Is Foreign Debt a Problem for Bangladesh? Justify the Implication on Economy. Report of FIN-5104: International Financial Management
Submitted To
Professor Dr. Md. Abu Misir Chairman, Department of Finance, Faculty of Business Studies Jagannath University, Dhaka
Submitted By
Sultan Ahmed Khan Representative of the group Epimetheus MBA 3rd Batch Department of Finance, Faculty of Business Studies Jagannath University, Dhaka.
Group Name: Epimetheus Name of the members of the group:
Serial No:
Name of the members of the group
Roll Number
01
Sultan Ahmed Khan
091597
02
Md. Anik Mahmud
091636
03
Md. Mehedi Hasan
091590
04
Sharjil Ahmed
091623
05
Protiva Talukder
091602
06
Sakhawat Hosain Chowdhury
091574
07
Mohammad Didarul Islam Khan
091613
08
Mohammad Mahmudul Hasan
091534
Group Representative: Sultan Ahmed Khan.
Contact
:
[email protected]
Web
: https://epimetheus.yolasite.com
May 7, 2014 The Course Instructor,
Professor Dr. Md. Abu Misir, Chairman Department of Finance, Jagannath University, Dhaka. Sub: Thanks giving letter to the respective faculty member.
Sir, We are the student of Department of Finance (3rd batch) of Jagannath University, Dhaka & also from the group named “Epimetheus”. We are very much enthusiastic about our presentation. We are really happy to have such a presentation of challenging and interesting like this presentation & also thanks to you for making us worthy for corporate. Our presentation topic is “Is Foreign Debt a Problem for Bangladesh? Justify the Implication on Economy”. We have learned many things from this topic which will help us in future to conduct as an official in the organization. There were some obstacles we have faced at the time of collecting data about our topic. But we have overcome all the obstacles by the endeavor effort by each member of our group and tried our best to give an overview of our topic. We the group “Epimetheus” tried our best to make this presentation attractive, impeccable, interesting, informative and enjoyable by the help of electronic and print media in association with our honorable teacher, mentor, counselor, instructor and advocate “Professor Dr. Md. Abu Misir”. We are really grateful to him. We had limitations at the time preparing presentation. So mistakes may occur in our demonstration of our presentation. We hope that, you will exempt our mistakes.
Thanking in anticipation, Yours Fidel,
Sultan Ahmed Khan Group Representative,
Group-“Epimetheus” MBA 3rd Batch Department of Finance Jagannath University,Dhaka.
First of all we would like to thank the Almighty for giving us the strength, and the aptitude to complete this report within due time. We are deeply indebted to our course teacher, mentor, and counselor, Professor Dr. Md. Abu Misir for assigning us such an interesting topic named “Is Foreign Debt a Problem for Bangladesh? Justify the Implication on Economy”. We also express the depth of my appreciation to our honorable course teacher for his suggestion and guidelines, which helped us in completing this report.
External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or citizens of that country. The main indicator of foreign debt is foreign debt to GDP and foreign debt to GNI. In % of GNI it represents a quite domination of foreign debt over our income which represents a high proportion of debt service cutting our income. The rate is getting reduced over a few years which is a good decision sign for the total income. Total reserve % of total external debt in Bangladesh was last measured at 48.81 in 2012. In case of % of GDP from a low of about 3% of GDP in the early 1990s, it has increased to 20% of the GDP in 2007-08. It represents the growth of percentage of foreign debt over GDP which is an alarming notification. If it gets more than foreign power will manipulate our policies and govt.
In case of exchange rate, a higher level of foreign currency makes a country's exports more expensive and imports cheaper in foreign markets; a lower currency makes a country's exports cheaper and its imports more expensive in foreign markets. In case of debt, large scale of foreign debt kills the potential industry of our country and reduces the power of making policies. Foreign debt is very harmful for the national banking industry and especially in this situation where it is forecast that bank industry going to collapse in our country. In case of GDP, it is growing, so will business, jobs and personal income
Last of all foreign debt can be both curse & blessing for us. It will be curse if we can’t control it over our growth. Huge amount of grants/aid causes to loss control of the government over national policies. Beside this it will be blessing if we can use it appropriately when it is necessary for the country. Along with, country should reduce its dependency over the foreign debt because it creates inflation in the market & at the time of payoff get dollar with cheaper rate.
