dollars, equivalent to 11.07 thousand crore Bangladeshi taka.

According to economists at the International Monetary Fund (IMF), a country is considered safe if its debt-to-GDP ratio remains below 55 percent. Once it exceeds this threshold, it becomes highly risky for the country's economic stability. Currently, Bangladesh's GDP-debt ratio stands at below 35 percent, indicating a relatively safe level of debt.

However, the continued growth of borrowing raises concerns about the potential for Bangladesh's external debt levels to escalate to dangerous levels in the coming decades. The recent example of Sri Lanka serves as a cautionary tale. Despite being hailed as an emerging economic powerhouse in South Asia, Sri Lanka's GDP-debt ratio soared to 103 percent due to excessive borrowing. Consequently, the country faced challenges in repaying its foreign loan installments, leading to its designation as a debtor state internationally.

The burden of foreign debt repayments in Bangladesh is escalating rapidly, posing significant challenges to the country's fiscal health. Over the past decade, the amount of foreign debt has surged by two and a half times, largely driven by various government development projects. As a consequence, the repayment of interest and principal on foreign loans has emerged as the second-largest sector in the national budget.

To illustrate, during the financial year 2013-14, Bangladesh repaid principal and interest on foreign debt amounting to US$ 192 crore. By the financial year 2022-23, this figure had risen to US$ 268 crore. Projections for the financial year 2029-30 indicate a further increase, with interest and principal installments reaching US$ 515 crore. Such a trend suggests that the country may soon face the grim reality of needing fresh loans to cover repayments on existing foreign debts.

The gravity of the situation is underscored by recent data showing a sharp 49 percent increase in principal and interest payments on foreign loans during the first six months (July-December) of the financial year 2023-24 compared to the same period in the previous year.

The utilisation of foreign loans is crucial, as it determines the impact on a country's development and economic stability. In the case of Sri Lanka, much of its external debt was channeled into non-essential and less productive sectors, resulting in suboptimal returns on investment. For instance, Sri Lanka built an international standard airport in an area with minimal air traffic, highlighting the misallocation of funds.

This mismanagement of funds led Sri Lanka to fall into the Chinese debt trap, a situation where excessive borrowing from China results in significant economic and political dependency. Many African nations have similarly faced challenges due to the China Debt Trap, hindering their development efforts. Consequently, there's a growing reluctance among countries to accept Chinese loans due to their geopolitical implications.

One notable characteristic of Chinese loans is their lack of stringent conditions, allowing governments to borrow substantial amounts without strict oversight. However, this leniency often serves China's geopolitical interests, leading borrowing countries to align with China's agenda. As a result, they become politically aligned with China, potentially compromising their sovereignty and economic independence in the long run.

In recent years, Chinese loans have gained prominence in Bangladesh's borrowing landscape. While Bangladesh secures loans from various sources, a significant portion of its debt comes from China. Presently, Bangladesh receives loans from a total of 32 countries and international organisations.

Japan holds the top position in terms of lending to Bangladesh, followed by traditional lenders like the World Bank and the IMF. Notably, China ranks fourth among the lenders to Bangladesh. It's important to highlight that IMF loans typically come with stringent conditions attached. However, Bangladesh has not received any loans from the IMF for over a decade, thus avoiding compliance with IMF conditions.

Bangladesh's borrowing from various organisations often comes with conditions attached, which may not always be conducive to sustainable development. While the goal of development cooperation is ostensibly to foster economic growth, in reality, lenders may prioritise increasing a country's indebtedness rather than promoting sustainable development. Moreover, foreign loans are increasingly influenced by political interests alongside economic objectives, necessitating a cautious approach to borrowing.

It's imperative to scrutinise why the implementation periods and estimated costs of large projects funded by loans are escalating. Priority should be given to projects strictly necessary for national interests to avoid unnecessary debt burdens on future generations.

Ultimately, the responsibility for repaying foreign debt falls on the shoulders of the people. Therefore, it's essential for the government to exercise prudence and transparency in its borrowing decisions, ensuring that loans are utilised effectively and contribute to the long-term welfare of the nation.

Author: Retired General Manager, Bangladesh Development Bank Plc and Writer on Economic Affairs.

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