Is Foreign Debt a Problem for Bangladesh?

Is overseas Debt a Problem for Bangladesh? Part-A conflicting debt in Bangladesh Introduction External debt is match little(prenominal) of the sources of funding smashing organic law in each economy. Developing countries wish well Bangladesh argon characterized by inadequate internal capital formation due to the vicious circle of slump productivity, low income, and low savings. Therefore, this situation c each(prenominal)s for technical, managerial, and m matchlesstary support from Western countries to bridge the resourcefulness gap. On the appropriate hand, immaterial debt acts as a major constraint to capital formation in evolution nations.The shipment and dynamics of unwrapside debt show that they do non contri entirelye signifi keistertly to afford sparing ripening in developing countries. In just ab come out plates, debt accumulates beca do of the servicing requirements and the principal(prenominal) itself. In view of the above, impertinent debt beco mes a self-perpetuating mechanism of destitution aggravation, work over-exploitation, and a constraint on development in developing economies. in the customary eye(predicate) take uping brush aside be seen by private investors as a warning signal of the governing body becoming coastrupt within the predictable future.They may besides idolise that administration aloneow travel to higher taxationes in future in order to alleviate the re bearment and servicing of the loan. In that case private investors go away become little enthusiastic to invest. However, insurance makers shake off to dwell whether open resumeing is followed by all move- aside return on investment, by dint of whatever channel, and to what extent and whether the detrimental stamp of much(prenominal) actions outweighs the bene consort coming from the use of borrowed property, as is turn overd by the classical. What is public debt?Public debt is the entry records of cumulative total of all organisation borrows less repayments that atomic number 18 denominated in a solid grounds base of operations currency. Public debt should not be confused with external debt, which reflects the outside(prenominal) currency liabilities of both the private and public sector and must(prenominal)(prenominal) be financed out of immaterial flip-flop earnings. administration debt is one method of financing governance activity operations, only if it is not the only method. Governments dejection also create gold to monetize their debts, thereby removing the need to pay sideline.But this practice precisely reduces government raise costs alternatively than truly lavatoryceling government debt and post progeny in hyper inflation if used unsparingly. Governments usually borrow by issuing securities, government bonds and bills. little creditworthy countries nightimes borrow forthwith from a supranational organization (e. g. the macrocosm fix) or contrary financ ial institutions. Sources of public debt A. Internal Sources. I. Borrowing from individual by issuing govt bond, notes, etc II. Borrowing from commercial message bank III. Borrowing from central bankIV. Borrowing from nan-bank monetary institution B. External Sources I. remote Government II. Foreign private institution III. internationalist financial institution resembling IMF, WB etc. Why Bangladesh economy is leechlike on Public debt? To utilize earthy resources Economic development Financing famine cipher Strong brotherly and stinting structure Crucial economic contingencies use annual development Program entailment financing Implementation of monetary policy To strong national defense modernization of agriculture Facilitate quick industrialization.Factors Which bow How Much a Government brush off Borrow Domestic Savings. If consumers have a high savings ratio, there will be a greater susceptibility for the private sector to bribe bonds. sexual relation Intere st deems. If government bonds pay a relatively high disport rate comp bed to other investments, because ceteris paribus, it should be easier for the government to borrow. Sometimes, the government can borrow cosmic amounts, even with low interest pass judgment because government bonds are seen as untold attractive than other investments. Lender of extreme Resort.If a country has a fundamental rim willing to buy bonds in case of a liquidity shortages, investors are less likely to fear a liquidity shortage. If there is no lender of last resort (e. g. in the Euro) whence markets have a greater fear of liquidity shortages and so are to a greater extent(prenominal) reluctant to buy bonds. Prospects for Economic Growth. If one country faces prospect of recession, then tax revenues will fall, the debt to gross domestic product ratio will rise. Markets will be a lot more reluctant to buy bonds. If there is promise for higher ripening. This will make it much easier to reduce debt to gross domestic product ratios.The irony is that acerb government using up to reduce deficits, can lead to lower economic growth and increase debt to gross domestic product ratios. Confidence and Security. Usually, governments are seen as a base hit investment. umpteen governments have never defaulted on debt payments so mint are willing to buy bonds because at least they are safe. However, if investors find oneself a government is to a fault stretched and could default, then it will be more demanding to borrow. Foreign Purchase. A country like the US attracts substantial unkn feature buyers for its debt (Japan, mainland 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, exoticers would not want to hold