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MTDS 2013 v-4 Final-Edited by Tarun Das April 2014
MTDS 2013 v-4 Final-Edited by Tarun Das April 2014
Table of Contents
List of Figures............................................................................................................ 3
List of Tables............................................................................................................. 3
List of Acronyms........................................................................................................ 4
Foreword.................................................................................................................. 5
Acknowledgement....................................................................................................... 6
Executive Summary..................................................................................................... 7
1. Introduction............................................................................................................ 8
2. Scope and Objectives................................................................................................ 8
3. Existing Debt Portfolio.............................................................................................. 8
3.1 External Debt Portfolio......................................................................................... 9
3.2 Domestic Debt Portfolio...................................................................................... 11
3.3 Redemption Profile of the Outstanding Debt Stock.....................................................12
3.4 Cost and Risk of Existing Debt Portfolio.................................................................13
4. Medium Term Macroeconomic Outlook.......................................................................14
4.1 GDP and Investment.......................................................................................... 14
4.2 Fiscal Sector.................................................................................................... 15
4.3 External Sector................................................................................................. 16
4.4 Inflation and Exchange Rate................................................................................. 17
5. Long-term Structural Factors..................................................................................... 18
6. Cost-Risk Analysis of Alternative Debt Management Strategies..........................................19
6.1 Classification of Debt Instruments.........................................................................19
6.2 Description of Shocks......................................................................................... 20
6.3 Description of Strategies..................................................................................... 21
6.4 Cost-risk Indicators: Baseline Scenario...................................................................23
6.5 Cost-risk Indicators: Shock Scenarios.....................................................................24
7. Recommendations.................................................................................................. 25
Glossary................................................................................................................. 27
List of Figures
Figure 1 : Profile of external debt (as on 30.06.2013)..........................................................9
Figure 2 : Profile of domestic debt (as on 30.06.2013).......................................................11
Figure 3 : Redemption Profile of Existing Debt Stock........................................................12
Figure 4 : GDP growth rate and investment (as % of GDP).................................................14
Figure 5 : Revenue and expenditure of the government......................................................15
Figure 6 : Export, import and remittance........................................................................16
Figure 7 : Inflation and exchange rate........................................................................... 17
Figure 8 : Structural change in Bangladesh Economy........................................................18
Figure 9 : Classification of debt instruments (grey boxes indicate the instruments used in MTDS).19
Figure 10: Debt/GDP and interest/GDP ratios..................................................................24
List of Tables
Table 1 : Cost and risk of existing debt portfolio..............................................................13
Table 2 : Strategy 1- Keeping the gross external financing similar.........................................21
Table 3 : Strategy 2- Increase of external non-concessional borrowing plus issue of sovereign bond 22
Table 4 : Strategy 3- Switching the source of finance from domestic to external but reducing external
concessional borrowing.............................................................................................. 22
Table 5 : Strategy 4- Switching maturities of domestic instruments from long/medium to short term.23
Table 6 : Cost-risk indicators under four strategies............................................................24
Table 7 : Nominal debt to GDP- Baseline vs. shock scenarios............................................243
Table 8 : PV of debt to GDP- Baseline vs. shock scenarios..................................................25
Table 9 : Interest payment to GDP- Baseline vs. shock scenarios..........................................25
Table 10: Comparison of cost and risk of various strategies.................................................26
List of Acronyms
ADB
ADF
ATM
ATR
BB
CAB
DMS
DSA
ERD
FABA
FD
FX
FY
GDP
IDA
IMF
LIBOR
FD
MTDS
NSD
OCR
PD
PV
RMG
TDMW
USD
WB
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Foreword
Medium Term Debt Management Strategy (MTDS) helps to identify a sound borrowing mix so that
cost and risk of Borrowing can be minimized. Therefore, the task of preparing an MTDS is a priority
for the government. The MTDS exercise is done based on a template jointly developed by the World
Bank and the IMF.
A group of officials from the debt management offices of Finance Division, Bangladesh Bank,
External Resource Division, National Savings Directorate have effectively carried out this MTDS
exercise and based on the results produced by the template in that exercise they have prepared this
document. The documents can be treated as the foundation to formulate a formal debt management
strategy (DMS) of the Government of Bangladesh.
However, preparation of MTDS is only half of the task. An all-out effort will be required to prepare a
formal DMS. After the DMS is approved by appropriate authorities, it will need to be reviewed
regularly and updated when needed. As the DMS will have implications for debt sustainability
analysis (DSA), the debt managers will also need to conduct DSA incorporating the policies adopted
in the DMS. All these activities will require considerable amount of efforts by all stakeholders for
public debt management. The debt managers at FD, ERD, BB and NSD have been trained to do the
task and they will be assisted by an expert team of consultants from the DMTBF Project to update
MTDS for subsequent years.
