Is Foreign Debt a Problem for Bangladesh?

Is contrary Debt a Problem for Bangladesh? Part-A hostile debt in Bangladesh Introduction outer debt is one of the sources of pay capital governance in any economy. Developing countries bid Bangladesh atomic number 18 characterized by light internal capital formation overdue to the vicious circle of deplorable productivity, crushed income, and natural depression savings. Therefore, this situation c tout ensembles for technical, managerial, and financial support from Western countries to duet the resource gap. On the other hand, international debt acts as a study constraint to capital formation in yield nations.The burden and dynamics of external debt show that they do not contri neverthe slighte signifi minttly to financing frugal development in developing countries. In most cases, debt accumulates because of the inspection and repair requirements and the principal itself. In view of the above, external debt becomes a self-perpetuating mechanism of destitution agg ravation, work over-exploitation, and a constraint on development in developing economies. usual borrowing can be seen by toffee-nosed investors as a warning signal of the administration becoming bankrupt deep down the foreseeable future.They may also fear that judicature forget land graduate(prenominal)er taxes in future in order to facilitate the quittance and servicing of the loan. In that case private investors pull up stakes become little(prenominal) enthusiastic to invest. However, form _or_ system of regime steelrs realize to know whether reality borrowing is followed by any crowding- out personnel on investment, by hatchs of whatever channel, and to what end and whether the detrimental tack together of such actions outweighs the bene discipline coming from the use of borrowed cash, as is argued by the classical. What is public debt? popular debt is the entry records of cumulative total of all government borrowings less re recompenses that are denominated in a boorishs residence currency. Public debt should not be conf utilise with external debt, which reflects the orthogonal currency liabilities of some(prenominal) the private and public sector and moldiness be payd out of inappropriate exchange earnings. authorities debt is one method of financing government operations, but it is not the and method. Governments can also create money to monetise their debts, thereby removing the need to pay wager.But this practice simply reduces government gratify make ups rather than truly scrape uping government debt and can result in hyper splashiness if used unsparingly. Governments usually borrow by issuing securities, government bonds and bills. little creditworthy countries sometimes borrow directly from a supranational brass (e. g. the man till) or international financial institutions. Sources of public debt A. Internal Sources. I. acquire from individual by issuing govt bond, notes, etc II. acceptation from commercial bank III. take overing from central bankIV. Borrowing from nan-bank Financial institution B. External Sources I. alien Government II. Foreign private institution III. International financial institution like IMF, WB etc. Why Bangladesh economy is dependent on Public debt? To utilize natural resources Economic development Financing deficit budget Strong social and economic structure Crucial economic contingencies enforce annual development Program Import financing Implementation of pecuniary policy To strong national defense Modernization of agriculture urge on quick industrialization.Factors Which Influence How Much a Government Can Borrow Domestic Savings. If consumers have a high savings ratio, there will be a great ability for the private sector to bribe bonds. Relative Interest order. If government bonds pay a relatively high interest evaluate compared to other investments, then ceteris paribus, it should be easier for the government to borrow. Sometimes, the government c an borrow large essences, even with low interest ranges because government bonds are seen as more(prenominal) attractive than other investments. loaner of Last Resort.If a country has a Central Bank impulsive to deprave bonds in case of a liquidity shortages, investors are less likely to fear a liquidity shortage. If there is no loaner of last resort (e. g. in the Euro) then markets have a greater fear of liquidity shortages and so are more reluctant to buy bonds. Prospects for Economic Growth. If one country faces prospect of recession, then tax revenues will fall, the debt to GDP ratio will rise. Markets will be much more reluctant to buy bonds. If there is forecast for higher(prenominal) growth. This will make it much easier to reduce debt to GDP ratios.The irony is that cutting government expenditure to reduce deficits, can lead to lower economic growth and addition debt to GDP ratios. Confidence and Security. Usually, governments are seen as a steady-going investme nt. many another(prenominal) governments have never