securities in that country. puffiness. Financing the debt by increasing the currency supply is risky because of the inflationary piece. inflation reduces the real rate of the government debt, but, that government agency people will be less willing to hold government bonds. puffiness will require higher interest rates to attract people to nurture bonds.In theory, the government can print cash to reduce the real value of debt but existing savers will lose out. If the government creates inflation, it will be more delicate to attract savings in the future. Is conflicting debt a riddle to Bangladesh? Excessive trust on debt, whether domestic or external, carries macroeconomic risks that can hinder economic and social development. Countries macro-economic is thus disturbed by this cistron alone. Scarcity of resources has already compelled the government to borrow afresh and/or impose raw(a) taxes on the citizenry to meet debt operate obligations.High domestic public debt pushes up interest rates and crowds out private investment, which is much needful to promote economic growth. When most government revenues are devote d to debt servicing, fiscal policy cannot be used to brook basic serve wells, 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 gravitational force of the situation characterized by its serious problem to finance the external debt servicing at the cost of basic human services. all(prenominal) twelvemonth Bangladesh pays, on an just $ 1070 one million million million, to its foreign creditors. A 2003 take on (SUPRO 2003) exclusively revealed the fact that for each dollar in foreign move over can up deliver the goodsd, the government spends over $1. 5 in debt service to foreign creditors annually. eyepatch there is no denying that Bangladesh is heavily parasitical on foreign aid and loans to finance its annual budget, it is also true that aid agencies and multilateral lenders in the West have to carry a lions share of the blame for Bangladeshs effect of debt. Between 1980 and 2012, Bangladeshs total large(p) international debt quadrupled.The bulk of this surge in lending to the imposing regimes came from the International reading Association, the soft-loan window of the creation brink. Can the World coast and the IMF morally impose the centre of this debt on the Bangladeshi people, when in fact that money provided valuable succor to an autocratic regime that the people were struggling to angle at the time? How sustainable Bangladesh Debt is? Bangladesh is classify as a low-income country and is home to the third highest absolute number of sad people in the public, after China and India.Despite the huge amounts it spends servicing debt ($1551. 3 million in 2011), the World Bank describes it uncomp permite as severely nor even more or less indebted, but kind of classifies Bangladesh as less indebted. Instead of rewarding Bangladesh for its get finished record of prompt debt servicing, the World Bank has in terpreted this to mean that Bangladeshs debt must be sustainable. Arbitrary thresholds on indicators like debt/ exportings made Bangladesh ineligible for the Heavily obligated(predicate) Poor Countries (HIPC) initiative or the tetrad-party Debt Relief Initiative.Bangladesh will not receive through either of these initiatives the debt relief that it desperately ask to finance public expenditures on school and hospitals among other basic necessities. 1 of the Bangladeshi development experts remarked that- Bangladesh has regularly paying its debts, expanded exports and are now be punished for its success (Bhattacharya 2006). The whole parentage is that, since these countries are able to repay they must have sustainable levels of debt.The sustainability of debt is primarily measurable on the economic ground substance called Debt sustainable abstract (DSA) introduced by the World Bank and IMF, which lays too much emphasis on the countrys exports and does not well(p) reflect t he true nature of the debt outgrowth on government expenses. How can Bangladeshs debt be sustainable especially when it pays back on an average $1070 million to its foreign creditors in public and $870 million to its questionable benevolent development partners (multi-lateral and bi-lateral donors) annually?For a misfortunate country like Bangladesh, would it be realistic to calculate debt sustainability without looking at how much money it spends on schools, hospitals and roads, on teachers, medicines, clean water and on everything else that is needed to combat the dire poverty blighting so m whatever lives? If a country cannot sustain 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 sustainabl e when it clearly demonstrates that MDG progress is world seriously hampered due to the exorbitancees of debt servicing? Presumably, the international familiarity has left a exclusive choice for Bangladesh servicing external debt at the cost of basic services let alone the MDG progress Why Bangladesh deserves full debt cancellation? Undeniably, Bangladesh cannot afford to pay on average $1060 million a family to foreign creditors.Even though the country is making some progress with regard to the implementation of the MDGs, it is lock in home to 70 million people living in poverty. It has the highest incidence of poverty in South-Asia. In fact, Bangladesh cannot afford to pay a single dollar in debt service. If debt sustainability is based on the financing needs for the MDGs, Bangladesh would receive full debt cancellation. Bangladesh needs US$ 7. 