Why have rating agencies downgraded Bangladesh's rating?

If I wrote that there is a "deep and dark conspiracy behind this" or "America is pulling the strings from behind the scenes," then this dry article of mine would grab readers' attention. I would be particularly popular among the few senior officials who, in recent times, have been 'defending' everything in unison.

But unfortunately, I cannot do so. While serving as an economist at Bangladesh Bank, I was involved in this credit rating, that is, the work and evaluation process of the rating agencies.  Despite bargaining and haggling like small-town lawyers, we couldn't change their decision. There evaluation was as fixed as a mathematical equation. There is no room for love or war here.

The three major global ratings are Moody's, Standard and Poor's (S&P) and Fitch. In May this year, Moody's downgraded Bangladesh's credit rating from B3 to B1. While all countries strive to steadily improve their credit ratings, this downgrade after a decade does not spell good news for the economy. This is a cautionary note that those running the economy are not running the policies with efficiency.

The Bangladesh Bank governor has explained this downgrade as "geopolitical". He sounds like he has taken on a bit of the foreign minister's burden! After keeping up the Moody's rating for the past 12 years, what sort of geopolitical conspiracy could have gripped Bangladesh? It is unclear whether an economy and finance research organisation has joined any political party or not. As the head of a knowledge-based regulatory agency like the central bank, the governor's politically-tainted remark hardly displays a sense of responsibility.

As part of my work at Bangladesh Bank, in 2015 and 2016 I faced the rating agencies. The governor at the time, Atiur Rahman, sincerely wanted the rating to improve. It was during his term that this rating practice began and Bangladesh won rating recognition in the outside world, much like in the old days when a good student won recognition for a first division in matric.

I tried to delve deep into the analysts of these agencies. While attending an investment summit in Singapore, during my free time I separately talked with senior officials of the three agencies and negotiated too. The upward curve of growth at the time was excellent, which I used for the market branding of Vibrant Bangladesh. The reserve funds were blessed at the time too.

The credit-GDP rate was quite safe at the time too. The taka value and exchange rates were stable. There were no worries about the current account. Political unrest had gone into a kind of hibernation too. The default records were genuine. The finance minister of the time perhaps had not acquired the art of fudging the definition of default to create a 'non-defaulting gentry'. The bank directors back then were not bestowed with any permanent zemandari in the style of Lord Cornwallis.

I highlighted these positives and the rating experts eyed these favourably. But there were two points where I got stuck -- per capital income and revenue incapacity, in other words, a loan-dependent government budget which, in simple terms means, incompetence in revenue collection.

Per capital income growth needs time. But despite economic growth, the capacity or commitment for revenue collection, that is, the revenue-GDP ratio, is on a steady downtrend. This is the main reason for the fall in Bangladesh's rating. The root of this predicament is one factor -- the incentive to appease the wealthy. They don't even like to pay their taxes.

They don't even like to return the bank's money. And certain policymakers lose their night's sleep over catering to this disregard of theirs.  If things continue in this manner, the state's economic rating will fall further. A country increases its revenue-GDP ratio along with its growth. The finance minister has said that the revenue-GDP rate will be pulled up above 20 per cent in the future.

It couldn't be discerned when this would happen. The trend is quite the opposite. In the 2013 fiscal's budget, the revenue was 13.5 per cent of the GDP. Instead of going up, it was ben steadily falling and in the latest budget of 2023, it fell to 9.8 per cent. The falling trend in the budget's capacity alongside the economy's growth, is a lot like the blood's haemoglobin count falling, despite improvement in health. Unless the doctor is changed, the patient's health risk will increase. The rating may fall further.

The S&P recent rating also downgraded Bangladesh's long-term outlook from stable to negative. This is even worse that Moody's because none of us want to see Bangladesh's long-term future in a negative outlook.

The apex business bodies too want to see 2023's 404 billion dollar economy to expand to a trillion dollar economy by 2040, though this is hardly reflected in their plans of action or outline regarding the banking sector and the revenue sector.

