Need for keeping a close watch over sustainability of public debt

  
 By Asif Reza Akash

"Blessed are the young, for they shall inherit the national debt" — Herbert Hoover

When a government spends more than it collects in taxes and other forms of revenue, it has a budget deficit. This deficit is financed by borrowing from the private sector. The accumulation of past borrowing is national/government/public debt. Generally, contents of public debt are: a) currency (when the central bank is a part of government), b) short-term debt (e.g. treasury bills), c) floating debt (e.g. provident fund, small savings etc.), d) special floating debt (e.g. issued securities to international organisations like International Monetary Fund (IMF), the World Bank (WB) etc., e) permanent/funded debt (maturity is usually between three and thirty years), f) external loans (obligations owed to foreigners- governments, institutions, firms or individuals). In general, however, the currency obligations of the government are usually excluded from the definition of the public debt and only the floating, funded, external and other obligations are included in it. 

The most popular source of taking debt is foreign aid. Most laymen think that aid is something that is non-repayable in nature. But the fact is, depending on the conditionalities, aid may be in the form of 1) hard loans, 2) soft loans, 3) grants, 4) tied aid and untied aid. The recipient country has to pay higher amount of interest (at the commercial rate) for hard loans, and nominal interest at the rate of two per cent or less with long repayments period in the case of  soft loans ordinarily received from international financing institutions. In the case of tied aid, procurement of goods and services from the donor country is obligatory, but in the case of untied aid, the recipient country is free to procure the goods and services from any country at a competitive price. All aid except grants adds to the debt burden of the recipient country and has to be repaid.

Whether public debt is a curse or a blessing is a very debatable issue in the field of macroeconomics. The first US secretary of treasury and economist Mr. Alexander Hamilton believed that "a national debt, if it is not excessive, will be to us a national blessing." While the fourth president of the USA Mr. James Madison argued that "a public debt is a public curse" .Whether public debt is a curse or a blessing but public borrowings have a profound effect on various dimensions of economy; distribution, capital accumulation, income and employment stability, and so forth. This way, public debt is both a source of problems and a tool of economic management in the hands of the authorities concerned. Simply, as long as the return on investments is higher than the cost of borrowings, public debt is beneficial until then. But most economists are critical of the external aid because of its adverse macroeconomic effect.

According to a research titled 'Analyzing Bangladesh's Debt Sustainability Using SimSIP Debt' by Bernhard G. Gunter and A. F. M. Ataur Rahman, Bangladesh's total public debt at the end of 1993, amounted to Tk 725 billion. Six years later, at the end of 1999, it just surpassed the Tk 1.0 trillion level; and at the end of 2006, Bangladesh's total public debt amounted to nearly Tk 2.0 trillion (about US$32 billion). The amount has still continued to increase. This increase in public debt levels has worried many observers inside and outside Bangladesh. Such trends seem to indicate that Bangladesh's debt is not sustainable. However, calculation of Bangladesh's public debt as per cent of its gross domestic product (GDP) provides a different picture; this ratio has actually decreased from 58 per cent in 1993 to less than 47 per cent in 2006. According to CIA world fact book, the data to Bangladesh's public debt as percentage of GDP were as followed:

Country	2004	2005	2006	2007	2008	2009	2010
Bangladesh	43	44.5	46.7	37.4	34.5	39.7	39.3

However, Bangladesh, forty years ago, was a country with abysmal poverty among the economic of the world. Henry Kissinger openly referred Bangladesh a,' a bottomless basket case'. But the living standard of its population has been improving and poverty has extensively been on the decline. Nevertheless, the amount of public debt does not always matter; rather, the sustainability of public debt matters. 

Bangladesh Economic Update, a report published by Unnayan Onneshan, a multi-disciplinary research centre based in Dhaka, revealed that the public debt issue was putting an upward pressure on real interest rate crowding private investment out. Public debt is also increasing the demand for debt servicing payments and reducing the government's capacity for public investment. The spending in the social sector has been the prime causality of this development. The per capita debt burden in fiscal year (FY) 2010-11 in Bangladesh increased 8.41 per cent than that of FY 2009-10, rising from $151 to $163. This is 22.99 per cent of Bangladesh's per capita GDP and it might increase to $171.83 in FY 2014-15, reflecting an increase by 5.42 per cent, the report said. Total debts of Bangladesh in FY 2010-11 stood at about $23,322 million, which was 22.21 per cent of its total GDP. Total domestic borrowing as percentage of GDP remained between 1.5% and 3.0% of GDP over the last ten years, according to the report. In FY 2010-11, total external debt of Bangladesh stood at $21,347.4 million which was 20.24 per cent of its GDP. The government may have to borrow Tk. 177.57 billion from domestic sources in FY 2014-15 and its outstanding external debt will then stand at $23.47 billion, according to figures reported by a national English daily in one of its recent issues.

Every year an increasing amount of our budgetary expenditure has to be spent on payments of interest on the outstanding amount of public borrowings on a cumulative basis and also on debt amortisation i.e. , repayment of the principal amount of such debts in phases. The overall debt service now involves annually more amount of more than what is spent on social security, safety net and welfare, out of the annual budgetary allocation. Furthermore, excessive borrowing from the banking sector, as has been witnessed in recent times, tends to crowd out the private sector, in terms of their access to bank credits. If this trend about government borrowing continues, this will also impact adversely its capacity to extend development spending. 

Against this backdrop, the government should try to keep a careful watch on the sustainability of the public debt. Every effort should be made by it to help avoid the recurring deficit budget on a larger scale and to allocate more fund - not squeeze it - for infrastructural development activities, with a simultaneous drive being made for strengthening its capacity to improve the implementation performance relating to the Annual Development Programme (ADP). Public-private partnership (PPP) should also be actively promoted. Unfortunately, the government has not been able to make progress, in real terms, about exploiting the potential for PPP programmes. Meanwhile, the tax collection authorities will need to make sustained efforts on a vigorous scale to raise the level of domestic revenue collection. Corruption should be curbed effectively. All political leaders and lawmakers must rise above their individual selfishness and well-being as well as narrow partisan interests.

This article was published on The Financial Express, Views & Analysis, (Sunday, January 22, 2012)

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