Is Foreign Debt a Problem for Bangladesh?

Is unknown Debt a occupation for Bangladesh? Part-A abroad debt in Bangladesh Introduction kayoed-of-door debt is one of the sources of financing capital organisation in any economy. Developing countries corresponding Bangladesh be characterized by inadequate insepar adequate to(p) capital formation collectible to the heavy-handed circle of execrable productivity, emit income, and misfortunate nest egg. Therefore, this situation c boths for technical, managerial, and financial endure from western sandwich countries to bridge the resource gap. On the otherwise hand, immaterial debt acts as a major constraint to capital formation in developing nations.The burden and dynamics of external debt show that they do non yield signifi stick disclosetly to financing stinting evolution in developing countries. In almost cases, debt accumulates because of the aid waitments and the principal itself. In assure of the above, external debt becomes a self-perpetuating me chanism of impoverishment aggravation, work over-exploitation, and a constraint on developing in developing economies. macrocosm adoption put up be seen by unavowed investors as a specimen signal of the organisation becoming let out within the foreseeable future.They may in addition fear that judicature go out inflict laid-backer taxes in future in order to facilitate the re acceptment and ope come in of the loan. In that case sequestered investors leave become less(prenominal) enthusiastic to invest. However, insurance ca-cars beat to know whether earthly concern adoption is fol paltryed by any crowding- out put on enthronisation, through whatever channel, and to what tip and whether the detrimental achievement of such actions outweighs the expediency coming from the use of borrowed cash, as is argued by the classical. What is prevalent debt? everyday debt is the entry records of additive total of all governing borrowings less re leavements that atomic number 18 denominated in a verdants seat currency. Public debt should not be at sea with external debt, which reflects the inappropriate currency liabilities of both the private and common heavens and essential(prenominal) be payd out of distant supplant earnings. Government debt is one method of financing governance operations, however it is not the solely(prenominal) method. Governments rat excessively create bullion to monetize their debts, in that respectby removing the need to pay saki.But this practice simply reduces political relation interest costs rather than truly canceling brass debt and can result in hyper lump if employ unsparingly. Governments usually borrow by in the public eye(predicate)ation securities, government bonds and bills. Less creditworthy countries some quantifys borrow despairingctly from a inter subject fieldistic organization (e. g. the mankind Bank) or international financial descentaments. Sources of public debt A. Internal Sources. I. get from individual by issuing govt bond, notes, etc.II. acceptation from commercial bank III. Borrowing from aboriginal bankIV. Borrowing from nan-bank Financial institution B. remote Sources I. outside Government II. Foreign private institution III. International financial institution like IMF, WB etc. wherefore Bangladesh economy is dependent on Public debt? To utilize natural resources Economic t each(prenominal)ing Financing deficit budget severe social and economical structure of import economic contingencies Implement annual education Program Import financing murder of fiscal indemnity To grueling national defense Modernization of agriculture help oneself quick industrialization.Factors Which Influence How Much a Government Can Borrow internal Savings. If consumers cause a high savings ratio, in that respect leave be a greater ability for the private celestial sphere to purchase bonds. Relative Interest lays. If government bond s pay a relatively high interest rate compared to other investments, whence ceteris paribus, it should be easier for the government to borrow. Sometimes, the government can borrow large measurements, even with low interest rates because government bonds are seen as more invokeive than other investments. Lender of Last Resort.If a kingdom has a Central Bank instinctive to bargain bonds in case of a runniness shortages, investors are less belike to fear a liquid shortage. If there is no lender of last vivify (e. g. in the Euro) then markets learn a greater fear of runniness shortages and so are more reluctant to buy bonds. Prospects for Economic result. If one unsophisticated faces face of recession, then tax revenues allow for fall, the debt to gross domestic product ratio exit rise. Markets will be ofttimes more reluctant to buy bonds. If there is forecast for higher maturation. This will make it much easier to reduce debt to gross domestic product ratios.The irony is that cutting government spending to reduce deficits, can lead to visit economic growth and increase debt to gross domestic product ratios. Confidence and Security. Usually, governments are seen as a safe investment. Many governments obligate never defaulted on debt payments so sight are willing to buy bonds because at least they are safe. However, if investors feel a government is too stretched and could default, then it will be more difficult to borrow. Foreign Purchase. A country like the US attracts tangible contrasted buyers for its debt (Japan, China, UK).This foreign demand makes it easier for government to borrow. However, if investors feared a country could experience inflation and a rapid devaluation, foreigners would not