S&P's 'positive' outlook means the country's future rating will go up, 'stable' means it has gained stability for the time being, from which the country can go up or down. And 'negative' means the country's rating is likely to fall further in the future. Why has this dark cloud appeared?

The agency has expressed concern over Bangladesh's twin deficit. The combined assault of revenue deficit and trade deficit is alarming for the economy. This twin deficit reared its head in the US economy during the term of President Reagan because the Republican political ideology of appeasing the wealthy had drastically slashed taxes for the rich. Revenue income fell and the government had to resort to bank loans to meet the deficit. This pushed up interest rates. Increasing foreign investment and increasing the value of the local currency or dollar, reduced exports and increased imports and increased the trade deficit further. High trade deficit decreases the government's reserves and increases loans, and once again exacerbates revenue incapacity.

In this manner, twin deficit, like diabetes and heart diseases, aggravated each other. At the end of the nineties, President Clinton freed the US economy from this twin disease and this was a major success of the Democrats.

This time the governor didn't write off S&P's 'negative outlook' as geopolitical. But the Bangladesh Bank (BB) spokesperson claimed that this will not affect the country's economy. Such a comment from a knowledge-based regulatory body hardly reflects professionalism or economic understanding.

The spokesperson also claimed that the fundamentals of the economy were on very strong standing. If these were on such strong standing , why did the 'negative outlook' arise? They didn't give that rating before. The three main factors they mentioned where fall in growth, fall in revenue capacity and reserve deficient. This is not like matchmaking where some may like the prospective bride or some may not. There is mathematical evidence behind this.

A country that had an 8 per cent growth rate just a few years ago, has now plummeted to 6 per cent. Arguments can be offered as to why it fell. Over the past year the revenue capacity part of the GDP had fallen, though it should have risen. Whether this is because of appeasing the wealthy, corruption or the incompetence of the finance ministry, is another discussion.

In 2013, the deficit of a 100 taka budget was Tk 23. In 2023, this deficit rose to 34 taka, though it should have fallen. The 48 billion dollar reserves used for external security fell from August 2021 by almost 50 per cent in the last two years. This is unprecedented in Bangladesh. It was BB that informed us about all this, so how come the 'fundamentals' are on strong standing?

It is a mark of intelligence to admit any weaknesses. This is nothing to be ashamed of. Bangladesh Bank could have said, we do not have control of all factors related to the weaknesses and deficits for which the rating agencies have downgraded our rating, indicating a negative future. Revenue failings, for example, are the ministry's issue. We are actively dealing with the matters that are in our control.

That could have been BB's response which would be true and professional. It is true that BB is trying all out to boost the reserves, though there is lacking in its strategy. BB has broken the ceiling of interest rates, has made the exchange rates somewhat market-based, and has curbed luxury imports. The finance ministry does not even display a fraction of such initiative. When the issue of raising taxes arises, their attention turns to the poor and the middle class. The rich remain unscathed.

There is hardly any scope to laugh off the rating agencies' grading or dismiss it with a casual comment. Foreign investors, after all, will never invest in any country without checking its rating.

All the agencies had warned Sri Lanka. The president paid no heed. Rajapaksa pitched the nation into dire straits and was obliged to step down. Even the US President Obama didn't laughingly ignore S&P when, on 5 August 2011, it downgraded the US rating from the highest possible Triple A to a Double A-Plus. That sent a stir around the world. The opposition took the chance to blame Obama for tarnishing America's pride and honour and call for him to step down.

Three days later President Obama made a speech from the White House. He said that America was still the safest country in the world when it came to credit. However, there were reasons to be concerned about the revenue sector, which we will address and make America even stronger."

President Obama would not have delivered this message to the world if he had the propensity to overlook the issue or write it off as a 'conspiracy' or 'retribution'. He took the matter seriously. Our authorities must also grow a culture of such knowledge-based responses. The seeds of a solution lie in understanding the problem in the first place. The precondition to gathering strength is being able to understand the weakness.

* Dr Biru Paksha Paul is a professor of economics at the State University of New York at Cortland

* This column appeared in the print an online edition of Prothom Alo and has been rewritten for the English edition by Ayesha Kabir