defaulted on debt payments so passel are free to buy bonds because at least they are safe. However, if investors feel a government is in any case stretched and could default, then it will be more troublesome to borrow. Foreign Purchase. A country like the US attracts substantial conflicting buyers for its debt (Japan, China, UK).This strange demand makes it easier for government to borrow. However, if investors feared a country could experience inflation and a rapid devaluation, foreigners would not want to hold securities in that country. Inflation. Financing the debt by increasing the money supply is risky because of the inflationary establish. Inflation reduces the corporeal pry of the government debt, but, that means people will be less willing to hold government bonds. Inflation will require higher interest rates to attract people to keep bonds.In theory, the government can print money to reduce the real value of d ebt but animated savers will lose out. If the government creates inflation, it will be more difficult to attract savings in the future. Is foreign debt a problem to Bangladesh? profligate belief on debt, whether domestic or external, carries macroeconomic risks that can hamper economic and social development. Countries macro-economic is thus disturbed by this factor alone. scarcity of resources has already compelled the government to borrow afresh and/or impose invigorated taxes on the citizenry to meet debt work obligations.High domestic public debt pushes up interest rates and crowds out private investment, which is much needed to put forward economic growth. When most government revenues are devoted to debt servicing, fiscal policy cannot be used to provide basic services, such as education, health, safe drinking water and housing. Unfortunately, the national budget annual statement of the governments income and expenditure does not recognize the gravity of the situation characterized by its serious problem to finance the external debt servicing at the cost of basic human services. all(prenominal) year Bangladesh pays, on an average $ 1070 mil social lion, to its foreign creditors. A 2003 study (SUPRO 2003) exclusively revealed the fact that for every dollar in foreign grant assist received, the government spends over $1. 5 in debt service to foreign creditors per annum. While there is no denying that Bangladesh is heavily dependent on foreign aid and loans to finance its annual budget, it is also authentic that aid agencies and two-lobed lenders in the West have to carry a lions share of the blame for Bangladeshs burden of debt. Between 1980 and 2012, Bangladeshs total outstanding international debt quadrupled.The bulk of this surge in modify to the autocratic regimes came from the International development Association, the soft-loan window of the World Bank. Can the World Bank and the IMF morally impose the burden of this debt on the Bangl adeshi people, when in fact that money provided valuable succor to an autocratic regime that the people were struggling to topple at the time? How sustainable Bangladesh Debt is? Bangladesh is classified as a low-income country and is home to the third highest absolute number of brusque people in the world, after China and India.Despite the huge amounts it spends servicing debt ($1551. 3 million in 2011), the World Bank describes it neither as soberly nor even moderately obligated(predicate), but kinda classifies Bangladesh as less indebted. Instead of rewarding Bangladesh for its track record of prompt debt servicing, the World Bank has interpreted this to mean that Bangladeshs debt must(prenominal)inessiness be sustainable. Arbitrary thresholds on indicators like debt/exports made Bangladesh ineligible for the Heavily Indebted Poor Countries (HIPC) hatchway or the Multilateral Debt Relief Initiative.Bangladesh will not receive through and through either of these initiative s the debt relief that it desperately necessarily to finance public expenditures on school and hospitals among other basic necessities. One of the Bangladeshi development experts remarked that- Bangladesh has on a regular basis paid its debts, expanded exports and are now being punished for its success (Bhattacharya 2006). The whole argument is that, since these countries are able to repay they must have sustainable levels of debt.The sustainability of debt is primarily deliberate on the economic matrix called Debt sustainable Analysis (DSA) introduced by the World Bank and IMF, which lays too much speech pattern on the countrys exports and does not mounty reflect the true nature of the debt burden on government expenses. How can Bangladeshs debt be sustainable especially when it pays back on an average $1070 million to its foreign creditors in general and $870 million to its so-called benevolent development partners (multi-lateral and bi-lateral donors) annually?For a poor cou ntry like Bangladesh, would it be realistic to address debt sustainability without looking at how much money