Will the govt borrow in dollars, Yen or Yuan?

While negotiating a new USD 4.5 billion loan programme with the International Monetary Fund (IMF), the government is also exploring alternative ways to borrow in foreign currencies. To this end, Bangladesh is preparing to issue sovereign bonds in international markets for the first time.

According to sources at the Finance Division of the Ministry of Finance, the government is considering issuing bonds in US dollars and euros, as well as exploring the possibility of Samurai bonds in Japanese yen and Panda bonds in Chinese yuan. The euro bond under consideration, however, would be dollar-denominated. The initiative aims to raise the equivalent of US$1 billion through bond issuance to diversify sources of foreign borrowing and create alternative financing options.

To achieve this goal, the government plans to hold discussions with investors or organise roadshows in London, New York and Hong Kong. However, the cost of borrowing through each type of bond will depend on interest rates, maturity, exchange rates and Bangladesh's creditworthiness in the eyes of international investors.

Bonds issued by foreign governments or institutions in Japanese yen in Japan's domestic market are known as Samurai bonds. These allow issuers to raise funds from Japanese investors. Similarly, bonds issued by foreign governments or institutions in Chinese yuan in China's domestic market are called Panda bonds.

Dollar-denominated Eurobonds, meanwhile, are a common means of raising funds by issuing bonds in US dollars in international markets. In this context, the term Eurobond does not mean a bond denominated in the European currency, the euro.

The government plans to appoint US investment bank JPMorgan and Hong Kong-based advisory firm Bridgeworks International to manage the bond issuance. The firms will help determine the bond structure, select legal advisers and trustees, communicate with investors, and coordinate with international credit rating agencies.

According to Finance Division sources, borrowing in dollars requires repayment of both the principal and interest in dollars; borrowing in yen requires repayment in yen, and borrowing in yuan requires repayment in yuan. However, unfavourable exchange rate movements could increase the actual cost of borrowing.

To make the bond issuance more attractive, the government is jointly organising an international conference on public debt with the Asian Development Bank (ADB) in Cox's Bazar on 15–16 November. Titled Public Debt Management in a Changing Global Landscape, the conference will bring together 100 representatives from 30 countries.

Finance and Planning Minister Amir Khasru Mahmud Chowdhury will attend the inaugural session as the chief guest. Other speakers will include Bangladesh Bank Governor Md Mostakur Rahman, Finance Secretary Khairuzzaman Majumder, ADB Country Director Qingfeng Zhang and World Bank Country Director Jean Pesme.

In July, the Finance Division formed a high-level, eight-member interministerial committee. The committee will review the bond amount, currency, maturity, interest rates, market selection and associated risks before submitting its recommendations.

Although the US dollar is the leading option for the proposed bond issuance, the government is also considering raising funds in the currencies of other countries, including the Japanese yen and Chinese yuan.

For instance, during Prime Minister Tarique Rahman's visit to China in June, an understanding was reached to advance plans for issuing Panda bonds denominated in yuan. However, no final decision has been made yet.

Interest rates on loans in Japanese yen and Chinese yuan are currently lower than those on dollar-denominated loans. However, if the dollar strengthens against the yen or yuan by the time Bangladesh has to repay the loan, the borrowing cost could rise. Conversely, if the dollar weakens against those currencies, the cost could fall. The government may therefore consider entering into forward currency exchange contracts to reduce exchange rate risks.

Dollar-denominated bonds offer a closer match between Bangladesh's foreign currency earnings and its debt repayment obligations. A substantial portion of the country's export earnings and remittances comes in dollars. Borrowing in dollars could therefore reduce the need for currency conversion. However, the financial burden could increase if dollar interest rates are high or the taka depreciates against the dollar over the loan's tenure.

Samurai bonds could provide access to Japanese investors, while Panda bonds could open up China's vast capital market. Before proceeding, however, the government will assess the interest rates investors in these markets would demand, the terms they would impose and the costs associated with issuing the bonds.

On 11 November 2019, the International Finance Corporation (IFC), a member of the World Bank Group, issued the first internationally marketed bond denominated in Bangladeshi taka. The bond, worth Tk 800 million, was equivalent to US$9.5 million and was known as the Bangla Bond.

The bond was issued to finance the expansion of PRAN Group's manufacturing operations and product distribution network. It had a three-year maturity and was listed on the London Stock Exchange. Asset management firms specialising in emerging market investments purchased the bond.

Nikhil Rathi, then chief executive officer of the London Stock Exchange and director of international development at London Stock Exchange Group, said the IFC's landmark bond had paved the way for the creation of a global Bangla bond market and increased the international profile of the Bangladeshi taka.

Ahsan Khan Chowdhury, chairman and CEO of PRAN-RFL Group, told Prothom Alo, "At the time, everyone wanted the bond market to open up and expand. We also wanted international experience. As far as I remember, the taka bond was very good. We benefited from it. We would return to that market if necessary."

The advantage of borrowing on commercial terms from international markets is that it creates new sources of financing. This can reduce dependence on multilateral lending agencies and the domestic banking system, opening up additional avenues for borrowing internationally.

Economists, however, have raised questions and concerns about how the money raised through bond issuance would be spent. They say investing in productive projects that generate higher revenue could make debt repayment easier. But if the funds are spent on unproductive sectors, the burden of repaying principal and interest would increase.

According to Finance Division officials, Bangladesh cannot simply choose whichever of the dollar, yen or yuan offers the lowest interest rate. The government must also consider which currency would pose the least repayment risk in the future, which market would offer relatively favourable terms, and how much economic benefit could be generated from the borrowed funds.

Bangladesh first attempted to issue US$500 million in sovereign bonds in international markets in 2011. A seven-member committee was formed in 2012 to pursue the initiative, but the plan made little progress. In 2013, discussions with potential investors in London began to raise another US$500 million. That initiative also failed to advance.

Subsequently, sovereign bond issuance was discussed again in 2014, when the government considered raising US$2 billion, and in 2016, when the proposed amount ranged from US$1 billion to US$2 billion. The idea resurfaced in 2021 and in later years. However, concerns over borrowing risks, market conditions and financing prevented any of these initiatives from progressing.

Asked about the latest initiative, Zahid Hossain, former lead economist at the World Bank's Dhaka office, said, "The government can certainly explore alternative sources of financing. But we need to examine what we are doing with the money raised through bond issuance. Spending the money on projects that are not commercially viable could expose us to risks. The calculation is not particularly complicated: if we issue bonds at an interest rate of 8 per cent to 9 per cent for two or three years and invest the proceeds in a project with a 10-year maturity, it is easy to understand what the outcome would be."

Asked whether he believed the sovereign bond initiative was linked to the prospects of securing a new loan from the IMF, Zahid Hossain said, "I think the government is pursuing both avenues in parallel. Even if that is the case, it is not a negative development. Given the current circumstances, the country needs diversified sources of financing."