Government budgeting is a system of mobilizing and allocating public resources by fiscal and monetary operations. If the expenditure of the budget is higher than its total revenue collections, it is called deficit budget. Bangladesh has a policy to prepare deficit budget. So, extra fund is required to offset this deficit and external borrowing is one of the ways to raise this fund.
Government debt has risen considerably over the past years in Bangladesh. The level of debt is determined by the level of budget deficit and the external debt is the part of total debt. Debt has an economic importance because it can enhance investment levels and increase growth rate. If the debt servicing cost is low from the returns of the investment it increases the growth and if the cost is high, it slows down the growth. Extensive borrowing from the external source increased the debt stock and it some instinct risks which becomes lethal to an economy or a country.
The reason of selecting this topic is for ‘prudent public debt management’ or for ‘prudent investment’. Because deficit budget is beneficial for developing countries like Bangladesh as the country uses the resources or savings of other countries through foreign borrowings. If external debt is managed properly and sustainably, it triggers the economic growth.
On the other hand, poor management can jeopardize the fiscal policy and monetary policy as well as the economic growth of a country. If we identify the risks of external debt, we will be able to take appropriate measures to address those risks. So, knowledge about external debt and its risks factors are needed for wise financing for deficit budget and prudent public debt management.
Foreign Borrowing or External Debt
According to the International Monetary Fund, “Gross external debt is the amount, at any given time, of disbursed and outstanding contractual liabilities of residents of a country to nonresidents to repay principal, with or without interest, or to pay interest, with or without principal.”
Sources of External Borrowing
In Bangladesh, it is classified into four major heads:
(a) Multilateral source,
(b) Bilateral source,
(c) Commercial borrowings, and
(d) Export credit (buyer’s or supplier’s credit).
(A) Multilateral Source or Official Development Assistance
> Main financing source of development sector for developing country or economy
> Mainly concessional loans
> It is not affected by credit ratings
> Tied with projects
w Suitable for social and physical infrastructure projects which yield no commercial return.
e.g. World Bank loan
(b) Bilateral Source
> Another vital financing source of development sector for developing country or economy
> Mainly concessional loans but some are semi-concessional
> Tied with import of goods, services and machineries from the creditor country.
e.g: JICA, USAid etc.
(c) Commercial Borrowings
> Most sensitive and risky
> Flows and costs depends on credit rating
> Non-concessional in nature
>In the form of loan or sovereign bond
> Suitable for projects with high return and short gestation period.
(d) Export Credit
> A commercial credit
> Provide export finance to overseas buyers on credit terms
> Risks are covered by Credit Insurance Company or Export Credit Agency (ECA)
> Borrowers gets benefits of high rating of ECA
Composition of the external debt portfolio (Debt stocks as on June 2016):
> Total: US$ 64,709 million
> External: US$ 26,950 million (41.7% of GDP)
Central Govt. US$ 25,527 million (94.7%)
Guaranteed US$ 1,423 million? (5.3%)
> Type of interest rate: External
> Currencies: External
> Costs of borrowing: External US$ 271 million (7%)
Central Govt. US$ 202 million? (75%)
Guaranteed US$ 69 million? (25%)
Role of FAPAD
External debt generally disbursed in Bangladesh through various projects and Foreign Aided Projects Audit Directorate (FAPAD) is the institutional setup to oversee the proper and effective financial management in donor funded projects. FAPAD operates compliance, financial and performance audit of donor funded projects and gives audit opinion. And it also takes necessary steps to settle down the audit observations. The audit report issued from FAPAD plays a vital role in the upcoming fund release procedures and internal control system. Ultimately, FAPAD ensures transparency and accountability of the external debt management system.