Bangladesh has significant scope to get non-concessional loans from external sources without undermining its debt sustainability or credit profile, said a leading global bank.
“We think Bangladesh has significant leeway to raise external commercial borrowings,” US-based Citibank said in its latest country analysis.
Bangladesh has promising growth prospects with significant scope to boost investment and export capacity, but the country needs to address significant infrastructure bottlenecks, the banking giant said recently.
It said the sovereign credit risk profile of Bangladesh is more analogous to that of Vietnam and less risky than Sri Lanka’s given much lower government and external debt ratios.
Although Bangladesh’s public finances face pressure due to lower tax and revenue base and large spending on subsidies, the Citi sees few fiscal sustainability risks at this juncture.
“The structure of Bangladesh’s government debt is favourable.”
Almost all of Bangladesh’s external debt, which is about 20 percent of GDP (gross domestic product), is owed by the government to development partners and is largely on concessionary terms with long maturities.
Thus, the government’s annual interest expense has been kept low at around 2.2 percent of GDP versus 5.3 percent for Sri Lanka, 4.5 percent for India, 4.3 percent for Pakistan, and 2.9 percent for the Philippines, Citi said.
“If the government can mobilise more revenues, cap subsidies and raise much-needed capital spending to boost growth, we think Bangladesh can run annual deficits at 3-4 percent of GDP for some time without undermining debt sustainability.”
The Citi-pinpointed drawbacks for the economy include vulnerabilities from a concentrated economic structure, very low revenue base and state sector institutional weaknesses.
Bangladesh has the lowest per capita income among countries the Citi covers and has a very narrow manufacturing or export base which is highly concentrated in garments, with exports to the EU also being very high.
Bangladesh’s manufacturing sector is relatively small at only 17.7 percent of GDP. Moreover, it is heavily skewed towards the garment industry, accounting for almost 79 percent of total exports in 2012.
The country also has very low revenue- and tax-to-GDP ratios that, along with still sizeable subsidy spending pressures, limit the fiscal space for much-needed social and infrastructure spending.
“Significant institutional weaknesses surrounding governance and business climate issues are also sources of risk, with these deficiencies undermining private investment and the management of state-owned enterprises and state-owned commercial banks.”
After three years of stable ratings of Ba3 and BB- from Moody’s and S&P, respectively, the government plans to issue inaugural sovereign bonds this year.
“However, it will probably need to seek further waivers on external commercial borrowing limits with the IMF, alongside other preparatory work, so we don’t think the issuance is imminent — delay risk is high,” it said.
The bank praised Bangladesh’s decent track record of prudent macro policy management, reversing the external imbalances the country temporarily faced in the fiscal year of 2010-11 and the first half of 2011-2012.
The analysis said Bangladesh has also made some recent inroads on structural reforms, most notably the new VAT law passed in 2012.
The Citi said boosting investment rates and export capacity are critical to raising growth.
Much-needed investment and associated productivity improvements that could boost exports are the critical growth drivers that could accelerate Bangladesh’s convergence towards (lower) “middle income status”, the Citi said.
Bangladesh’s investment rates remain at relatively low levels at about 25 percent of GDP despite its gross infrastructure deficiencies, with net foreign direct investment being particularly low (averaging about 0.9 percent of GDP in the last five years), likely due to weak business climate and infrastructure.
The Citi said Bangladesh’s main competitive advantage of low labour costs will likely persist for a while.
It also said to reach low middle income status faster, than the government’s target of 2021, Bangladesh will need to make further efforts to diversify its export base and increase its domestic value-addition.
“Thus, it will need to address its physical and human capital deficiencies,” it said.
The Citi said the recent cut in repo rate by 50 basis points and relaxing some of its monetary and credit growth targets is justified, given the country’s macroeconomic backdrop.
The central bank could ease even further if disinflation, as projected by the International Monetary Fund, persists, it said.
Tapping commercial funding to get around these conditionalities could undermine the quality of future spending.
Bangladesh significantly lags all countries in Asia in terms of infrastructure quality, as shown by the index published by the World Economic Forum.
Another significant gap is transport linkages — the country scores poorly internationally in terms of port infrastructure, roads, rail links and air transport. Bangladesh also needs to address appropriate infrastructure to meet climate change risks, including better water management systems, Citi said. (Source)
No comments:
Post a Comment