Index
Page no
Executive Summary Introduction Introduction
i
Rational of the study
i
Objective of the study
I
Scope of the study
ii
Methodology of the study
ii
Limitations of the study
ii
Body of the term paper Foreign Aid
1
Reasons Donor Countries DO Give Aid
2
Distribution of Foreign Aid
3
Forms of Foreign Aid
4
Understanding Foreign Aid
5
Sources of Foreign Aid
7
Factors Affected by Foreign Debt
8
Historical Analysis
9
Statistical Analysis
13
Findings
25
Foreign Aid Foreign aid refers to the transfer of goods, capital or services from an international organization or a country to offer some benefits or help to the recipient country. This aid comes in several forms for example; military, emergency humanitarian or economic aid. It is aimed at providing help in terms of crisis or disaster. Foreign aid in economic terms is served basically for infrastructural development. There are four types of foreign aid mostly practiced and Bangladesh get all four types of aid as per its need. Those are given below:
Foreign Aid
Bilateral aid
Multilateral aid
Tied aid
Project aid
Bilateral aid – when the capital flows from a developed nation to a developing nation. Multilateral aid – when the capital flows to developing nations from a world agency such as the World Bank. Tied aid – when funds are used to buy imports from the donor country or for a specific project. Project aid – when the funds are used to finance a particular project.
Reasons Donor Countries DO Give Aid Donor countries generally give aid because it is in their own interest to do so. Undoubtedly some aid is given with humanitarian motives in mind; however, most foreign aid is given for variety of political, strategic and economic reasons that benefit the donor countries in the longer term.
Political Reasons Official Development Assistance (ODA) is often designed to achieve political objectives other than increasing prosperity in recipient countries. In the United States, national security considerations often influence foreign-aid decisions. During the 1980s, Cold War considerations caused a sharp escalation in U.S. aid to Central America and the Caribbean even, as aid to Africa declined. More recently concern over Middle East instability has made Israel, Egypt, and Jordan the largest recipients of U.S. foreign aid. Other donors have their own objectives. For many years Sweden targeted aid toward 'progressive' societies. In France, governments have sought to promote the maintenance and spread of French culture and the French language as well as the preservation of French influence. In Japan, aid has historically flowed disproportionately to neighboring Asian nations in which Japan has the greatest commercial interests, and has often been tied to purchases of Japanese products.
Economic Reasons Official Development Assistance (ODA) is often designed to achieve economic objectives rather than political reasons. Filling Gaps Self-interest of Donor Country
Filling the gaps Providing aid to Less Developed Countries (LDCs) ensures that the savings gap and the foreign exchange gap are filled. For domestic investment to take place domestic savings must also occur. If these are absent then a flow of development assistance can help finance investment projects. Likewise, there should also be technical assistance to ensure that the capital is efficiently used. For some economists, development is synonymous with the creation of a sizable, modern manufacturing sector, as opposed to reliance on exports of primary products. The international product life cycle theory suggests that as countries industrialize they off-load more labor-intensive industries to countries in earlier stages of industrialization. This theory provides some support for the notion that the development of manufacturing industries frequently accompanies increasing prosperity in the developing world. However, others argue that aid for capital investment can be anti-developmental as more capital intensive production in countries may contribute to increasing levels of unemployed and consequential poverty.
An inflow of foreign exchange may also enable LDCs to import foreign capital considered necessary for economic growth and development. In the case of Zambia, where there have been considerable shortages of foreign exchange earning due to falling commodity prices and debt servicing, inflows of foreign exchange through aid have enabled the capital investment needed to maintain the copper industry. It should also be mentioned however, that debt relief would be more effective than aid in reducing the foreign exchange gap.
Self Interest of Donor Countries Less and less development assistance is given in the form of outright grants and increasingly interest is being charged albeit at concessionary rates. Tied aid is also becoming more prevalent. Tied aid occurs where conditions are place by the donor upon the recipient about what they use the aid assistance for. Usually the recipients are required to purchase the exports of the donors. This may be a more expensive option than purchasing the capital from sources other than the donors. Tied aid may help fill savings and foreign exchange gaps; however, it may not always be in the best interests of the recipient country.