it spends on schools, hospitals and roads, on teachers, medicines, pretty water and on everything else that is needed to combat the dire meagreness blighting so many lives? If a country cannot afford to meet the basic needs of its own people, then how can one argue that giving money to the rich world is affordable or sustainable? How can its debt be sustainable when the cost of external debt servicing exceeds the public spending on health and education, for example?In what criteria, the Bangladesh external debt can be measured as sustainable when it clearly demonstrates that MDG progress is being seriously hampered due to the excesses of debt servicing? Presumably, the international community has left a single selection for Bangladesh servicing external debt at the cost of basic services allow alone the MDG progress Why Bangladesh deserves full debt cancellation? Undeniab ly, Bangladesh cannot afford to pay on average $1060 million a year to foreign creditors.Even though the country is making some progress with regard to the implementation of the MDGs, it is still home to 70 million people living in poverty. It has the highest incidence of poverty in South-Asia. In fact, Bangladesh cannot afford to pay a single dollar in debt service. If debt sustainability is based on the financing needs for the MDGs, Bangladesh would receive full debt cancellation. Bangladesh needs US$ 7. 5 billion a year to finance the implementation of the MDGs. A growing number of NGOs, governments and analysts have come to the remainder that debt cancellation should be expanded.As independent expert Bernards Mudho explained earlier this year (2007) in a report commissioned for the United Nations There is a need for still comprehensive solutions to the debt problems of poor countries, including further debt relief by other multilateral institutions and for permanent solutions to the problems of bilateral and commercial debts. Bangladesh Debt must be cancelled, because ? Debt costs too much to Bangladeshi people in general and poor and marginalized in particular. People need a healthy and prosperous life that requires increase government spending on basic services such as health, education, water-sanitation etc. ? Bangladesh needs to achieve the MDG targets in time. To finance the Millennium Development Goals, every year a staggering US7. 5 billion in external budget support is needed. This is about four times the amount of aid and concessional loans currently provided by foreign donors and creditors. ? At this juncture, Bangladesh can no longer afford to pay a single dollar for debt servicing. Because.. Every dollar paid in debt service is a dollar doomed for the MDGs. Part-B Impact of Foreign debt on Bangladesh 1. Effects on Economic growth 2. Effects on NNP 3. Effects on Inflation 4. Effects on Investment 5. Effects on consumption 6. Effects on work 7. Effects on Distribution 8. Effects on Risk, uncertainty, liquidity Part-C statistical Analysis 1. Trend Analysis of Foreign Debt Trend Analysis of External debt of last 10 years is presumption below Y=1714. 5+0. 8647x R? = 0. 9247 Appendix Table 1 shows the summary of trend compare and r2 of External debt of Bangladesh.The trend equation of Foreign debt is, Y=1714. 5+0. 8647x and the material of correlation coefficient coefficient (r2) = . 9247. Interpretation The trend equation indicates that during the period from 2003 to 2012 debt increase at the rate of . 8647 billion per year and 1714. 5 is the average external debt of Bangladesh. It is reflected from the fudge that trend equation of foreign debt are positive and goodness of fit of all the equations are very high. 2. descriptive Analysis of Foreign Debt Descriptive Statistical Analysis of External debt of last 10 years is given below (All amounts are in billions) Descriptive Statistics N Range marginal Maximum Mean St d. Deviation Variance Skewness Kurtosis Statistic Statistic Statistic Statistic Statistic Statistic Statistic Statistic Std. misplay Statistic Std. Error Foreign_Debt 11 8. 7200 16. 5000 25. 2200 2. 103273E1 2. 9825127 8. 895 -. 169 . 661 -1. 108 1. 279 Valid N (listwise) 11 Interpretation This table provides statistical information about the data set, such as showing mean value of foreign debt individually and its deviation.For this information, for instance we found that minimum value of the variable is 16. 5bill, Maximum value is 25. 22billon, its mean 2. 103273e1 and Standard deviation is 2. 9825127. 3. coefficient of correlation Analysis Table shows the correlation matrix for estimating interrelationships between chosen economic parameters of Bangladesh. Variables GDP real Growth tally of Foreign Debt Inflation rate Investment Amount Remittance Inflow Import Export Amount Foreign Reserve GDP real Growth Rate 1 . 635 . 638 . 748 . 427 . 457 . 485 . 352 Amoun t of Foreign Debt . 35 1 . 819 . 555 . 919 . 901 . 920 . 846 Inflation rate . 638 . 819 1 . 518 . 686 . 742 . 763 . 494 Investment Amount . 748 . 555 . 518 1 . 