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Bangladesh Economic Update Debt and Deficit: Recent Trends October, 2014

The Unnayan Onneshan (UO), an independent multidisciplinary think-tank, in its October issue of Bangladesh Economic Update 2014, reveals that increases in per capita debt, share of debt in GDP and debt service payment have been lowering public spending in physical and socio-economic infrastructure and escalating intergenerational debt burden in the future.

The research organisation notes that in FY 2013-14, the per capita external debt burden increased by 2.41 percent and per capita domestic debt burden increased by 10.71 percent compared to the previous FY 2012-13. During the period from FY 2011-12 to FY 2012-13, the debt service payment increased by 12.58 percent.

The outstanding domestic debt as percentage of GDP was 17.46 percent, whereas the outstanding external debt was 18 percent in FY 2012-13, finds the think tank.
Government borrowed more from non banking system than the banking system in FY 2013-14.

From FY 2008-09 to FY 2013-14, the per capita domestic debt has increased by 42.38 percent at an annual rate of 14.71 percent, whereas the per capita external debt burden has increased by 11.46 percent at an annual rate of 0.86 percent during the same period of time.

The annual rate of increase in per capita domestic debt was 12.24 percent during the period from FY 2001-02 to FY 2006-07 and 17.51percent during the period from FY 2007-08 to FY 2008-09. The per capita external debt, however, increased annually at 4.48 percent during the period from FY 2001-02 to FY 2006-07 and at 2.41 percent during the period from FY 2006-07 to FY 2008-09.

The domestic debt stood at Tk. 202044 crore in FY 2013-14, which was Tk. 181184 crore, 160423 crore and 139220 crore in FY 2012-13, FY 2011-12 and FY 2010-11 respectively. Debt has increased by Tk. 41621 crore during the period from FY 2012-13 to FY 2013-14. If the trend continues, the domestic debt might reach Tk. 260498.44 crore and 318953.08 crore in FY 2014-15 and FY 2015-16 respectively.

The external debt has increased by USD 296 million in FY 2013-14 compared to FY 2012-13, whereas the debt increased by USD 9.7 million in 2012-13 compared to the previous fiscal year. The total external debt stood at USD 23250 million in 2013-14, whereas it was USD 22085.5 million, USD 22095.2 million and USD 22981.4 million in FY 2010-11, FY 2011-12 and FY 2012-13 respectively.

The per capita external debt was USD 115.52 in FY 2001-02, which stood at USD 136.45 in FY 2006- 07, USD 147.5 in FY 2010-11 and USD 149.72 in FY 2013-14.

Taking the growth path of increase in per capita external debt into account, the UO projects that the per capita external debt might reach USD 153 and USD 158 in FY 2014-15 and FY 2015-16 respectively.

The per capita domestic debt was Tk. 3433.36 in FY 2001-02, which reached Tk. 5533 in FY 2006-07, Tk. 9292.95 in FY 2010-11 and Tk. 12968 in FY 2013-14. Taking the growth path of increase in per capita domestic debt into account, the UO projects that the per capita domestic debt would stand at Tk. 15969.42 and Tk. 18970.69 in FY 2014-15 and FY 2015-16 respectively.

The think tank further observes that the foreign debt-service payment is increasing over the years, which indicates a decrease in the net foreign asset of the country. In 2012-13, the total service payment was 1091 million among which 895 million was paid as principal and196 million was paid as interest. The payment, however, reached 787.88 million where principal payment was USD 640 million and USD 147 million until February 2014.

Expenditure on repayment of the principal and interest on foreign debt as a percentage of yearly loan disbursement was 52.22 percent until February’14 of FY 2013-14 and was 53 percent, 60.84 percent and 90.09 percent in FY 2012-13, FY 2011-12 and FY 2009-10.

Increasing allocation for non-development expenditure due to financing the deficit does not allow the government to allocate adequately for development expenditure resulting in barrier to the expansion of productive capacity in the economy, says the think tank.
The think tanks shows that while the rate of growth in non-development expenditure has increased to 20.39 percent in FY 2013-14 from 10.56 percent in FY 2012-13, the rate of growth in development expenditure has decreased to 8.33 percent in FY 2013-14 from 31.73 percent in FY 2012-13.

The research organisation evinces that the deficit amounting to five percent of GDP stands at Tk. 67552 crore without grants in the budget of FY 2014-15, whereas the deficit was Tk. 55032 crore in FY 2013-14, which is 4.6 percent of the total GDP in that year.
As a result, the target of government borrowing in the budget of FY 2014-15 increases and amounts to Tk. 61346 crore, which was Tk. 48362 crore in the budget of the previous fiscal year causing a 26.84 percent increase in target of government borrowing, finds the UO.

Increasing government borrowing from domestic sources may, however, crowd out the private investment by causing the interest rate to rise. In July of FY2014-15, domestic debt has increased by 78.15 percent from the corresponding month of the previous fiscal year, while the external debt stands negative at Tk. 153.46 crore indicating higher repayment than borrowing.

Financing of budget deficit in July of FY 2014-15 stood higher at Tk. 9101 crore representing an increase of 77.18 percent than Tk. 5137 crore during the corresponding period of the previous fiscal year, notices the research organisation.

In order to check the ominous effects of debt and deficit, the UO urges for the adoption of an immediate debt management policy through harmonisation of the macroeconomic policies that ensures an effective fiscal management in the economy.

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