Efforts are underway to develop a full fledged Middle Office within TDMW so that in future they take
the responsibility for developing and updating MTDS on regular basis.
( A. R. M. Nazmus Sakib )
Additional Secretary
Treasury and Debt Management Wing
Finance Division, Ministry of Finance
Acknowledgement
The Finance Division, Ministry of Finance has suitably formulated a Medium Term Debt
Management Strategy (MTDS) for Bangladesh. It would not have been possible without the kind
support and help of many individuals and organizations. I would like to extend my sincere thanks to
all of them.
I take this opportunity to express my profound gratitude and deep regard to our guide Mr. A. R. M.
Nazmus Sakib, Additional Secretary, Finance Division, Ministry of Finance for his exemplary
guidance, monitoring and continuous encouragement throughout the preparation of the MTDS. His
stimulating suggestions and encouragement helped to coordinate the task especially in writing this
report.
I also take this opportunity to express a deep sense of gratitude to Mr. Md. Mahiuddin Khan, Joint
Secretary (Ex-Director, Companent-1of Deepening MTBF and Strengthening Financial
Accountability
Project) and his team for providing us with technical support and valuable
information, which helped us in completing this task through various stages.
My thanks and appreciations also go to my colleagues and members of the working group for
preparing MTDS for their constant effort in preparing a well-timed Debt Strategy for Bangladesh.
They not only provided necessary information in their respective fields but also contributed directly
by providing data for the MTDS template. I am grateful for their cooperation during the period of the
assignment.
I am grateful to Bangladesh Bank, National Savings Directorate and External Resources Division for
all their support. Their quick response in nominating officials for the working group for preparing
MTDS is highly observed.
Furthermore I would also like to acknowledge the crucial role of the staff of Finance Division who
provided us with all required equipment and settings to complete the task.
Executive Summary
Formulation of Medium Term Debt Management Strategy (MTDS) is important because MTDS helps
to find out the appropriate borrowing mix required to minimize cost and risk of the debt portfolio. It
also gives clear indication to the financial market about the borrowing plan of the Government which
in turn helps to ensure efficient allocation of financial resources. Keeping these objectives in the front,
different strategies are tested in the MTDS template, jointly developed by the World Bank and IMF, to
find out the best borrowing strategy. The analysis carried out in the MTDS template takes into account
four distinct issues- (1) composition of the existing debt portfolio, (2) terms and condition at which
the existing debt was provided to the government, (3) current and future macroeconomic outlook and
(4) potential strategies based on which the government may determine its mix of debt instruments.
Existing debt portfolio as on 30 June 2013 shows that total debt stock of the Central Government on
that day was USD 50.55 billion of which external debt was USD 22.59 billion (45% of the stock) and
domestic debt was USD 27.96 billion (55% of the stock). More than 95% of the external and the
entire domestic debt were borrowed at fixed rate implying low risk arising out of interest rate
fluctuations. More than 75% of the external debt stock was on concessional terms with long maturity
period. This helps the central government debt portfolio improve in terms of both average time to
maturity (ATM) and average time to refixing (ATR). Rate of interest is also very low on most of the
external debt stock. In the case of domestic debt portfolio, ATM and ATR are both significantly lower
than those of external debt. On the other hand, interest rate is higher for domestic debt than the
external debt. According to the baseline scenario, present value (PV) of total central government debt
to GDP remains below 40% and therefore, it may be said that the central governments debt portfolio
does not indicate any major risk over the medium term.
The medium term macroeconomic outlook shows stable GDP growth rate coupled with moderate
growth rates of exports and wage earners remittance. It appears that the economy has some inherent
strength and resilience independent of the political developments. Therefore, in spite of a number of
political conflicts over the last three decades, the country constantly grew not only in terms of percapita income but also in terms of other social indicators. A look into the structure of the economy
reveals that over the decades, manufacturing sector overtook the agricultural sector.
Considering the backdrop mentioned above, four distinct scenario were tested- (1) what happens if the
mix of debt instruments in the existing debt portfolio remains the same over the medium term with
40% of the gross financing requirements coming from external sources, (2) what happens if the
government ventures for commercial external loans with 40% of the gross financing requirements
coming from external sources, (3) what happens if the government gets 60% of the financing
requirements from external sources when the amount of concessional loans gradually decrease and
amount of bilateral semi-concessional loans gradually increase, (4) what happens if the government
issues more treasury bills reducing issuance of medium and long-term treasury bonds when 60% of
the financing requirements coming from the domestic sources.