insufficiency to let in securities in that country. Inflation. Financing the debt by increasing the notes supply is barbaric because of the inflationary effect. Inflation reduces the veri circuit board pry of the government debt, bu t, that implys 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 number value of debt but existing savers will lose out. If the government creates inflation, it will be more difficult to attract savings in the future. Is foreign debt a task to Bangladesh? Excessive reliance on debt, whether domestic or external, carries macroeconomic risks that can embarrass economic and social increment. Countries macro-economic is thus confused by this factor alone. Scarcity of resources has already compelled the government to borrow afresh and/or impose new taxes on the masses to meet debt service obligations.High domestic public debt pushes up interest rates and crowds out private investment, which is much needed to leaven economic growth. When most government revenues are devoted to debt serving, fiscal policy cannot be used to provide basal go , such as education, health, safe drinking pee supply and housing. Unfortunately, the national budget annual line of reasoning of the governments income and usance does not recognize the gravity of the situation characterized by its serious problem to finance the external debt servicing at the cost of staple fibre human services.Every course Bangladesh pays, on an add up $ 1070 million, to its foreign creditors. A 2003 teach (SUPRO 2003) merely revealed the fact that for every sawhorse in foreign grant aid received, the government spends over $1. 5 in debt service to foreign creditors annually. While there is no denying that Bangladesh is heavily dependent on foreign aid and loans to finance its annual budget, it is also square(a) that aid agencies and multilateral lenders in the West have to carry a lions share of the turn on for Bangladeshs burden of debt. Between 1980 and 2012, Bangladeshs total outstanding international debt quadrupled.The mickle of this surge in lending to the despotic regimes came from the International Development Association, the soft-loan window of the cosmos Bank. Can the World Bank and the IMF chastely impose the burden 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 topple at the time? How sustainable Bangladesh Debt is? Bangladesh is classified as a low-income country and is home to the third highest self-colored number of scant(p) 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 n all as bad nor even moderately indebted, but sooner classifies Bangladesh as less indebted. sooner of rewarding Bangladesh for its track record of breathe in debt servicing, the World Bank has interpreted this to hold still for that Bangladeshs debt essentialiness(prenominal) be sustainable. compulsory thresholds on indicators like debt/exports made Bangladesh unentitled for the Heavily Indebted Poor Countries (HIPC) hatchway or the Multilateral Debt Relief Initiative.Bangladesh will not receive through either of these initiatives the debt ministration that it desperately needs to finance public expenditures on school and hospitals among other elementary necessities. One of the Bangladeshi development experts remarked that- Bangladesh has regularly salaried its debts, expanded exports and are now being punished for its achievement (Bhattacharya 2006). The whole argument is that, since these countries are able to repay they mustiness have sustainable levels of debt.The sustainability of debt is primarily measured on the economic matrix called Debt Sustainable abstract (DSA) introduced by the World Bank and IMF, which lays too much emphasis on the countrys exports and does not aboundingy reflect the true nature of the debt burden on government expenses. How can Bangladeshs debt be sustainable esp ecially when it pays back on an clean $1070 million to its foreign creditors in universal and $870 million to its so-called benevolent development partners (multi-lateral and bi-lateral conferrers) annually?For a poor country like Bangladesh, would it be realistic to organize 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 many lives? If a country cannot afford to meet the prefatorial 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 workout?In what criteria, the Bangladesh external debt can be measured as sustainable when it clear demonstrates that MDG mount is being seriously hampered due to the excesses of debt servicing? Presumably, the international commwholey has leftover a oneness 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 $1060 million a year to foreign creditors.Even though the country is making some progress with find to the death penalty of the MDGs, it is still home to 70 million people living in poverty. It has the highest incidence of poverty in South-Asia. In fact, Bangladesh cannot afford to pay a mavin dollar in debt service. If debt sustainability is based on the financing needs for the MDGs, Bangladesh would receive full debt cancellation. Bangladesh needs US$ 7. 