Debt storm rising?
I’ve been looking at some data recently, and thought it would be a good idea to share some charts.
The first chart shows government’s domestic debt — simply debt from hereon.
Debt had been rising since 2005-06, and when the current government assumed office, it stood at about 520 billion taka. For the next two years, the government kept a lid on debt. Then in 2011, it started rising rather quickly. By June, debt stood at over 730 billion taka. By October, it had risen to nearly 880 billion taka.
What’s causing the explosion in debt? I’ll tackle that in a follow up post. Over the fold, some implications of this debt surge.
Even though debt started rising under the last BNP government, it’s interesting that Saifur Rahman kept loans from the banking sector roughly steady — the increase in debt under him was pretty much from the Bangladesh Bank. The 1/11 regime followed a different tack, halting loans from the Bangladesh Bank and borrowing from the banking sector. This trend continued under the current government. And in the past few months, Mr Muhith has been borrowing heavily from both the Bangladesh Bank and the banking sector.
What happens when government borrows heavily? In the first instance, government borrowing crowds out loans to the private sector. This chart, showing the year ended growth in bank credit to government and private sector, suggests that this is exactly what is happening.
During the summer of 2011, credit to government was rising by about 35% a year, while credit to private sector was rising by about 30% a year. In the year to October, credit to government was rising by 60% while growth in credit to the private sector slowed to about 20%.
If credit growth to private sector slows further, it will dampen investment. And anyone remotely following the Bangladeshi economy knows that a lot more investment is needed.
Secondly, borrowing from the Bangladesh Bank essentially means the central bank printing money. And when money supply grows significantly faster than the growth in the economy, inflation follows. There are two channels through which inflation is ignited. Directly, it’s a case of too much money chasing too few goods. Indirectly, increase in the supply of domestic currency can cause its price to fall relative to other currencies — that is, it can depreciate — leading to increase in the cost of imports.
In case of Bangladesh, both might be happening.
That inflation is high and rising is well known. Let me point to the non-food inflation in the chart below.
The inflationary episodes of 2007 and 2008 were driven mainly by food prices. Even in the first half of 2011, inflation shot up because of food prices. But more recently, it’s the non-food prices that are leading the charge. Interestingly, food price inflation was 12.5% in the year to November — uncomfortably high, but not as high as 14.4% in the year to April. Meanwhile, non-food inflation rose from 4% in the year to April to 10.2% in the year to November.
Incidentally, since April, taka has depreciated by about 5% against US dollar (which affects the non-food import) while appreciating by about 5% against the Indian rupee (which plays a bigger role in food prices).
Depreciation of taka is not all bad news. It helps the exporters, for example. And it’s not the case that the authorities are helpless. While foreign currency reserves have fallen, Bangladesh Bank still holds nearly three times as much in reserve as it did five years ago — as shown in the chart below.
So it seems that there is some ammunition against an imminent crisis. And to be sure, it’s not clear that a crisis is iminent.
But anyone following the world economy in the past four years would know that nasty things can happen very quickly. I am more convinced than ever that the central bank is being run by the wrong man. The rest of the economic team is not much better.
The outlook for 2012 might be good, but looking at these charts, I’m getting quite nervous.