M. Shamsul Haque Ph.D.

It seems the topic is not raised seriously in BD? The City Bank, a commercial bank of good standing recently obtained equity capital from IFC an offshoot of the WB. The bank has sold shares amounting to 5% of its equity capital and also got a loan of $20 million from IFC at low rate convertible to equity capital after some years. The shares were sold at high premium, 80% above face value. Other companies such as the mighty Grameen phone and Rabi, Summit Power and many others also raised money in FX from international lenders.
Reportedly FX reserves with BB have hit $28 bn along with other remittances. One can expect the reserve will soon reach $30 bn if such major inflows come in. Why are these entities obtaining funds from abroad when banks in BD are loaded with excess liquidity? The clear answer is they want to reduce their cost of capital as it is much higher in BD given higher rate of inflation and higher rates of profit on govt savings bonds.
It is a good move by the entities as it will allow banks and mobile cos to offer lending and mobile services at lower costs. These are expectations that will be realized if market conditions are appropriate. Lowering interest rates is not enough for increasing demand for bank loans by the private sector. Currently the private sector in BD is slow in investing due to infrastructure deficits, such as energy, land and skilled human resources.
In a densely populated country shortage of manpower indicates lack of strategicplanning and investment in technical education. We evenhave shortages of trained teachers in schools and colleges.
It was reported in the press that $4.0 bn was paid to India last year alone as outward remittance for human resource employed in BD.
We must also remember that funds in FX must be repaid in the future earnings of FX.Against this situation the government is borrowing heavily from the domestic market through savings bonds at much higher rates than are being offered by commercial banks on FDRs. It was reported in the press that target of total borrowing from such bonds has already reached the maximum amount for the whole year within the first 7 months of the fiscal year. Interest payments on public debt have already reached 12% of budget this fiscal. Collection cost of money by selling bonds should be added with actual profit paid on such bonds.
Opportunity cost of capital to government: insensitive
High amount of interest burden is arising due to financing mega projects such as the PMB and financing equity capital short falls in State Owned Banks.For last two years govt subsidy was not needed for the Petroleum Corporation when price of oil reduced substantial in the international market. Govt has recovered half the amount of subsidy given earlier by keeping domestic prices unchanged. That is a good move by the govt to raise more revenue taking advantage of the market for oil imports.
The GoB should also reduce cost of capital by borrowing from abroad. We missed an opportunity to do so for not obtaining funds from the WB and other donors on the row over corruption allegation by the WB. Funds fromdonor agencies would have reduced cost of capital by a significant proportion. That is borrowing @2% instead of 11% for PMB could have saved millions of Tk. per year for debt servicing on the mega project.
The savings would have allowed govt to take more development projects especially in education and health sectors. It is time that the GoB should negotiate for more and lower cost of funds from donors including the WB. When private companies are getting money from FX sources then GoB should be more sensitive to the cost of funds and increasing borrowing in FX for the next fiscal years. The supply and price of capital are both crucial elements in financial management. Insensitiveness is costly.

The writer is a professor of finance at NUB and ex-VC