Analysis done in the MTDS template over a 3-year horizon shows that none of the strategies pose any
serious risk to the existing debt portfolio. However, strategy 3 seems to be better than the other three
strategies in terms of both cost and risk. The result is so because the rate of interest is very low for the
external borrowings and maturity of the concessional and semi-concessional external loans are usually
long. Therefore, the government may adopt this strategy for the medium term. However, if the amount
of external borrowing increases in terms of the gross financing requirements, as assumed in strategy
3, there is a possibility that the increased inflow of foreign exchange may increase inflationary
pressure. If the inflationary pressure on this account looks excessive, the government may adopt
strategy 1, i.e. keeping the existing borrowing mix the same over the medium term, as a second best
option.
7
1. Introduction
Formulation of a Medium Term Debt management strategy (MTDS) not only helps the government to
assess its options to choose an appropriate borrowing mix to optimize the debt portfolio but also helps
develop capital market by way of revealing to the creditors the plan of borrowing by the government.
World Bank (WB) and the International Monetary Fund (IMF) Missions in Bangladesh during the last
couple of years also highlighted this and stressed that an MTDS needed to be formulated. As initial
part of the process to complete the task, an extensive hands-on training on MTDS, jointly organized
by the WB and the DMTBF Project of the Finance Division (FD), was conducted during August 2013
to build capacity to run the MTDS template developed jointly by the WB and the IMF. This document
elaborates the results achieved out of the template and based on the results suggests choices of
borrowing-mix for the GOB.
Analysis in this section does not include two NSD schemes (USD investment and USD premium bonds) that are also treated as
external debt by the MTDS template.
1
Source: ERD.
10
11
Includes two NSD schemes that are denominated in USD, namely- USD investment bond and USD premium bond. Although these two schemes are
considered domestic debt by the government, MTDS template treats them as external because of their currency denomination.
12
Domestic debt
27,959.0
20.9
Total debt
50,545.4
37.9
12.0
20.93
32.9
1.0
9.7
5.8
ATM (years)
Debt maturing in 1yr (% of total)
ATR (years)
Debt refixing in 1yr (% of total)
12.9
4.8
12.7
8.6
4.5
26.0
4.5
26.0
8.3
16.5
8.1
18.2
95.9
100.0
98.2
FX risk
Refinancing risk
External debt
22,586.4
16.9
44.7
7.0
13
Risk:
Average time to maturity (ATM) has decreased and the amount of debt maturing in
one year has increased in 2013 than in 2010. This can be attributed to shift of billbond ratio from 20-80 to 50-50 in the beginning of FY 2013. The refinancing risk
may be considered low because of substantial loans from concessional external
sources. ATM for external debt has been found to be 12.9 years. On the other hand,
ATM of domestic debt has been found to be 4.5 years. Only 4.8% of the external debt
and 26% of domestic debt is going to mature in one year. The risk related to
movement in the interest rate is low as 98.2% of the total debt portfolio has been
borrowed at fixed interest rate. The size of short term foreign exchange denominated
debt is 7% of official reserve, which indicates that perhaps the government will not
face difficulty servicing it. The size of total foreign currency denominated debt is
44.7%.This is a considerable amount and the government will need to monitor
movements in the exchange rates and also foreign currency debt on regular basis to
avoid any FX related risk.
14
15
Source: FD.
.
16
17
18
Source: FD.
19
6.2Description of Shocks
Exchange rate shocks: The baseline exchange rate scenario assumes that Taka will not depreciate
against USD in FY 2014 and then on an average will depreciate by 2% in FY 2015 and in 2016.Two
shocks have been tested on this baseline exchange rate assumption- (1) 8% additional depreciation of
Taka against USD during the FY 2015 (this is also combined with the interest rate shock to test
strategies with respect to a combo shock), and (2) a stand-alone shock of 15% depreciation of Taka
against USD during the FY 2015.
Shocks to interest rate of external loans: A large part of the external debt of Bangladesh is
concessional and interest rates of these loans are not likely to face any shock in the medium term. The
only shock that may apply is in case of loans with variable interest rate. A part of the interest rate of
variable rate external debt in the central governments debt portfolio is linked to LIBOR. On an
average a 3% shock to LIBOR has been assumed for the period FY 2014 to FY 2016 (2% for FY
2014, 3% for FY 2015, and 4% for FY 16).
