International Islamic University Chittagong

BBA Program Course Title: Public Finance Course Instructor: Md.Shahriar Kabir Contact: 01676-634451 / Shahriarkabir1987@Gmail.com

PUBLIC DEBT AND DEFICIT

Public debt is the debt owed by a central government. In the U.S. and other federal states, "government debt" may also refer to the debt of a state or provincial government, municipal or local government.) By contrast, the annual "government deficit" refers to the difference between government receipts and spending in a single year, that is, the increase of debt over a particular year.
Why does Govt borrow? (Reasons for taking public debt)

1. Meeting Development Expenditure E.G Padma Bridge was proposed to be financed by World Bank JICA ADB IDB 120 crore 41 crore 61 crore 14 crore

2. Sudden Emergency Situation ( 1971- Debt from Russia and USA) 3. Ensuring Economic Growth ( Present Growth Rate over 6%) 4. Social Safety Nets Programs VGF 5. Marinating Economic Stability

Sources of Public Debt Government debt in Bangladesh consists of domestic and external debt. External Debt is directly linked to borrowing from bilateral and multilateral institutions for project funding through the Annual Development Programme and budget support systems. Domestic borrowing is generated for financing segments of the budget deficit in addition to intra-year cash flow management. In general, external borrowing is applied to long term commitments while domestic borrowing is required for short, medium and long term commitments.

1. External Debt:
External assistance has played a vital role in the economic development of Bangladesh, assisting in bridging the internal gap (savings-investment gap) and external gap (export-import gap). The costs, risks and maturity structure related to external debt management analysis are important. The cost of external debt is low as the most of the foreign loans received are through the concessional window of IDA, ADB and Japan. The structure of maturity of the external debt of Bangladesh is composed of medium and long term debt with an average grace period of 10 years and a repayment period of 20 years. With the shrinkage of share of grant aid in the external aid package in recent years, the volume of external borrowings is increasing which has resulted in a progressive increase of per capita debt .

Sources of External Debt:

1.World Bank-An international organization dedicated to providing financing, advice and research to developing nations to aid their economic advancement. The World Bank was created at the end of World War II as a result of many European and Asian countries needing financing to fund reconstruction efforts. Created out of the Bretton Woods agreement of 1944, the Bank was successful in providing financing for these devastated countries. Today, the Bank functions as an international organization that attempts to fight poverty by offering developmental assistance to middle and poor-income countries. By giving loans, and offering advice and training in both the private and public sectors, the World Bank aims to eliminate poverty by helping people help themselves.

2. Asian Development Bank Founded in 1966, its headquarters are in Manila, Philippines. The Asian Development Bank's primary mission is to foster growth and cooperation among countries in the Asia-Pacific Region. It has been responsible for a number of major projects in the region, raising capital through the international bond markets. The two largest shareholders of the Asian Development Bank are the United States and Japan. Although the majority of the Bank's members are from the Asia-Pacific region, the industrialized nations are also well represented. Regional development banks usually work in harmony with both the International Monetary Fund and the World Bank in their activities. 3 Japan International Cooperation Agency (JICA) The Japan International Cooperation Agency (JICA) is a governmental agency of Japan which is responsible for the technical cooperation of Japans Official Development Assistance (ODA) programs. There are about 50 overseas offices (including the Philippines) of Japan International Cooperation Agency. Today, JICA is advancing its activities around the pillars of a field-oriented approach and human security that enhance effectiveness, efficiency, and speed. JICAs office here in the Philippines gives life to the organizations principle which is the human resources development, nation-building, and heart-to-heart communication. 4. The Islamic Development Bank (IDB) : It is a multilateral development financing institution located in Jeddah, Saudi Arabia. It was founded in 1973 by the Finance Ministers at the first Organisation of the Islamic Conference (now called the Organisation of Islamic Cooperation). The bank officially began its activities on 20 October 1975, inspired by King Faisal.There are 56 shareholding member states. Mohammed bin Faisal is the former president of the IsDB. On the 22 May 2013, IDB tripled its authorized capital to $150 billion to better serve Muslims in member and non-member countries. The Bank continues to receive the highest credit ratings of AAA by major rating agencies. On the basis of paid-up capital, major shareholders include: Saudi Arabia (26.5%) Libya (10.7%) Iran (9.32%) Egypt (9.22%) Turkey (8.41%) United Arab Emirates (7.54%) Kuwait (7.11%) Pakistan (3.31%) Algeria (3.31%) Indonesia (2.93%)

2.Sources of Domestic Debt:

1. Borrowing From Citizens- Government also uses three to five years term savings certificates (Sanchay potro) and bonds for the purpose of domestic borrowing from the public. Savings certificates include 5-year Bangladesh Sanchay Potro, 3 months Sanchay Potro and Pensioner Sanchay Potro. Bonds include Wage Earners Development Bonds, 3-year Investment bonds, US Dollar Investment Bonds and US Dollar Premium Bonds.

