No need to worry about Bangladesh's debt situation right now

For Bangladesh, the comfortable level for total public debt is 70% of GDP and external debt is 55% of GDP

Bangladesh's total debt burden is currently far below the threshold level on both domestic fronts posing no threat to the economy, according to an official document.

For Bangladesh, the comfortable level for total public debt is 70% of GDP and external debt is 55% of GDP.

The country's projected total debt (42.9% of GDP) and external debt (16.4% of GDP) by fiscal 2023-24 are far below the respective thresholds and do not pose any threat despite having a slight upward trend due to the Covid-19 shock, according to the recent document.

It said that prudent fiscal policy adopted by the government is expected to keep the public debt at a sustainable level over the medium term.

The country's debt sustainability analysis (DSA) by the World Bank-IMF shows that government debt remains at low risk of debt stress despite the economic shock caused by the Covid-19 pandemic (IMF article IV report 2020).

External and domestic debt indicators are below their respective thresholds under the baseline and stress test scenarios until 2030.

The document said that the composite index (CI) rating that is calculated by the above framework based on the country's real GDP growth, remittances, international reserves, world growth, and CPIA (Country Policy and Institutional Assessment) score is calculated at 3.06 that suggests a strong debt carrying capacity.

The official document stated that Bangladesh has a solid and strong track record in debt service payments and the country's external debt stock is still reasonably low.

Projected external debt stock stands at $53.5 billion at the end of FY21, which is 14.7% of the projected GDP.

The country's external debt service liability which includes amortisation of long term external debt and interest payments stands at $2.1 billion in FY21, which is 5.7% of the projected export earnings and 3.6% of the projected revenue earnings in FY21.

The World Bank-IMF joint Debt Sustainability Analysis (DA) in 2019 assessed the threshold level of external debt service liability for Bangladesh as 21% of its export and 23% of government revenue.

This indicates that Bangladesh's external debt lies far below the danger level and the government has adequate repayment capability.

“However, the government should remain vigilant against any external development including exchange rate risk,” the document mentioned.

It said that the government usually provides guarantees/counter guarantees against loans incurred by the state-owned enterprises in line with the government's priority sectors, such as power, energy, national aircraft carrier (i.e Biman Bangladesh Airlines Itd), agriculture etc. These liabilities would come into effect only if the concerned enterprise fails to pay back the loan.

As of May 2021, the face value of government guarantees/ counter guarantees stands at Tk. 1,066.6 billion and the outstanding amount of loan against those Guarantees is Tk. 738.4 billion, which is 2.1% of the projected GDP and 12.2% of the government expenditure in FY22.

The Power and Energy sector alone accounts for 58.5% of the outstanding contingent liabilities followed by Bangladesh Biman and the Agriculture sector as 14.8% and 6.7% respectively.

Having such an extent of contingent liabilities, the government has devised a necessary monitoring system under a risk framework so that these guarantees do not turn into government liabilities.

“Rigorous monitoring and sovereign guarantee/counter-guarantee guidelines issued by the government are expected to keep the contingent liabilities in control.”

The document stated that Implementation of the declared economic recovery program, providing adequate investment in the health sector including the mass vaccination program, and implementation of expansionary monetary policy pursued by Bangladesh Bank would help for a sustainable economic recovery as the government has projected 7.2% GDP growth in FY22.

At the same time, the projected overall implicit interest rate that is calculated from the projected debt stock and interest payments is 5.3.

Favourable debt dynamics on the back of higher GDP growth compared to lower interest costs implied that projected government finance would not accumulate the public debt (Debt: GDP).

A slight upward trend in the debt-GDP ratio due to the winding fiscal deficit during the economic recovery period will not be a cause for concern as the revenue collection will boost in the medium term when the economy gets back to its normal level.