Govt's debt dependency rising due to low tax revenue: CPD

The government's dependence on borrowing has risen due to an imbalance between income and expenditure, i.e., low revenue collection. As a result, repayment obligations are also forcing the government to depend on more borrowing to repay loans, the Centre for Policy Dialogue (CPD) said on Thursday.

The think-tank also said that outstanding public and publicly guaranteed (PPG) debt as percentage of revenue earnings and export of goods, and services and remittance earnings have reached 200%.

Publicly-guaranteed debt is the long-term external obligations of public debtors, such as the government, and the external obligations of private debtors that are guaranteed for repayment by a public entity.

The CPD, in partnership with The Asia Foundation, organized a discussion in the capital titled, “Bangladesh’s External Borrowings and Debt Servicing Scenario: Are There Reasons to be Concerned?”

Discussants also suggested that the government  enforce a zero-tolerance policy against tax evaders.

Mustafizur Rahman, distinguished fellow of the CPD, delivered the keynote presentation.

“We are indeed borrowing to repay a large part of our PPG debt obligations. Therefore, there is no alternative but to rapidly increase domestic resource mobilization,” he said.

In his presentation, it was noted that the rate of external borrowings and debt servicing obligations have increased in recent years.

Bangladesh's public and private external debt was $98.9 billion in June 2023, and it crossed the $100-billion mark in September 2023.

Mustafizur Rahman also noted that the current external debt-to-GDP ratio of 21.6% is not as high compared to other countries.

The presentation also stated that outstanding public debt as a percentage of revenue earnings and exports of goods and services and remittance earnings have been rising sharply in recent years.

Projections are that these will rise further over the next few years.

However, he warned against complacency, emphasizing that the capacity for repayment was of critical importance.

Debt portfolio changing

The CPD also highlighted that the composition of the debt portfolio is rapidly changing.

The proportion of concessional loans is decreasing, while the share of non-concessional and market-based loans is increasing. Loan terms are also becoming more stringent.

Mustafizur Rahman expressed concerns about the rapid increase in both external borrowings and debt servicing obligations, especially when compared with the growth of GDP, revenue earnings, exports, remittances, and foreign exchange reserves.

The CPD also said that Bangladesh's revenue-GDP ratio was one of the lowest in the world. This coupled with the debt-carrying capacity and debt-servicing strength raises concerns.

An increasing portion of domestic resources is being used to repay the principal and interest of domestic and external loans.

“At the end of the day, it is the domestic resource mobilization that will need to underwrite the debt servicing for both domestic and external borrowings,” Rahman added.

The think-tank urged the authorities concerned to give the highest priority to enhancing domestic resource mobilization (DRM) through taxation, particularly by raising direct taxes, reviewing tax expenditures and incentives, closing loopholes and broadening tax net.

Dr Mashiur Rahman, economic adviser to the prime minister, attended the event as the chief guest while Salehuddin Ahmed, former governor, Bangladesh Bank and Kamran T Rahman, president, Metropolitan Chamber of Commerce and Industry (MCCI), attended as panelists.

“Export diversification and improvement of export capacity is very important. As per the national perspective, it is very important to improve our capacity for export and improve our capacity for production,” said Mashiur Rahman.

He said there is enormous scope of productivity improvement.

"Investment in modernisation, improvement in machinery is also important for productivity improvement," he added.

Dr Debapriya Bhattacharya, distinguished fellow, CPD and former ambassador and permanent representative of Bangladesh to the WTO and UN Offices in Geneva, attended as special commentator.

“Apart from government or PPG Borrowings, there is also private sector borrowing. If you calculate, it will show that 80% of the foreign debt is from the government and 20% is taken by the private sector," he remarked.

“The question is about the private sector loan situation. Not only government debt but also private sector foreign loans should also be discussed seriously,” he added.

Rehman Sobhan, chairman of CPD, and Kazi Faisal Bin Seraj, country representative, The Asia Foundation – Bangladesh, were also present at the event, while Dr Fahmida Khatun, executive director, CPD, chaired the session.