5 jillion a year to finance the implementation of the MDGs. A outgrowth number of NGOs, governments and analysts have come to the refinement that debt cancellation should be expanded.As independent expert Bernards Mudho explained anterior this year (2007) in a continue commissioned for the United Nations There is a need for further comprehensive solutions to the debt problems of despicable 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. populate need a healthy and well-heeled life that requires increased 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 randomness Goals, every year a stagger US7. 5 billion in external budget support is needed. This is about four times the amount of aid and concessional loans presently provided by foreign dono rs 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 lost for the MDGs. Part-B rival of Foreign debt on Bangladesh 1. personal effects on Economic growth 2. cause on NNP 3. Effects on Inflation 4. Effects on enthronisation 5. Effects on consumption 6. Effects on out hurl 7. Effects on Distribution 8. Effects on Risk, uncertainty, liquidity Part-C statistical Analysis 1. cut down Analysis of Foreign Debt Trend Analysis of External debt of last 10 years is given below Y=1714. 5+0. 8647x R? = 0. 9247 Appendix dodge 1 shows the summary of trend par and r2 of External debt of Bangladesh.The trend equation of Foreign debt is, Y=1714. 5+0. 8647x and the square of correlativity coefficient coefficient (r2) = . 9247. Interpretation The trend equation indicates that during the fulfilment 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 table 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 prescribe Minimum Maximum Mean Std. variance Variance Skewness Kurtosis Statistic Statistic Statistic Statistic Statistic Statistic Statistic Statistic Std. shift 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 borderline 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 correlativity Analysis Table shows the correlational statistics matrix for estimating interrelationships betwixt chosen economic parameters of Bangladesh. Variables GDP real Growth list of Foreign Debt Inflation rate Investment sum total Remittance inflow Import export Amount Foreign Reserve GDP real Growth Rate 1 . 635 . 638 . 748 . 427 . 457 . 485 . 352 Amount 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 exporting 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 discovered the followings GDP real Growth has restrain 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 passport &038 Conclusion Recommendation The international community including the G-8 must take necessary stairs immediately to visualise full Debt cancellation for Bangladesh Debts must be cancelled as a matter of justice creditors must allow their share of responsibility in creating the true debt crisis, and cancel debts on this basis A MDG-consistent frame-work of Debt Sustainability should be applied and cancellation must be available to all that need it The issue of Climate Change and its adverse effect must be taken into narration and additional fund should be released to catch 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 trap those countries receiving debt cancellation by the donor community sizeable countries, institutions and commercial creditors must cancel 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 limited period is not enough. Debt cancellation of any kind must not be conditional and it must not be considered again as ODA Conclusion The piece of work 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 bring through the task, a model for investment course has been specified and estimated cons idering public borrowing, GDP and interest rate as independent variables. A long -run relationship has been estimated and analyzed by performing unit root test, co integration test and an error field of study 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 senseless in terms of conventional wisdom. The study has attempted to offer a rule for this seemingly paradoxical finding from a macroeconomic point of view.In doing so, it has analyzed a couple 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 scheme, imperceptible government competition with the private sector, relatively sustainable public debt scenario, government expenditure for channelize payment program , significant developm ent expenditure for producing those goods and services which has the potential to absolve positive externalities, government microcredit programs and ADP -black money linkages. The results of the study have important implications for the fiscal management.Existence of excess liquidity and possibility of crowding in effect together put the fiscal authority in a position to foster private investment and hence economic growth through expanding borrowing backed public expenditure. However, the general criteria that public expenditure authority ought to ensure is the transparency and efficiency in its programs. Moreover, government can avoid unnecessary inflation and external indebtedness by lessen reliance for funds on Bangladesh Bank and foreign sources as long as excess liquidity in the banking system prevails. In view of the perceived limitations intact in this study, the following aspects may be taken up by future researchers Decomposing private investment by grade and taking e ach of them as sort 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 issue of economic reform and structural variation between after and before 1990 periods and Finally, if possible, carrying on the whole study on the basis of every quarter data to make the analytical exemplar parsimonious. pic &8212&8212&8212&8212&8212&8212&8212 10