2.Borrowing From the Commercial Banks-For short term borrowing up to 364 days, GoB uses Treasury Bills (T-Bills). T-bills are of multiple maturities, consisting of 28 days, 91 days, 182 days and 364 days. Recent restriction in issuing T-bills up to 364 days has aligned the government securities classification with the international standard. Bangladesh Government Treasury Bonds (BGTB) are being used for borrowing for both medium and long term maturities ranging from 5 years up to 20 years. In order to bring flexibility in T-bond financing, government has introduced bonds with varying maturities and interest rates. 3.Borrowing from the central bank Lender of the last resort Deficit budget is financed from Primary Dealers of Bangladesh Bank . A primary dealer is a bank or securities broker-dealer that may trade directly with the central bank. Such institutions are required to make bids or offers when Bangladesh Bank conducts open market operations, provide information to its open market trading desk, and to participate actively in government treasury securities auctions. These dealers purchase a vast majority of government treasury securities such as T-bills and T-bonds sold at auction and resell them to the public. Primary Dealers of Bangladesh: The twelve PD banks are: 1. Sonali Bank, 2. Janata Bank, 3. Agrani Bank, 4. NCC Bank, 5. Uttara Bank, 6. Southeast Bank, 7. Prime Bank, 8. National Bank, 9. AB Bank, 10. Mercantile Bank, 11. Mutual Trust Bank 12. Jamuna Bank. The three others PD NBFIs are: 13. IPDC, 14. Lanka-Bangla Finance and 15. International Leasing And Financial Services Limited (ILFSL)

The countrys fifteen primary dealer banks and non-banking financial institutions are facing severe liquidity crisis, as they have invested Tk 20,805.63 crore in treasury bills and bonds to facilitate government borrowings. A BB official said that investment of PD banks and NBFIs in the treasury bills and bonds has turned into idle assets as they failed to resell the bills and bond to individual persons or other institutions because of the absence of a secondary bond market.

A large amount of bills and bonds of PDs have become worthless asset causing liquidity pressure among the banks and NBFIs. For this reason, some PD banks and NBFIs applied for withdrawing their names from the list.

Tied Loan A loan that a government makes to a foreign borrower in exchange for the promise that the borrower will use the loan to purchase goods from the lender's country. A tied loan may be mutually beneficial; for example, it may spur business in the lending country while aiding the borrower's economic development. Suggested Readings: On Public Indebtedness: Jyoti Rahman http://archive.thedailystar.net/forum/2011/September/public.htm

Bailout A situation in which a business, individual or government offers money to a failing business or govt In order to prevent the consequences that arise from a business's downfall. Bailouts can take the form of loans, bonds, stocks or cash. They may or may not require reimbursement. The Greek government-debt crisis is one of a number of current European sovereign-debt crises, which was triggered by the arrival of the global economic recession in October 2008, and is believed to have been directly caused by a combination of structural weaknesses of the Greek economy along with a decade long pre-existence of overly high structural deficits and debt-to-GDP levels on public accounts. In October 2011, Eurozone leaders consequently agreed to offer a second 130 billion bailout loan for Greece

Analyzing Public Debt:

1.Look at the absolute and relative size and its growth rate over the years. 2.The absolute size of the debt gives us idea about the magnitude of debt burden of the govt which at the end of the day will have to borne out by the people in the form of increased tax. 3.The growth rate of the public debt shows the ability of the govt to finance its expenditure without incurring debt . An increasing rate of public debt means less available funds for private investments .

4. 'Debt-To-GDP Ratio The ratio of a country's national debt to its gross domestic product (GDP). By comparing what a country owes to what it produces, the debt-to-GDP ratio indicates the country's ability to pay back its debt. Often expressed as a percentage, the ratio can be interpreted as the number of years needed to pay back debt if GDP is dedicated entirely to debt repayment. Economists have not identified a specific debt-to-GDP ratio as being ideal, and instead focus on the sustainability of certain debt levels. If a country can continue to pay interest on its debt without refinancing or harming economic growth, it is generally considered to be stable. A high debt-to-GDP ratio may make it more difficult for a country to pay external debts, and may lead creditors to seek higher interest rates when lending. If a country were unable to pay its debt, it would default, which could cause a panic in the domestic and international markets. The higher the debt-to-GDP ratio, the less likely the country will pay its debt back, and the higher its risk of default. While governments may strive to have low debt-to-GDP ratios, government borrowing may increase in times of war or recession - a macroeconomic strategy attributed to Keynesian economics.