Lanka crisis eye opener for Bangladesh

The country’s foreign loan repayment is likely to be critical in the coming days as the maturity period for some megaprojects with costly foreign loans are approaching near.   

Economists said that most of the megaprojects in Bangladesh had already suffered overruns.

They were talking against the backdrop of the worst-ever economic crisis in Sri Lanka that crippled the Island nation’s capacity for debt amortisation.

They said that the projects include Rooppur Nuclear Power Plant, Rampal Power Plant, Padma Bridge Rail Line and Karnaphuli Tunnel.   

Such ‘overrun’ projects cannot bring optimum benefit to an economy other than increasing its debt liability, said former Bangladesh Bank governor Salehuddin Ahmed. 

He noted that implementing infrastructure projects with costly credit from the international bond market and bilateral lenders was among the major reasons for the current economic predicament of Sri Lanka.   

One of such mega projects, the Hambantota Deep Sea Port, was built with a Chinese loan of $1.5 billion, but poor revenue from it forced the Lankan government to lease out the port to a Chinese company for 99 years in 2019.

The former BB governor said that the Bangladesh economy was larger than that of Sri Lanka, but megaprojects should be completed timely with good governance to reap the optimum benefits from them.

There is no scope for the nation to stay complacent with the overall current debt-to-GDP ratio that might become crucial in the event of lower-than-expected returns from such projects, he observed.    

He noted that many negative factors like a rise in short-term loans, projects with cost and time overruns and corruption were common between two South Asian neighbours.

On April 7, an AFP news agency report from Colombo said that rating agencies had warned of a potential default in Sri Lanka’s $51 billion foreign debt.

Sri Lanka, owing a $11.8 billion debt through sovereign bonds, has now about $2.31 billion in forex reserve against $7.5 billion in 2019. It will face $7 billion in total debt due this year, of which $1 billion for the international sovereign bonds.

Its foreign exchange reserve crisis was exacerbated by government mismanagement, years of accumulated borrowing, ill-advised tax cuts and a ban on use of chemical fertilisers, said the report.

Protesters have rallied against the powerful Rajapaksa family, members of which hold several top positions in the government, including president Gotabaya Rajapaksa and prime minister Mahindra Rajapaksa.

Top policymakers in the current regime of Bangladesh, however, have dismissed Sri Lanka-like situation in the country.

On Thursday, finance minister AHM Mustafa Kamal at a briefing after the meeting of the Cabinet Committee on Government Purchases said that the country’s economy was strong.

The economy is on a safe trajectory and it faces no impending danger, said the finance minister.

Economists said that the government needed to give more attention to project implementation, foreign loan negotiations and more revenue generation.

Former World Bank Dhaka Office lead economist Zahid Hussain said that the country’s overall external debt payment would surge in the coming days because of the short maturity of loans taken for some megaprojects.

Rooppur Nuclear Power Plant is being constructed in Ishwardi at a cost of $12.6 billion, with $11.38 billion or 90 per cent of the cost, taken as loan from Russia at an interest rate of over 4 per cent with the repayment period of 30 years, including a 10-year grace period.

The country will have to pay the first instalment of $559 million of the principal amount in March 2027 in addition to the interest against the single biggest loan taken for the project.

The Rampal Power Plant is being built with $1.6 billion loan received from the EXIM Bank of India in 2016.  Usually, the India EXIM Bank credit carries 1 per cent interest rate with the repayment period of 20 years and a five-year grace period.

Although the power plant was scheduled to be commissioned in August 2020, it is yet to be completed.

The country’s overall external debt soared to $60.15 billion in the financial year 2020–21 from $23.61 billion in 2010–11, registering a 2.5 times increase under the present government, according to the Economic Relations Division.

The amount was $81.57 as of June 2021 as per the Bangladesh Bank data that included external loans taken by the country’s private sector.

The ERD officials said that the short-term commercial borrowings had risen sharply compared with concessional loans from the country’s traditional multilateral lenders like the World Bank and the Asian Development Bank.

The Standing Committee on Non-Concessional Loans, headed by the finance minister, approved 65 proposals for non-concessional loans till June 2021 since 2013.

The Financial Stability Report 2018, released by the Bangladesh Bank in 2019, had also highlighted that the short-term external debt was in a rising trend and stood at 4.5 per cent of the nation’s gross domestic product in 2017–18, rising from only 1.3 per cent in FY12.

The ERD in its latest review on the ‘Foreign Aid Scenario’ said that $1914.81 million was spent on meeting foreign debt repayments in FY21, $1418.63 million as principal amount and $496.18 million in interest.

In current FY22, the budget allocation for foreign loan repayment is $ 2094.00 million.

The ERD’s ‘Golden Jubilee Special Edition’ on the flow of external resources to Bangladesh in 2020–21 said that the net flow of foreign debt had decreased by 7.80 per cent in FY21 as compared with the previous fiscal year as the principal payment increased by 12.90 per cent.

The payment for interest on foreign loans alone would cross $1 billion in 2023–24, according to the Medium Term Macroeconomic Policy Statement 2021–22 to 2023–24 prepared by the Finance Division.

Policy Research Institute executive director Ahsan H Mansur said that the Sri Lankan debt crisis should be an eye opener for Bangladesh.

He noted that its ability to pay off debt declined drastically due to cut in the tax rates.

The Sri Lanka’s tax-to-GDP ratio went down to 8.4 per cent in 2020 from 18.4 per cent in 1992.

Bangladesh’s tax-GDP ratio has been static at around 10 per cent for long.

According to the PRI executive director, the county’s revenue-debt ratio, hovering about 10 per cent for years against the 23 per cent threshold, is a weak point.

He also noted that the very high reliance on the readymade garment exports and the inflow of remittance carried risks as the government will have to rely on such revenue to meet foreign debt repayments in adverse situations like Sri Lanka in future.

News Courtesy:

https://www.newagebd.net/article/167997/lanka-crisis-eye-opener-for-bangladesh