The issue of overall public debt and debt sustainability has long been a major concern for policy makers in Bangladesh. High public debt stems from persistent fiscal deficit and can have a significant negative effect on economic activities. It leads to high taxes and puts upward pressure on real interest rates, which may crowd out private investment. When a government is no longer able to finance its deficit, it is forced to cut spending or raise revenues, often at times when expansionary fiscal policy is needed to help stabilize the economy.
The assessment of debt sustainability is a sensitive issue and depends on a host of factors, such as the current level of debt, primary balance, volatility in inflation rate, movement in interest and exchange rates, export growth, current account balance, and the GDP growth rate. Debt sustainability is usually defined as a situation in which a borrower is expected to be able to continue servicing its debt without an unrealistically large correction to the balance of income and expenditure (IMF 2006.The issue, therefore, encompasses the concepts of solvency and liquidity. These two aspects are relevant in making any sustainability assessment which also depends on individual country circumstances. From a solvency point of view, the debtor must be able to generate sufficient funds in future periods to cover the debt-service obligations without indefinitely accumulating debt. In other words, the sovereign must be able to produce a level of primary surplus that, over the medium term, would maintain or lower the ratio of debt to GDP. From the liquidity point, debt sustainability implies that the debtor must be able to find sufficient amounts of financing in each period to close any financing gaps without having to resort to disorderly adjustment.
Debt sustainability is an essential condition for macroeconomic stability and sustained economic growth. Most often, high public debt levels create repayment flows that can crowd-out much needed public spending, and can generate adverse incentives for private investors to engage in activities that spurt long-term growth. An excessive level of public debt can make a nation vulnerable to interruption in aid flows or to sudden shifts in domestic financial market conditions. These problems are aggravated by a narrow export and production base and various structural, political, and institutional factors that reduce returns on investment (ADB 2005).
In order to support the low-income countries in their efforts to achieve the Sustainable Development Goals (SDGs), the IMF, along with the World Bank, has developed a debt sustainability framework (IMF 2007). The framework incorporates three elements: (i) assessment of debt sustainability guided by indicative country-specific debt-burden thresholds related to the quality of policies and institutions; (ii) standardized forward-looking analysis of the debt and debt-service dynamics under a baseline scenario and in the face of plausible shocks; andappropriate borrowing (lending) strategy that contains the risk of debt distress. As per the debt burden thresholds indicator under debt sustainability assessments of low income countries, Bangladesh has been categorized in the medium-category in terms of its institutional strength and the quality of its policies (IMF 2005).
In the wake of persistent high fiscal deficit in the 1970s and 1980s, total debt-GDP ratio in Bangladesh, on average, rose sharply from 33.65 percent during the 1970s to 56.95 percent during the 1980s. During the period, high levels of public debt triggered growth of monetization and financial repression, including forced absorption of Government bonds by banks and financial institutions, leading to underdevelopment of financial markets. The fiscal adjustment measures initiated in the early 1990s have brought down the debt-GDP ratio to 51.05 percent during the 1990s. With 4.53 percent fiscal deficit, the ratio slightly increased to 51.98 percent, on average, during 2001-2006 (Table 1).
Source: (1) Economic Trend, Bangladesh Bank, (2) External Resource Flow, Economic Relation Division (ERD), (3). National Savings Directorate (NSD), (4) BBS and (5) Authors’ own calculation.
Regarding domestic debt, the accumulation in domestic debt was from mainly three sources: (1) Bangladesh Bank (BB), (2) Deposit Money Banks (DMBs), and (3) Non-banks (including NSD). Bangladesh Bank and DMBs purchase Government securities/treasury bills to finance budget deficit. When BB purchases government treasury bills4 to finance the deficit, it engages in money creation. The interest rates of these instruments are determined on ad-hoc basis and the rates are relatively lower as compared to NSD certificates or fixed deposit rates offered by the commercial banks.
The growth rate of outstanding debt on NSD certificates averaged at a rate of 25.25 percent per year during a 16-year span of 1974-1990 as compared to a 20.32 percent growth rate in 1990-2006. This method of borrowing is expensive. The interest rate is close to market rates but higher than that of the banking system and external financing (Table 3). However, despite the high interest rate, it is non-inflationary. It dampens inflation and encourages household savings. The outstanding stock of NSD certificates sky-rocketed to Taka 394.64 billion at the end of FY06 from Taka 93.00 billion in FY91. Lending and deposits rate of commercial banks are also affected by the high interest rates of NSD certificates (Ahmed and Islam, 2006b). Thus interest rate of NSD certificates is of much significance in maintaining the balance between this form of savings and the banking system.
Since the interest rates on Government securities were administered and kept well below the market rates of comparable maturity during the eighties and first half of 1990s, the soft option of monetization was considered least burdensome, leading to a deleterious impact on debt management policy and monetary control. It is generally recognized that high level of money financing of deficit leads to high inflation. However, there are few studies that support the fact that such form of deficit financing leads to inflation in Bangladesh. Rangarajan et al (1989) captured the nexus between monetary financing of deficit and inflation in India. A statistically significant relationship can be observed between monetized deficit and growth of domestic debt in India. Therefore, concerns of high levels of public debt for price stability and macro-economic balance reinforce the need for stability in debt/GDP ratio in Bangladesh.
Foreign Aided Projects Audit Directorate is one of the audit directorates of the Auditor General Office of Bangladesh (OCAG).It has the constitutional mandate to do audit of the accounts of the projects financed by various donor agencies. The government of Bangladesh borrows money from different donor agencies to implement the annual development program. The different executive agencies of the government and other agenciesexpend the borrowed money to implement the strategic plan taken by government of Bangladesh. It has a link to the debt management of Bangladesh. If the borrowed money is not used properly then the whole program will be useless. And the money which was borrowed by the government will create a burden for the debt management and the overall economy of Bangladesh. Now it could be said that a fair and transparent accountability should be maintained whether the money or resource borrowed for the implementation of the projects in on the right path or not. In this regard, Foreign Aided Project Audit Directorate (FAPAD) plays a vital role to give a true and fair opinion of the financial statement of the projects accounts. By auditing the accounts of the projects of the government of Bangladesh Foreign Aided Projects Audit Directorate (FAPAD) plays a vital role in the aspect of the public debt management of Bangladesh. The audit reports reflect the true picture of the funds arranged by debt. If the audit reports give misstatement of the projects accounts, it means the funds come from public debt is not being used in the proper way. Hence the debt management could be addressed in a proper way. So Foreign Aided Project Audit Directorate (FAPAD) has a great role in the public debt management of Bangladesh.