Shocks to interest rate of domestic instruments: It has been assumed that interest rates of domestic
debt instruments will not increase more than 5% over the medium term. Therefore, except the
Treasury Bills, a 5% interest rate shock has been assumed on the domestic debt instruments. Treasury
20
Bills are short term instruments and therefore the magnitude of variability of its interest rate is likely
to be low. Considering this, for Treasury Bills a 3% shock has been introduced in the model.
Using the above three shocks, four shock scenarios are tested in the MTDS template- (1) Exchange
rate shock of 15%, (2) Interest rate shock-1 where both LIBOR and domestic rates are increased, (3)
Interest rate shock-2 where only LIBOR is increased, and (4) A combined shock of exchange rate
depreciation (8% depreciation of local currency against USD) and interest rate shock-1.
2014
73.0%
11.0%
4.0%
6.1%
5.5%
0%
2015
73.0%
11.0%
4.0%
6.1%
5.5%
0%
Not used
64.84% 64.84%
4.57% 4.57%
5.02% 5.02%
3.43% 3.43%
2.74% 2.74%
14.84% 14.84%
0.38% 0.38%
4.57% 4.57%
2016
73.0%
11.0%
4.0%
6.1%
5.5%
0%
64.84%
4.57%
5.02%
3.43%
2.74%
14.84%
0.38%
4.57%
Strategy 2-Increase of external non-concessional borrowing plus issue of sovereign bond: Bangladesh
is gradually approaching towards the status of a middle income country. Flow of concessional external
borrowing will start to shrink when the country will achieve that status. Therefore, it is likely that
Bangladesh will have to acquire more of non-concessional external borrowing in future. In addition,
the policymakers of the country are now actively considering the option to float sovereign bond in the
international capital market to raise fund to finance large projects to build physical infrastructure of
the country. This strategy combines these two possibilities and seeks to evaluate the scenario where
non-concessional borrowing increases over time and fresh issuance of sovereign bonds takes place.
The proportion of external to domestic gross financing in this strategy has been assumed to be 40:60.
The ratio of debt instruments in this strategy is shown in the table below.
21
2014
70.0%
11.0%
4.0%
6.1%
8.5%
64.84%
4.57%
5.02%
3.43%
2.74%
14.84%
0.38%
4.57%
2015
54.0%
10.0%
3.0%
6.1%
6.5%
20.0%
Not used
64.84%
4.57%
5.02%
3.43%
2.74%
14.84%
0.38%
4.57%
2016
65.0%
11.0%
4.0%
6.1%
13.5%
64.84%
4.57%
5.02%
3.43%
2.74%
14.84%
0.38%
4.57%
Strategy 3- Switching the source of finance from domestic to external but reducing amount of external
concessional borrowing: This strategy considers the scenario where the government will resort to
proportionately more of external financing than domestic subject to the condition that concessional
borrowing will decrease over the years being replaced by more of bilateral semi-concessional loans.
In this strategy it has been assumed that the proportion of gross financing from external and domestic
sources considered in strategy 1 and in strategy 2 will be reverted, i.e. 60% of the total borrowing will
come from external sources. The ratio of debt instruments in this strategy is shown in the table below.
Table 4: Strategy 3- Switching the source of finance from domestic to external but
reducing external concessional borrowing
Instrument
USD_1
USD_2
USD_3
USD_4
USD_5
USD_6
USD_7
BDT_8
BDT_9
BDT_10
BDT_11
BDT_12
BDT_13
USD_14
BDT_15
22
Strategy 4- Switching maturities of domestic instruments from long/medium to short term: This
strategy considers the scenario where proportions of external debt instruments in strategy 1 remains
the same but the proportion of domestic debt instruments changes in such a way that more of the
domestic debt portfolio become short-term. This scenario is tested to find out what happens if the
government steps up to solve the liquidity problem of the commercial banks that they have been
flagging up to the authorities since the last couple of years. The proportion of external to domestic
gross financing mix in this strategy has been assumed to be 40:60.
