• Thursday, December 18, 2014

Freedom in the air

Korean experts suggest model for robust debt management

Star Business Report

A team of South Korean experts is set to provide an economic model that would help Bangladesh manage its external debt efficiently and ensure macroeconomic stability.
The model, which is being prepared under the Korean government-funded Knowledge Sharing Programme, is largely based on the East Asian nation's experience in transforming its war-torn economy into a full-fledged industrialised nation in less than four decades.
The draft of the model was shared with senior finance ministry officials yesterday at a workshop hosted by the Centre for International Economic Studies, Sookmyung University and Korea Fixed Income Research Institute at Sonargaon Hotel in Dhaka.
Based on the Korean experience, the experts recommend centralisation of the authorisation system of commercial loans, as borrowing from commercial sources increases the debt service ratio.
They said foreign capital management was connected with project management in South Korea and has been injected primarily into the export industry. The decision of introducing and managing foreign debt should not be a political issue but an economic one.
The government should also ensure that foreign capital contributes to economic growth, by directing funds into industry and infrastructure, they said.  
Speaking to reporters later, Prof In Soo Kang, senior research fellow of Sookmyung Women's University, one of the experts, said the model is being built in the backdrop of Bangladesh's increasing need for funds to support the economy, which has been growing at around 6 percent for a decade now.


He said the current estimation of potential gross domestic product (GDP) is crucial for accurate policy implication, but due to lack of data it cannot be estimated properly so far.
The economist said a macroeconomic model is important for a country as projects would be undertaken accordingly. "Policies can be misleading if there is no sound macroeconomic model."
The model will improve data accumulation and correct macroeconomic model, he said.  
Another important feature of the model is its plan for debt management.
Kang said the demand for capital for various infrastructure projects would increase in the coming days to pave the way for higher economic growth. But Bangladesh cannot rely only on cheap loans from development partners, as the flow of concessional credit is limited.   
“The conditions for concessional loans are good but they are limited in quantity, as every developing country wants such cheap loans which carry almost no interest. So, you will have to consider the commercial loans.”
After the Korean War, Seoul relied on grants and foreign aid from development partners to develop the country. But in 1960s and 1970s, it had to resort to commercial loans to drive growth further.
Kang said: "There are some good sides and bad sides to the Korean model in case of borrowing from commercial sources. So, you should not repeat the failures we had made."
"You can get a good result in the future if you can manage the model."
According to the draft model, Bangladesh's capital market is not developed enough to finance the capital needs needed for economic development, while the volume of the government bond market is low.
There is a limit in financing foreign capital through foreign grant and concessional loans. As a result, the ratio of foreign grant to GDP is continuously decreasing. The target GDP growth rate of 8 percent cannot be achieved through the concessional loans.
The presentation also points to rotation system of Economic Resource Division personnel responsible for foreign debt management.
“Foreign debt management needs very specific knowledge and skills. So, maintaining specially trained and experienced workforce is very important," the paper said.
It also said there is no long- or short-term strategy for foreign debt management and no guideline on how to and how much to finance.
The Korean team called for strong regulation for companies borrowing from foreign markets, as sometimes they become insolvent.
The draft also said the government should choose good agents who can arrange commercial loans with low cost.
Speaking at the event, Mohammad Asif-uz-Zaman, additional secretary of ERD, said the model might pave the way for effective management of commercial borrowing and debt management.
Mahmuda Begum, an additional secretary of the finance ministry, said Bangladesh could learn from Korea's experience as the East Asian country faced problems in debt management in its early days of industrialisation.

Published: 12:00 am Thursday, February 06, 2014

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