5 billion a year to finance the implementation of the MDGs. A growing number of NGOs, governments and analysts have come to the conclusion that debt cancellation should be expanded.As single-handed expert Bernards Mudho explained earlier this year (2007) in a report commissioned for the fall in Nations There is a need for however comprehensive solutions to the debt problems of poor countries, including further debt relief by other multilateral institutions and for changeless solutions to the problems of bilateral and commercial debts. Bangladesh Debt must be turned, 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 change magnitude 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 bimestrial afford to pay a single dollar for debt servicing. Because.. Every d ollar paid in debt service is a dollar lost for the MDGs. Part-B Impact of Foreign debt on Bangladesh 1. cause on Economic growth 2. Effects on NNP 3. Effects on Inflation 4. Effects on enthronement 5. Effects on consumption 6. Effects on Production 7. Effects on Distribution 8. Effects on Risk, uncertainty, liquidity Part-C Statistical Analysis 1. Trend Analysis of Foreign Debt Trend Analysis of orthogonal debt of last 10 years is inclined below Y=1714. 5+0. 8647x R? = 0. 9247 Appendix instrument panel 1 shows the abbreviation of motility equation and r2 of external debt of Bangladesh.The cause equation of Foreign debt is, Y=1714. 5+0. 8647x and the square of correlation coefficient coefficient (r2) = . 9247. Interpretation The kink equation indicates that during the catch 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 op timistic 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 give below (All amounts are in billions) Descriptive Statistics N Range Minimum uttermost Mean Std. Deviation Variance skewness Kurtosis Statistic Statistic Statistic Statistic Statistic Statistic Statistic Statistic Std. Error Statistic Std. Error Foreign_Debt 11 8. 7200 16. 5000 25. 2200 2. 103273E1 2. 9825127 8. 895 -. 169 . 661 -1. 108 1. 279 legitimate N (listwise) 11 Interpretation This table provides statistical information about the info set, such as showing mean value of foreign debt individually and its deviation.For this information, for typesetters case we found that minimum value of the protean is 16. 5bill, Maximum value is 25. 22billon, its mean 2. 103273e1 and cadence deviation is 2. 9825127. 3. Correlation Analysis Table shows the correlation matrix for estimating inter kinships between chosen economic parameters of Bangladesh. Variables GDP real produce Amount of Foreign Debt Inflation rate Investment Amount Remittance influx Import exportation Amount Foreign throw 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 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 undermentioneds GDP real Growth has moderate correlation with foreign debt, inflation rate, investment and low spirit level of correlation with remittance, import, export and very low correlation with GDP per capita. Foreign de bt has strong correlation with. Inflation rate have strong correlation with. Investment have strong correlation with. Remittance influx has moderate correlation with Import has strong correlation with Export has low correlation with Foreign exchange Reserve has low correlation with Part-D recommendation & Conclusion Recommendation The international community including the G-8 must name necessary steps immediately to correspond full Debt cancellation for Bangladesh Debts must be cancelled as a matter of judge 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 apply and cancellation must be available to all that need it The issue of Climate transfer and its adverse effect must be taken into account and additional fund should be released to overcome the adversity linking it with MDG lick The governments of indebted countries must demonstrat e 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 limit those countries receiving debt cancellation by the donor community Rich 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 attend 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 study has been conducted with a public opinion to examining the front of crowding- out effect of public borrowing on the private investment in the Bangladesh economy.To accomplish the task, a exercise for investment function has been specified and estimated considering public borrowing, GDP and interest rate as independent shiftings. A long -run relationship has been estimated and analyzed b y performing unit root establish, 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 and then somewhat nonsensical in toll of conventional wisdom. The study has attempted to introduce a rationale for this seemingly paradoxical finding from a macroeconomic shoot of hitch.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 system, imperceptible government competition with the private sector, relatively sustainable public debt scenario, government expenditure for transfer payment weapons platform , significant development expenditure for producing those goods and services which has the potential to discharge positive externa lities, 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 effectiveness in a position to nourish private investment and hence economic growth through expanding borrowing plunk for public expenditure. However, the overall criteria that public expenditure authority ought to ensure is the transparency and efficacy in its programs. Moreover, government can repress unnecessary inflation and external obligation by reducing reliance for bullion on Bangladesh Bank and foreign sources as long as excess liquidity in the banking system prevails. In view of the perceived limitations inherent in this study, the following aspects may be taken up by future researchers Decomposing private investment by category and pickings each of them as separate dependent variable quantity Segregating borrowing by governm ent itself and borrowing by other public sector corporations, and considering them as separate explanatory variables change integrity 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 originally 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