USD_1
USD_2
USD_3
USD_4
USD_5
USD_6
USD_7
BDT_8
BDT_9
BDT_10
BDT_11
BDT_12
BDT_13
USD_14
BDT_15
2014
2015
2016
72.0%
11.0%
4.0%
6.0%
5.5%
0%
72.0%
11.0%
4.0%
6.0%
5.5%
0%
Not used
72.0%
11.0%
4.0%
6.0%
5.5%
0%
64.84%
13.00%
5.00%
3.43%
2.00%
10.00%
1.50%
1.73%
64.84%
13.00%
5.00%
3.43%
2.00%
10.00%
1.50%
1.73%
64.84%
13.00%
5.00%
3.43%
2.00%
10.00%
1.50%
1.73%
2013
Current
37.9
32.9
S1
36.9
29.3
As at end FY2016
S2
S3
36.9
36.6
29.9
27.6
5.8
5.4
5.5
4.7
5.4
12.9
4.5
8.3
8.1
18.2
98.2
44.7
7.0
18.1
4.1
11.8
11.5
18.7
97.3
55.7
4.8
17.1
4.1
11.3
11.0
18.7
97.3
55.7
4.8
18.7
4.4
13.7
13.1
16.0
95.3
65.6
4.8
18.0
3.9
11.7
11.4
20.3
97.3
56.1
5.1
S4
36.9
29.3
24
S1
36.9
39.0
37.3
36.9
38.5
2.2
S2
36.9
39.1
37.4
36.9
38.5
2.2
S3
36.6
39.0
36.9
36.6
38.2
2.4
S4
36.9
39.0
37.3
36.9
38.5
2.2
PV of debt to GDP ratio at the end of FY 2016:The debt-GDP ratio improves considerably when PV
amount of debt is taken into account instead of nominal amount. Again, risks of the four shock
scenarios do not seem to differ significantly.
S1
29.3
30.8
29.8
29.5
30.6
1.5
S2
29.9
31.4
30.6
30.2
31.4
1.5
S3
27.6
29.2
28.0
27.8
28.9
1.6
S4
29.3
30.8
29.8
29.4
30.6
1.5
Interest payment to GDP as at the end of FY 2016: Interest payment in terms of GDP does not cross
3% mark in any shock scenario. Historical data show that interest payment in terms of GDP from FY
2007 to FY 2013 was between 2.2% and 2.5%. Therefore, interest payment under the shock scenarios
may be considered benign.
S1
1.8
1.8
2.0
1.8
2.1
0.3
S2
1.8
1.8
2.1
1.8
2.1
0.3
S3
1.5
1.6
1.7
1.5
1.7
0.2
S4
1.8
1.8
2.0
1.8
2.1
0.3
7. Recommendations
Per capita GDP of Bangladesh has been estimated to be USD 1044 at the end of FY 2013 and the
country is gradually approaching towards the status of a middle income country. It is expected that the
window of highly concessional loans might shrink in the long-run and the country might need to
borrow at less concessional terms from external sources. However, risk related to public debt portfolio
is low in Bangladesh and, therefore, Bangladesh has room to opt for different strategies including the
one with borrowing at less concessional terms, or with short maturity.
Out of the four strategies tested in the MTDS template, strategy 3 produces the most favorable results.
Strategy 3 assumes that 60% of total financing requirement will come from external sources. This
strategy shows that getting more financing from external sources, even when the concessional loan
reduces gradually over the medium term, will be most favorable and therefore, the Government may
aim to increase the volume of external loans5. It may be noted that the difference among the strategies
5
25
are small and therefore if the best strategy (strategy-3) is not opted by the Government, it may
maintain existing borrowing mix to achieve the second-best option.
Table 10: Comparison of Ranks of Cost and Risk Indicatiors of Various Strategies
(1 indicates the best rank and 4 indicates the worst)
Indicator
Cost (implied interest rate)
ATM
Short-term foreign exchange debt as % of reserve
Debt/ GDP with 15% FX shock
Debt/GDP with combined shock of interest and
exchange rate
Interest payment/GDP with 15% FX shock
Interest payment/GDP with combined shock of interest
and exchange rate
Strategy-1
2
4
1
1
2
2
2
Rank
Strategy-2 Strategy-3
3
1
2
1
1
1
2
1
2
1
2
2
1
1
Strategy-4
2
3
2
1
2
2
2
26
Glossary
Average time to maturity (ATM):
Weighted average time to refix interest rate of a debt portfolio. If the debt
portfolio consists of all fixed rate debt then ATR will be equal to ATM.
However, if the portfolio consists of some variable rate loans, then the ATR
will differ from ATM.
Example: In the above example, if the third loan of USD 300 is issued with
(2%+ 6 months LIBOR) then it will be treated as variable rate debt. In this
case, although this loan has a maturity of 10 years, the interest rate is
considered revised in every 6 months. Therefore, the ATR will be:
((100X40 + 200X20 + 300X0.5)/(100+200+300) = 13.58 years.
Cost of debt:
The extent to which the debt portfolio is exposed to exchange rate shock. It
is the share of foreign currency denominated debt in the total debt stock.
Generally, domestic debt is denominated in local currency, therefore there
is no foreign exchange risk for domestic debt denominated in local
currency.
Refinancing risk:
27