Mukti

Debt storm rising?

Posted in economics by jrahman on December 15, 2011

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.

18 Responses

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  1. kgazi said, on December 15, 2011 at 11:01 am

    The “wrong man” in this economic failure is the one & only Finance Minister Mr. AMA Muhith. Whether the failed policy are his own, or they are being dictated by Hasina – bottomline is – current economy is a total disaster, attributable to AL bankruptcy of economics.

    A Minister of finance is held responsible for failure of fiscal policy, bank credits, stock market, inflation, and national finance. Lets call a spade a spade – this (Hasina) regime’s gross failure in economics has now been proven once again, in case it was not obvious in 1996-2001.

    So, lets not beat about the bush. Hasina and her team’s finance & economy has ruined whatever shoestring there was left for the nation to hang on – and the pursuit of crime & corruption has topped all other lists.

    • Rumi said, on December 16, 2011 at 1:23 am

      And this is the first time in history of Bangladesh when the Bangladesh Bank Governor is a political appintee. He is in the position more because of his partisan sycophant activities than his credibility and quality as a banker.

      • kgazi said, on December 18, 2011 at 1:30 am

        Are we basically witnessing daylight BANK Robbery of Bdesh Bank with ‘awami’ Governor, awami FM and awami PM – without the existence of national ‘checks & balance’ of Un-accountable money pilfering, in the size of 10’s of $billions of dollars ? Thats a crafty way to siphon money from national banks in the name of “country’s economics” – when really the money is going to awami ministers pockets ?!

  2. tacit said, on December 16, 2011 at 11:51 pm

    1. When making the point about foreign currency reserves being thrice what it was five years ago, it would be helpful to have some corresponding chart of figure about total imports. I mean if the amount of imports have also increased (which it has, although I don’t know if it has increased threefold), then this increase in FC would be put in better context.

    2. Between Nov’08 and Nov’09, our foreign reserves seem to have exploded, doubling from $ 5 bn to 10 bn. Am I reading the data wrong? What happened in this one year?

  3. dhakashohor said, on December 17, 2011 at 2:49 am

    “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.”

    I found this part a bit convoluted to be honest. It could be that I’m being slow – so help me work through this.

    From the charts it appears that borrowing from BB is just about a little more than it was in 08. So that channel for inflation might be probable. but possibly not the entire story. Maybe you should start considering changes elsewhere. e.g the role of the banking sector itself.

    Suppose back in the day there were only so many credit worthy private sector actors willing to take loans – credit growth never did exceed 30%. So that implies a certain number for the money multiplier from the base. Now, the government seems hungry for credit and loan growth to the government has been unprecedented – and no doubt this is being seen as safe debt which itself has echoes of 2008 – which means that the multiplier has shifted. Is this what you meant to say? Or am I missing something completely?

    Two interesting questions for me: How are the private sector banks funding this? What are their leverage ratios at the moment?

    Oh and welcome back!🙂

  4. […] Mukti is alarmed by the steep rise of Bangladesh government’s domestic debt which is triggering downfall of credit growth in the private sector thus stopping investment. Tweet Mukti is alarmed by the steep rise of Bangladesh government’s domestic debt which is triggering downfall of credit growth in the private sector thus stopping investment. […]

  5. jrahman said, on December 19, 2011 at 9:08 am

    DS, there are many possible channels through which inflation is affected. The one you describe is very likely to be one of them. No idea what the leverage ratios are.

    Tacit, good questions re: reserves — a separate post will follow.

    Rumi bhai, you’d recall that when Atiur Rahman was appointed, I was the only person criticising it. At that time, even anti-AL folks said ‘well, at least he is an honest guy’. And he is an honest guy, a gentleman, sincere in person, inspirational personal history. But all irrelevant because he is not qualified for the job.

    Goes to show that competence is extremely important, and let’s not get distracted by the hyperventilation about corruption that we hear all the time.

    • kgazi said, on December 19, 2011 at 12:43 pm

      Are we missing the point that final word is made by the PM, FM, and absolutely nothing by the BB Governer ?? Its irrelevant whether the Governor is honest, qualified or inept – the ultimate policy is branded by the awami politburo !! BB govner is just a nonir putul for the ministry of finance.

      And corruption is equally relevant in the Ministry of Finance. Wonderful BD policies like “black money whitening” are symbols of hard-core corruption, but can any BB govner change that poicy? NO
      No amount of govner’s honesty, qualification or skill can take that policy away from the FM / PM’s office.

  6. On reserves « Mukti said, on December 21, 2011 at 12:19 pm

    […] post tries to answer the questions Tacit asked about […]

  7. Sam said, on December 29, 2011 at 10:12 am

    Hello everyone ,
    Me not being a economist but a simple living person in dhaka have a different view , the taka has fallen against usd more than 12% today as of 28th dec 2011 , now I feel is the challenge taken by the government it self , it is not the question of who is political or who is qualified to run economy . The massive budget is the main culprit and when you target more than you have leads to the present situation , I do blame the people of my country frankly all just wants free education and jobs and better city or business life but let’s be practical all this can happen when you have a stable government with proper control and most of all the government needs to have a certain amount of money to manage the country , now what is happening to Bangladesh is simple we are building castles without cement !!! So taka has fallen and will fall more !!! Lastly I would like to point out just look and bangladesh , development is surely there but the percentage of people paying tax to government is too poor , if people paid proper taxes than we would be in much better positions today I blame us the citizens who just think of making money at the expense of others , frankly to build a growing economy taxes must be paid by people to support any government . Thanks for reading .

    • kgazi said, on January 1, 2012 at 1:47 am

      “The massive budget is the main culprit ” who created this budget?
      “we are building castles without cement ” who controls building, permits, zones, codes, planning?
      ” % of people paying tax to government is too poor” who controls tax collection ?

      The answer to all above questions is THE GOVT , not the people. Govt’s sole responsibility is to implement budgets, building codes, and tax collection. And for that purpose $50 billion dollars budget every year are in their hands, so that they can develop and provide basic needs to the nation.

      But why does govt fail ? Because nobody blames them. They steal and abuse 50% of the national budget (corruption $25 billion per year ) , while fooling the people with 1971 history and bogus democracy.

    • jrahman said, on January 8, 2012 at 9:28 am

      Sam, you do touch on something important. The government will have to collect more in taxes if we are to achieve fast paced growth. The good news is that tax-to-GDP ratio is rising, and NBR is actually doing a reasonable job of reforming itself. Also, there is more awareness among the public about taxes. The bad news is that this is not enough.

      However, the current exchange rate worries doesn’t appear to be about taxes — see the more recent post.

  8. […] noted earlier, domestic debt owed by the government of Bangladesh shot up in 2011.  The popular story is that this is caused by […]

  9. Twin deficits in Bangladesh « Mukti said, on April 10, 2012 at 12:57 pm

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  10. What does the Fund say? « Mukti said, on July 14, 2012 at 7:16 am

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  11. […] earlier, and actions then would have spared us from the volatility of 2011).  The Bangladesh Bank printed money to pay for the government’s quick rental power plants.  The imported fuels needed for these […]

  12. […]  In late 2011, when the full fiscal cost of the rental power plants was becoming apparent, the government resorted to borrowing, including from the Bangladesh Bank (Chart 3) — that is, printing money.  This directly pushed […]

  13. […]  In late 2011, when the full fiscal cost of the rental power plants was becoming apparent, the government resorted to borrowing, including from the Bangladesh Bank (Chart 3) — that is, printing money.  This directly […]


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