The government of Bangladesh is concerned about the decline in foreign loans and grantsthat is to be expected following the country’s upgradeto a lower middle-income country in March of 2018; and rightfully so.
For the next phase of our development, we must start thinking about how to finance our own development and prepare accordingly.
To that end, I propose that our government should consider issuing municipal bonds to supply capital for local development projects. I argue that this will go a long way in terms of ensuring steady, even development throughout the country, easing the tremendous pressure on Dhaka, and reduce our budget deficit as well as dependence on international credit.
If 25-50% of all local development projects were funded by issuing local government bonds, our government would be able to manage the budget far better and won't need as much from foreign lenders.
This would be a critical step for local independence and that’s a good thing because we want to see less pressure on the central government and more activity at the local level. A relatively autonomous and fiscally independent local government will boost the development of the whole nation and lift millions out of poverty.
Fortunately, Bangladesh has no dearth of business schools supplying a steady stream of fresh graduates every year who can be deployed to assist eight divisional commissioner’s offices, 64 district councils, 491 sub-district councils, 4,554 rural, 323 municipal, and 11 city councils.
New recruits from the graduate pool can contribute significantly to the operation of local government bodies and issuing bonds to raise capital. Some training and licensing must be included as a professional requisite to standardize the process.
This job will require people to be able to analyze financial data and risk analytics to design viable projects.
It is also imperative that municipal leaders understand and are able to explain the details regarding potential risks and returns to investors. Otherwise, the project will fail.
Next, we would need bond underwriters, brokerages, and banks to have a coordinated effort to run these. For this I recommend hiring experts to establish an effective system and coordination mechanism. Over time, when the process has been streamlined, our new recruits will have gained enough experience and some of them will emerge as experts and leaders themselves.
Beat the bureaucracy
The long and costly delays in development projects due to red-tape and bureaucracy that we have come to take for granted can be brought under control if we allow local projects to be funded by municipal bonds.
Decision-making will be much quicker and so will implementation. Also, there would be less scope for corruption and embezzlement.
Direct input and output
As local residents will be able to invest in local projects, we can expect a much better outcome of the projects.
There is strong evidence that when local budgets and taxes are set by the residents themselves, the outcome is much better in every way. Countries that tried this approach found that there isrelatively more transparency, accountability, and efficiency. People tend to feel a personal obligation and commitment towards the projects, thus ensuring their success.
We need to nurture such a mindset amongthe Bangladeshi people. But it’s difficult to achieve that when laws and taxes are imposed on citizens without their participation or input and when they can’t see any direct benefit from it.
Moreover, although local governments would require some subsidization by the central government, their obligation to pay back interest to investors will instill fiscal discipline and ensure the best use of public funds for the public good.
Local job opportunities
Local projects would give preference to local residents for employment and contractor opportunities, as that would be most cost-effective. This would encourage skills development around the country and reduce the pressure of commuters and domestic migration into Dhaka.
It will also engage different communities to be competitive and innovate so as to attract the best minds of the county to move where they are most needed.
It will change the country’s political landscape from the traditional, unproductive conflicts over political allegiance to a healthy and productive competition on community development projects driven by citizens and local leaders.
I know there is no lack of resourcefulness and great ideas among our people. They just need the funds and the means to execute.
Their ideas should turn into reality, and that is possible through funding by issuing bonds. Any local government that is capable or can be upgraded to a level with self-governing capabilities should start acquiring the skills to manage the population well.
How it will work
Raising capital is only one step in the process of local development and it isn’t limited to simply issuing bonds. I propose this for financing any such project.
Allowing local governments to issue bonds will be a milestone in our development, but it must be follow a very clear guidance in order to avoid corruption.
Municipal bonds are different from the savings bonds currently circulated by Bangladesh banks. Savings bonds are a direct IOU from the government and there is no secondary market. We have to redeem them directly from the government.
But municipal bonds will be traded on the secondary market.
I would recommend having a separate trading platform like what DSE is running, as these are debt instruments and should have different laws and transaction processes to protect both the investors’ and bond issuers’ interests.
It will allow people to switch back and forth from stocks to bonds, and this flexibility will encourage more investment.
Municipal bonds also react to interest rate fluctuations so investors to can adjust their positions.
If the interest rate drops the local government can issue new bonds to buy back old bonds issued on higher rates.
State agencies related to finance and banking can coordinate with local governments for the best interest of the country.
The central government should figure out how to recruit competent people to lead local governments and large utility projects.
And finally, the government should encourage diversity in local leadership from the get-go. My proposed idea can start leveling the playing field for women and minorities by giving a much-needed fresh start, giving others a chance to run for office.
Mazher Mir is a financial advisor for Morgan Stanley, USA. He has 15 years of experience in the American financial industry, and is registered with NYSE and US Investment Authorities. He is advocating for international investments in Bangladesh by consulting for technological infrastructure developments.