Cautionary stance on hard loans

The government has taken on a cautionary approach for hard-term external borrowing to mitigate future risks even though there is no longer such condition from the International Monetary Fund.

From now, the government has decided to consider foreign loans with grant element lower than 35 percent to be hard-term ones.

The IMF set the condition in its Extended Credit Facility loan programme that was taken in 2012, but the programme's tenure ended in June last year.

Earlier, the government followed that if the grant element was lower than 25 percent the loan was considered to be hard-term.

A policy was drafted regarding hard loans, which was approved last week by the cabinet committee on economic affairs.

In taking such loans, the government agencies must take approval from the standing committee on non-concessional loans, according to the policy.

As there is no IMF conditionality, the scope for getting the loans reviewed at a higher level has become limited, it said. “As a result, the possibility of taking risky foreign loans will increase.”

It seems that following the internationally accepted policy for hard-term loans would be proper, the policy added. Bangladesh's debt to gross domestic product ratio as per international standards is still low, said a finance ministry official.

But the government in recent times has taken on a good number of transformational infrastructure projects, the financing of most of which would not be possible with concessional foreign borrowing.

In case of the $13 billion Rooppur nuclear power plant project, $12 billion will be taken from Russia.

The rate of interest on the loan may rise as high as 4 percent and the repayment period is also much less than that of the concessional loan.

A major portion of the $4 billion Padma Rail Link project will be provided by China. The terms and conditions of the loan are not of concessional nature. 

Besides, there are various projects in the pipeline where the government is going to take non-concessional loans.

Going by the current practice in Bangladesh, the projects may not end on time, and in that case the costs may soar, said the finance ministry official.

In that case, the debt-GDP ratio, especially non-concessional borrowing, is likely to increase, he added.

Many organisations take hard-term borrowing for projects that are not economically viable, putting the country into the risk of plunging into a debt-trap.

For this, the government has been taking these pre-cautionary measures. 

Zahid Hussain, lead economist of the World Bank's Dhaka office, said: “Transformative projects are needed to accelerate economic growth. Opport-unities for concessional financing need to be used to the fullest in this regard.”

Bangladesh has the space to use some non-concessional financing as well, but it has to be careful so that this space is not wasted.

It will be important to address the usual problems of time and cost overruns so that the returns from these projects are realised soon enough to pay for the servicing of non-concessional loans without any unnecessary pressure on the budget.

Project selection in these cases should be based on rigorous analysis of costs, benefits and risks and, once adopted, project implementation management will have to set much better standards of efficiency than is usually the case, he added.

DEBT BURDEN

The IMF's latest Debt Sustainability Analysis (DSA) on Bangladesh based on June 2014 statistics shows that in the last three years the country's debt-GDP ratio decreased.

As per the DSA, Bangladesh's debt-GDP ratio was 35.8 percent in fiscal 2013-14, which was 41.9 percent in fiscal 2011-12.

According to this fiscal year's budget document, the debt-GDP ratio is 32 percent. The debt-GDP ratio of foreign loan is below 15 percent.

The IMF's DSA report said the present value of public debt-GDP ratio is projected to remain broadly stable over the medium term, but rise slightly in the long term, reflecting a gradual increase in the real interest rates as the concessionality of debt is assumed to decline steadily.

The report also said, by fiscal 2034-35, the debt-GDP ratio will rise to 39 percent of GDP as compared with 36 percent of GDP in fiscal 2013-14.