Is Foreign Debt a Problem for Bangladesh?

Topics: Debt, Macroeconomics, Inflation Pages: 12 (3055 words) Published: April 23, 2013
Is Foreign Debt a Problem for Bangladesh?

Foreign debt in Bangladesh

External debt is one of the sources of financing capital formation in any economy. Developing countries like Bangladesh are characterized by inadequate internal capital formation due to the vicious circle of low productivity, low income, and low savings. Therefore, this situation calls for technical, managerial, and financial support from Western countries to bridge the resource gap. On the other hand, external debt acts as a major constraint to capital formation in developing nations. The burden and dynamics of external debt show that they do not contribute significantly to financing economic development in developing countries. In most cases, debt accumulates because of the servicing requirements and the principal itself. In view of the above, external debt becomes a self-perpetuating mechanism of poverty aggravation, work over-exploitation, and a constraint on development in developing economies.

Public borrowing can be seen by private investors as a warning signal of the government becoming bankrupt within the foreseeable future. They may also fear that government will impose higher taxes in future in order to facilitate the repayment and servicing of the loan.

In that case private investors will become less enthusiastic to invest. However, policy makers have to know whether public borrowing is followed by any crowding- out effect on investment, through whatever channel, and to what extent and whether the detrimental effect of such actions outweighs the benefit coming from the use of borrowed money, as is argued by the classical.

What is public debt?

Public debt is the entry records of cumulative total of all government borrowings less repayments that are denominated in a country's home currency. Public debt should not be confused with external debt, which reflects the foreign currency liabilities of both the private and public sector and must be financed out of foreign exchange earnings. Government debt is one method of financing government operations, but it is not the only method. Governments can also create money to monetize their debts, thereby removing the need to pay interest. But this practice simply reduces government interest costs rather than truly canceling government debt and can result in hyperinflation if used unsparingly. Governments usually borrow by issuing securities, government bonds and bills. Less creditworthy countries sometimes borrow directly from a supranational organization (e.g. the World Bank) or international financial institutions. Sources of public debt:

A. Internal Sources.
I. Borrowing from individual by issuing govt bond, notes, etc II. Borrowing from commercial bank
III. Borrowing from central bank
IV. Borrowing from nan-bank Financial institution
B. External Sources
I. Foreign Government
II. Foreign private institution
III. International financial institution like IMF, WB etc.

Why Bangladesh economy is dependent on Public debt?

To utilize natural resources

Economic development

Financing deficit budget

Strong social and economic structure

Crucial economic contingencies

Implement annual development Program

Import financing

Implementation of fiscal policy

To strong national defense

Modernization of agriculture

Facilitate quick industrialization.

Factors Which Influence How Much a Government Can Borrow

• Domestic Savings. If consumers have a high savings ratio, there will be a greater ability for the private sector to buy bonds. • Relative Interest rates. If government bonds pay a relatively high interest rate compared to other investments, then ceteris paribus, it should be easier for the government to borrow. Sometimes, the government can borrow large amounts, even with low interest rates because...
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