406 . 433 . 468 . 222 Remittance Inflow Amount . 427 . 919 . 686 . 406 1 . 915 . 935 . 920 Import Amount . 457 . 901 . 742 . 433 . 915 1 . 994 . 888 Export Amount . 485 . 920 . 763 . 468 . 935 . 994 1 . 885 Foreign Reserve Amount . 352 . 846 . 494 . 222 . 920 . 888 . 885 1 From the correlation matrix we have observed the followings GDP real Growth has moderate correlation with foreign debt, inflation rate, investment and low degree of correlation with remittance, import, export and very low correlation with GDP per capita. Foreign debt has strong correlation with. Inflation rate have strong correlation with. Investment have strong correlation with. Remittance inflow has moderate correlation with Import has strong correlation with Export has low correlation with Foreign exchange Reserve has low correlation with Part-D Recommendation & outcome Recommendation The international community including the G-8 must take necessary steps immediately to ensure full Debt cancellation for Bangladesh Debts must be cancelled as a matter of justice creditors must accept their share of responsibility in creating the current debt crisis, and cancel debts on this basis A MDG-consistent frame-work of Debt Sustainability should be applied and cancellation must be accessible to all that need it The issue of Climate Change and its adverse effect must be taken into account and additional fund should be released to overcome the adversity linking it with MDG process The governments of indebted countries must demonstrate to their citizens that they are spending money well and accountably.But this must not be used as an excuse to impose economic policy conditions or to termination those countries receiving debt cancellation by the donor community Rich countries, institutions and commercial creditors must can cel all illegitimate and un-payable debts being claimed from all poor countries Total Debt stocks must be cancelled, not just Service debt service cancellation for a confine period is not enough. Debt cancellation of any kind must not be conditional and it must not be considered again as ODA Conclusion The study has been conducted with a view to examining the presence of crowding- out effect of public borrowing on the private investment in the Bangladesh economy.To accomplish the task, a model for investment function has been specified and estimated considering public borrowing, GDP and interest rate as independent variables. A long -run relationship has been estimated and canvass by performing unit root bear witness, co integration test and an error correction model. The main findings of the study confirm with statistical significance that there is no crowding- out effect in Bangladesh, rather, the crowding- in effect is evident. This result is indeed somewhat wild in terms of constituted wisdom. The study has attempted to offer a rationale for this seemingly paradoxical finding from a macroeconomic point of view.In doing so, it has analyzed a checkmate of macroeconomic issues and ended up with the conclusion that the presence of crowding- in instead of crowding out effect can be attributed to such factors as excess liquidity in the banking system, imperceptible government competition with the private sector, relatively sustainable public debt scenario, government expenditure for transfer payment program , significant development expenditure for producing those goods and services which has the potential to cast off positive externalities, government microcredit programs and ADP -black money linkages. The results of the study have primal implications for the fiscal management.Existence of excess liquidity and possibility of crowding in effect together put the fiscal post in a localization to foster private investment and hence economic growth t hrough expanding borrowing backed public expenditure. However, the overall criteria that public expenditure authority ought to ensure is the transparency and efficiency in its programs. Moreover, government can lift unnecessary inflation and external indebtedness by reducing reliance for funds on Bangladesh Bank and foreign sources as long as excess liquidity in the banking system prevails. In view of the comprehend limitations inherent in this study, the following aspects may be taken up by future researchers Decomposing private investment by category and victorious each of them as separate dependent variable Segregating borrowing by government itself and borrowing by other public sector corporations, and considering them as separate explanatory variables Splitting public borrowing by sources (not only banks, NBDC or general public but also Bangladesh Bank and external sources) and taking all of them as explanatory variable s Incorporating a dummy variable for capturing the i ssue of economic reform and structural variate between after and before 1990 periods and Finally, if possible, carrying on the whole study on the basis of quarterly data to make the analytical framework parsimonious. pic 10