External borrowing will continue to play an important role in Bangladesh’s fiscal framework and development activities
Since external finance will play an import role in Bangladesh’s fiscal framework regarding post Covid-19 recovery, the country had to prioritize the sources of borrowing, as well as its repayment terms and conditions, said Debapriya Bhattacharya, distinguished fellow at the Centre for Policy Dialogue (CPD) on Tuesday.
He made the remark while addressing a virtual discussion titled "Multilateral Response to Covid-19 – Perspectives for South Asia" on the day.
CPD and the Organization for Economic Co-operation and Development (OECD) jointly organized the discussion in association with India’s Research and Information System for Developing Countries (RIS), Pakistan’s Sustainable Development Policy Institute (SDPI), Institute of Policy Studies of Sri Lanka and Nepal’s South Asia Watch on Trade, Economics and Environment (SAWTEE).
At the discussion, a report titled "Multilateral Development Finance in the Covid-19 Era and Beyond" of OECD was presented at the discussion where it mentioned that multilateral development finance was on the rise and at a faster pace than bilateral cooperation.
The economists also said that the governments in the South Asian countries should divert their concentration to explore international capital markets for mobilizing funds rather than only keeping their concentration on foreign debt based development activities.
Besides, investment financing should also be considered to ensure effective utilization of the remittance to lower dependency on debt financing as those finance comes with conditions, they said.
While explaining the Bangladesh perspective of the report, CPD distinguished fellow Debapriya Bhattacharya said that the county’s external debt was 38% of the country’s GDP. Of the foreign finance, only 4% came as grants while the rest 96% came as debt.
“There are three major external finance demands for Bangladesh - financing post-Covid rebound and recovery, locating compensatory concessional finance in view of LDC graduation and mobilizing for covering shortfall of sustainable development goals' (SDG) financing,” Debapriya remarked in his keynote presentation.
External borrowing will continue to play an important role in Bangladesh’s fiscal framework and development activities. In addition, foreign aid and multilateral financing will remain important for Bangladesh in the coming years, said the economist.
"Hence, Bangladesh has to decide carefully and prioritize its external sources, while we also have to innovate new financial instruments with greater concessional elements to service the development needs of the lower and middle income countries (LMICs)," said Debapriya.
"On the other hand, although Bangladesh's debt-to-GDP ratio was better, we have to think about sustainability as there might be debt pressures," he added.
He also called for ensuring access to real time data and information.
Effective negotiation is crucial
Speaking at the discussion, former adviser to the interim government AB Mirza Azizul Islam said that considering the requirement of finance, there was no scope to be complacent with the financing that the multilateral development partners were providing.
Taking about the conditions set by the donors against financing, he said that sometimes some conditions are good for the countries and sometimes they are not and that was where it required negotiation with the donors.
In choosing projects, bureaucrats were mostly unaware about the requirements and that was why many projects were chosen based on the recommendation of the lenders, he said, adding that sometimes those projects are not for the best interest for the countries.
Effective negotiation with the lenders by the recipient countries could help ensure best use of external debts, he mentioned.
Mirza Aziz mentioned that the foreign direct investments come where private investments are high but the private sector investments have been stuck around 20-22% of GPD for long. Much has been talked about to bring ease in doing business to boost investments but not much happened, he said.
Stressing on need-based project selection and funding, CPD chairman Rehman Sobhan said that the authorities should have strong control on selecting sources of finance while adopting a project.
"Which sort of finance would be required or effective for a particular project should be determined for the best interest of the country," he mentioned.
Suggesting ensuring effective utilization of remittance, he said that the inflow of remittance should be used as investment financing rather than consumption financing.
In the Eight Five Plan (FY 2021-25), external resources provide 12.6% of total outlay, while about 54% of the total external resource comes through the public sector.
Net external borrowing to finance the fiscal deficit will gradually increase to 2.37% of GDP (2025), i.e. about 47.4% of net fiscal deficit.