Govt revives talk of sovereign bond

Bangladesh is once again considering issuing a sovereign bond to raise funds from international investors, but economists warn the country may not yet be ready, citing weak macroeconomic indicators, governance shortcomings and the risk of costly borrowing.

Last month, Finance Minister Amir Khosru Mahmud Chowdhury chaired a meeting with the Bangladesh Bank governor and senior officials from the Finance Division and the Economic Relations Division to discuss the proposal.

Tap Here to Add The Daily Star As A Trusted Source

The meeting decided to form an inter-ministerial committee to assess the feasibility of issuing a sovereign bond and submit recommendations, a finance ministry official told The Daily Star, adding that the initiative remains at an early stage.

Officials also agreed to incorporate technical discussion of a sovereign bond into the upcoming medium-term debt strategy, annual borrowing plan and debt sustainability analysis to signal Bangladesh’s intentions to investors.

A Finance Division presentation at the meeting outlined the rationale, potential benefits and key risks, stressing that such borrowing would only be sustainable if project returns exceed the bond’s total cost, including coupon payments, spreads and fees.

Officials discussed two options: a conventional dollar-denominated Eurobond and a renminbi-denominated Panda Bond issued in China’s domestic market.

An ERD official said Sri Lanka and Pakistan have already tapped international sovereign bond markets and suggested Bangladesh could begin building its own presence, although the IMF may have reservations.

He added that China has expressed willingness to support Bangladesh if it chooses the Panda Bond route.

Bangladesh Bank officials proposed starting cautiously with a bond of about $50 million to gauge investor appetite while limiting risk.

A Finance Division official acknowledged the ministry’s earlier reluctance to pursue sovereign bonds because of the risks involved.

However, current economic conditions warrant revisiting the idea, he added, stressing that any issuance should wait until Bangladesh’s sovereign credit rating improves enough to secure favourable borrowing costs.

Minister Khosru expressed optimism about Bangladesh’s eventual entry into international capital markets and said the initiative could complement a proposed Hong Kong-based Bangladesh Investment Fund aimed at attracting private equity investment.

Attempts to explore issuing sovereign bonds in 2013 and 2021 under the Awami League government were shelved by the finance ministry.

A similar proposal under the interim government also stalled largely because of reservations from then finance adviser Salehuddin Ahmed.

Salehuddin said there had been no pressing need for such borrowing at the time. “There was no major fiscal pressure, and most planned projects were still in the pipeline,” he told The Daily Star.

He said any decision must be preceded by a thorough assessment of debt sustainability, including debt-to-GDP ratios, foreign exchange reserves, external debt exposure, as well as the country’s income level, economic capacity and external vulnerabilities.

He recalled that a similar proposal had also failed to gain traction during Saifur Rahman’s tenure as finance minister, when he was Bangladesh Bank governor.

“Sovereign bonds should not be issued simply out of a need for money,” he said.

THE SRI LANKA LESSON

Salehuddin cited Sri Lanka as a cautionary example, warning that issuing sovereign bonds without sufficient analysis can expose a country to significant risks.

He said countries such as India make such decisions only after carefully assessing the sustainability of their external debt, an exercise he said he had started for Bangladesh but was never completed.

Zahid Hussain, a former lead economist at the World Bank’s Dhaka office, was even more sceptical.

“I don’t think we’re ready now,” he said.

He also pointed to Sri Lanka’s debt crisis as evidence of the dangers. Heavy repayments on international sovereign bonds worsened the country’s external financing pressures and contributed to a severe foreign exchange crisis.

“Sri Lanka is the one that sank on sovereign bonds,” Zahid said.

Bangladesh’s weak macroeconomic fundamentals and credit rating would translate into higher borrowing costs because investors demand a greater risk premium from countries with lower ratings, he said.

In May, Fitch Ratings affirmed Bangladesh’s issuer default rating at “B+” but revised the outlook on its long-term rating to “Negative” from “Stable”, citing macroeconomic vulnerabilities linked to the Middle East conflict.

Given current conditions, Zahid estimated Bangladesh would likely have to borrow at 7-8 percent in dollar terms, creating an even heavier repayment burden when converted into taka.

By comparison, Sri Lanka borrowed at about 5 percent when global interest rates were much lower, yet still ended up in crisis.

LAUNDERING, CORRUPTION RISKS

For Zahid, however, the greater concern is how the money would be used.

Weak revenue mobilisation, poor governance in public spending and limited project implementation capacity mean sovereign bond proceeds could be wasted or even siphoned off.

“Without fixing expenditure management problems, bond issuance will be risky,” Zahid said.

He argued that sovereign bond proceeds should be used only for commercially viable projects capable of generating enough revenue to service the debt.

For example, roads financed through bond proceeds should have toll systems, while water treatment plants should charge user fees.

“You cannot build a primary school with a commercial sovereign bond,” Zahid said. “That loan doesn’t generate the direct income needed to repay it.”

In his view, Bangladesh still lacks the institutional capacity to consistently design and implement projects that generate returns exceeding financing costs.

Strengthening public expenditure management, revenue collection, project selection and debt management must come first, he said. Otherwise, sovereign bonds could deepen Bangladesh’s debt vulnerabilities instead of easing its financing constraints.