• Friday, December 19, 2014

Freedom in the air

Arrival of sovereign bonds

Faaria Tasin

THE news of Bangladesh's imminent international sovereign bond issuance has caught the attention of plenty. The world's leading investment bank- Goldman Sachs- is expected to advise the government on its maiden sovereign bond issuance and believes that Bangladesh can raise $2-$3 billion from the international market through such bonds.

Firstly, what are sovereign bonds and how can they help? Sovereign bonds are debt securities issued by national governments. These bonds can be denominated in either a local or global currency like the US dollar or euro.

The proceeds from bond sales can be used to fund governments' day-to-day operations, building a country's infrastructure and the like. For Bangladesh, the proceeds can be used for several reasons- to finance a major infrastructure project (for example, Padma bridge), to finance a gap in the fiscal budget (where government's expenditure is higher than its revenue), to finance an external account deficit (when a country imports more than it exports) or to finance investments for future economic growth. Sovereign bonds, if managed the right way, can be used for the country's economic development; it can help to divert government resources to where it is needed the most. For instance, we know that education is a necessary component for the economic development of Bangladesh; however the sector is suffering from inadequate funds.

Bangladesh's education expenditure as a proportion GDP has been hovering around 2%, compared to Malaysia (5.8%), Thailand (3.8%), China (4%). The government, on the other hand, has decided to finish Padma Bridge through domestic financing with an allocation of Tk 8,100 crore (approx US$1 billion). In instances like these, proceeds from sovereign bonds can be used to finance large infrastructural projects like the Padma Bridge which can free the public resources to be used on sectors such as education or health.  Though sovereign bonds may sound like a definite solution for economic development, it can act as a double-edged sword. Mismanagement of proceeds can eat into these funds which can ultimately defy the purpose of development

However, what is important to remember as Bangladesh takes a plunge into the international markets, is that it is not only the lack of foreign capital that is constraining the country's growth- rather it is low levels of local investment opportunities and weak business confidence among others. Given the wide range of investment opportunities available to investors globally, there will be no incentive for them to stay invested in Bangladesh, unless the country delivers good policies and performs well.

The writer is the head of research at The Daily Star and can be reached at faaria.ts@gmail.com

Published: 12:00 am Thursday, August 28, 2014

TAGS: sovereign bond sovereign bond issuance

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