Foreign-Funded Mega Projects: Debt repayment may become a headache

Even though the debt-to-GDP ratio is still not extremely high, paying back the debts will become uncertain unless the foreign-funded mega projects boost exports, eminent economist Prof Wahiduddin Mahmud warned yesterday.

"We need more coping power in terms of having sufficient foreign exchange reserves to avoid balance of payment crisis and we need more fiscal space to be able to stimulate the economy and strengthen social security measures at difficult times," he told a session of the 6th South Asian Network on Economic Modeling (SANEM) Annual Economists' Conference at the capital's Brac Centre Inn yesterday.

"We have seen that a build-up of reserves may lead to complacency. Bangladesh, for example, was tempted to commit a significant portion of its reserves to project funding, forgetting that reserves should not be treated as budgetary resources, but only as a cushion for unforeseen external shocks," said the former adviser to the caretaker government at the session.

Rehman Sobhan, chairman of Centre for Policy Dialogue, also spoke at the event.

"We should be aware of another miscalculation. Even though the current debt-to-GDP ratio may not have crossed the red line, a debt repayment crisis may be in the offing, if there are too many mega-infrastructure projects being taken up through foreign funding without an understanding of whether such projects will attract enough private investment especially in export-oriented industries."

He observed, however, that a mega project, once started, needs to be completed in time because delays in implementation come at a cost to the economy.

"Mega projects need very careful scrutiny in terms of timing, financial commitments, cost recovery and prioritisation."

Taking up projects just because they look "prestigious" irrespective of priorities and future debt financing obligation is simply not the way to go, he said.

The International Monetary Fund's (IMF) prescriptions are often not informed by country-specific situations.

The IMF usually recommends aligning domestic fuel prices with the global price. But very sharp and sudden hikes in domestic fuel prices may lead to price hikes across the board, he said, referring to the price hike of fuel in Bangladesh amid existing inflationary pressure on the economy.

The problem is more serious in Bangladesh as the government has to rely heavily on taxes on fuel for revenue purposes.

"A universal intermediate input like fuel should not be a major source of VAT revenue collection. If VAT on fuel could be waived, there would have been hardly any need for last year's sudden fuel price hike in Bangladesh."

A weak financial system is always a problem for economic management, he said, but it is much more so at times of economic shocks.

A serious problem is that a weakly governed financial system is unable to prevent illegal capital flight abroad that is likely to take place at times of economic uncertainty.

"The overall lesson here is that there is a need for an active, capable and pragmatic government with sufficient institutional capabilities. To absorb shocks, and ensure a soft landing, the coping policies have to be clever and nimble, and informed by adequate analysis and information."

Referring to IMF's condition to reduce default loans, he said bad loans cannot be reduced unless there is political will.

In his speech, CPD Chairman Prof Rehman Sobhan said non-performing loans are a major issue in the banking sector and it eventually becomes a way of transferring people's funds to influential businesses.

The banks are collecting deposits from millions of people and then lending the money to the section of people with power and many of them do not repay the loans, he said.

The central bank is also making opportunities for them by allowing rescheduling of loans by providing 2 percent down payment.

"This is a profoundly unjust arrangement," he said.

In Bangladesh, poverty is declining but inequality is rising.

The government should emphasise export services through raising skills because it will reduce exploitation of people's migration, he said, adding that the quality of education at Dhaka University should improve.

Investment on education and healthcare is no less important than infrastructural investment, he said.

The noted economist then recommended more emphasis on regional trade relations with the neighbouring countries.