Distribution of Foreign Aid Grant ($ in Million)
Purpose
Loan ($ in Million)
Total ($ in Million)
Food Aid
5,997.883
762.557
6,760.440
Commodity Aid
5,650.833
5,257.007
10,907.840
Project Aid & Budget Support
13012.642
28,630.735
41,643.377
Total
24,661.358
34,650.299
59,311.657
Chart: Foreign Aid to Bangladesh (1971/72-2012/13)
Forms of Foreign Aid The term 'Foreign Aid' is broad one. It refers to any money or resources that are transferred from one country to another without expecting full repayment. Official Development Assistance (ODA) includes all grants and concessional or soft loans that are intended to transfer resources from More Developed Countries (MDCs) to Less Developed Countries (LDCs) with the intention of fostering economic development. Most studies consider concessional loans as those that have a grant element at 25% or more. It does not include commercial or non-concessional loans, private foreign direct investment such as inward investment by multilateral corporations, nor does it include preferential tariff reductions offered by MDCs to LDCs enabling them easy access for their exports into the markets of the MDCs. To be considered foreign aid a flow of funds should meet two simple criteria: 1. It should be non-commercial from the donors point of view 2. It should be concessional so that the interest and repayment is less stringent or softer than commercial terms. Foreign aid includes all grants and concessional or soft loans that are intended to transfer resources from MDCs to LDCs with the intention of fostering economic development. Most studies consider concessional loans are those that have a grant element at 25% or more. Foreign aid can be divided into Public Development Assistance and Private Development Assistance:
Foreign Aid
Public or Official Development Assistance
Individual government assistance, known as bilateral aid
Multilateral donor agencies such as the IMF and World Banks offering multilateral aid
Private Development Assistance
Private non-governmental organizations (NGOs) such as the Red Cross, Oxfam
Chart: Forms of Foreign Aid
A considerable amount of foreign aid is tied aid. Here the grants or concessionary loans have conditions laid down by the donor country about how the money should be used. Tied aid by source means that the recipient country receiving the aid must spend it on the exports of the
donor country. Tied aid by project means that the donor country requires the recipient country to spend it on a specific project such a road or a dam. Often this might be to the commercial or economic benefit of the firms in the donor country. For example their engineers might be the designers of the project.
Understanding Foreign debt External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or citizens of that country. The debt includes money owed to private commercial banks, other governments, or international financial institutions such as the International Monetary Fund (IMF) and World Bank. One relative measurement of foreign debt safety is that foreign exchange reserves should not be less than outstanding short-term foreign debts. Governments can lower their foreign debts by rescheduling their obligations or simply by paying them off. Total reserve % of total external debt in Bangladesh was last measured at 48.81 in 2012. In our country it is less then half which shows the poor scenario of our country. The main indicator of foreign debt is foreign debt to GDP and foreign debt to GNI. External debt percentage of Gross national income. Year
% of GNI
Year
% of GNI
Year
% of GNI
1973
6.15
1986
36.65
1999
34.79
1974
10.08
1987
39.98
2000
31.92
1975
8.67
1988
39.12
2001
30.69
1976
19.8
1989
38.39
2002
33.43
1977
24.31
1990
39.94
2003
33.56
1978
21.27
1991
41.08
2004
33.02
1979
19.07
1992
41.32
2005
29.12
1980
21.59
1993
41.43
2006
30.49
1981
20.94
1994
44.46
2007
29.07
1982
26.84
1995
40.22
2008
26.5
1983
30.26
1996
36.2
2009
25.25
1984
27.43
1997
32.62
2010
23.48
1985
29.69
1998
34.05
2011
22.58
It represents a quite domination of foreign debt over our income which represents a high proportion of debt service cutting our income. The rate is getting reduced over a few years which is a good decision sign for the total income. It represents dependency over policy making.
Foreign Debt Percentage of GDP
Total debt as percent of GDP has been on a relatively continuous upward track until 1993-94, when it reached a peak of 53.5% of GDP. It fell to 42.8% in 1997-98, but increased in the following year to average around 50%. It means debt has a productive contribution to GDP also showing dependency on it. Foreign debt as percent of GDP closely mirrored the developments in total debt until the mid 1990s. Since then, an increasing share of the total debt has been finance by domestic debt. From a low of about 3% of GDP in the early 1990s, it has increased to 20% of the GDP in 2007-08. It represents the growth of percentage of foreign debt over GDP which is an alarming notification. If it gets more then foreign power will manipulate our policies and govt. In recent years, the share of foreign assistance was been shrinking while that of domestic debt is on the increase. It is a praiseworthy policy taken by the Govt. but Padma Bridge project will change the situation.
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