Government debt skyrocketed in the first half of the current calendar year, fueled by a sharp increase in its borrowing, a US consulting firm found.
Government borrowing rose 3.5 percentage points to 37.8% of GDP between January and June compared to the same period a year earlier, according to the Institute of International Finance, a financial intelligence agency based in Washington.
Household debt jumped to 11 percent of gross domestic product in the first half of the year from 10.5 percent in the same period last year.
Financial sector debt increased to 2.3 percent of GDP during the period under review from 2.1 percent in the same period a year earlier. Financial institutions issue debt instruments, mainly junior bonds, to fill their capital gap.
Debt of non-financial corporations, however, edged down to 35 percent of GDP, from 35.8 percent during the same period last year.
Economists attributed the increase in government debt to weak revenue mobilization and slowing economic activity.
They said the COVID-19 pandemic continues to hit the national economy, resulting in lower revenues.
Many people were unemployed or saw their incomes plummet as a result of the outbreak of the deadly virus.
Dr Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh (PRI), a private think tank, told FE that the main reason for rising public debt is declining tax collection.
“Revenue mobilization has been much lower over the past six months than at the same time last year. That was the main reason,” said Dr Mansur.
He said the shortfall would worsen the situation as the government paid off its debt through taxes.
Another reason is the implementation of large projects, mainly financed by foreign loans.
“Large projects under construction have no financial returns, so the debt will rise more and its rate will be the fastest shortly.”
Dr Mustafa K. Mujeri, executive director of the Institute for Inclusive Finance and Development, told FE it was high time the government took prudent debt measures; otherwise, it can prove to be a big burden on the nation.
He said Bangladesh’s external debt is increasing as many private companies have borrowed from foreign sources.
He stressed the need for proper and efficient use of debt.
“There have been cases of debt abuse in the past,” he said, warning that the failure to service the debt is degrading the country’s credit ratings.
Dr Mujeri, who had previously been chief economist at the Bangladesh Bank, said debt sustainability depends on the effective implementation of projects and the proper use of debt.
Dr Mirza Azizul Islam, a former financial adviser, told FE debt was on an uptrend, fueled by the COVID situation.
He said central banks around the world are pushing for “quantitative easing” and expansionary monetary policies to support the deficit.
He said once the pandemic subsides, the situation could improve provided the tax administration increases collection.