Is foreign Debt a Problem for Bangladesh.pdf

Is Foreign Debt a Problem for Bangladesh? Justify the Implication on Economy. Report of FIN-5104: International Financial Management

Submitted To

Professor Dr. Md. Abu Misir Chairman, Department of Finance, Faculty of Business Studies Jagannath University, Dhaka

Submitted By

Sultan Ahmed Khan Representative of the group Epimetheus MBA 3rd Batch Department of Finance, Faculty of Business Studies Jagannath University, Dhaka.

Group Name: Epimetheus Name of the members of the group:

Serial No:

Name of the members of the group

Roll Number

01

Sultan Ahmed Khan

091597

02

Md. Anik Mahmud

091636

03

Md. Mehedi Hasan

091590

04

Sharjil Ahmed

091623

05

Protiva Talukder

091602

06

Sakhawat Hosain Chowdhury

091574

07

Mohammad Didarul Islam Khan

091613

08

Mohammad Mahmudul Hasan

091534

Group Representative: Sultan Ahmed Khan.

Contact

: [email protected]

Web

: https://epimetheus.yolasite.com

May 7, 2014 The Course Instructor,

Professor Dr. Md. Abu Misir, Chairman Department of Finance, Jagannath University, Dhaka. Sub: Thanks giving letter to the respective faculty member.

Sir, We are the student of Department of Finance (3rd batch) of Jagannath University, Dhaka & also from the group named “Epimetheus”. We are very much enthusiastic about our presentation. We are really happy to have such a presentation of challenging and interesting like this presentation & also thanks to you for making us worthy for corporate. Our presentation topic is “Is Foreign Debt a Problem for Bangladesh? Justify the Implication on Economy”. We have learned many things from this topic which will help us in future to conduct as an official in the organization. There were some obstacles we have faced at the time of collecting data about our topic. But we have overcome all the obstacles by the endeavor effort by each member of our group and tried our best to give an overview of our topic. We the group “Epimetheus” tried our best to make this presentation attractive, impeccable, interesting, informative and enjoyable by the help of electronic and print media in association with our honorable teacher, mentor, counselor, instructor and advocate “Professor Dr. Md. Abu Misir”. We are really grateful to him. We had limitations at the time preparing presentation. So mistakes may occur in our demonstration of our presentation. We hope that, you will exempt our mistakes.

Thanking in anticipation, Yours Fidel,

Sultan Ahmed Khan Group Representative,

Group-“Epimetheus” MBA 3rd Batch Department of Finance Jagannath University,Dhaka.

First of all we would like to thank the Almighty for giving us the strength, and the aptitude to complete this report within due time. We are deeply indebted to our course teacher, mentor, and counselor, Professor Dr. Md. Abu Misir for assigning us such an interesting topic named “Is Foreign Debt a Problem for Bangladesh? Justify the Implication on Economy”. We also express the depth of my appreciation to our honorable course teacher for his suggestion and guidelines, which helped us in completing this report.

External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or citizens of that country. The main indicator of foreign debt is foreign debt to GDP and foreign debt to GNI. In % of GNI it represents a quite domination of foreign debt over our income which represents a high proportion of debt service cutting our income. The rate is getting reduced over a few years which is a good decision sign for the total income. Total reserve % of total external debt in Bangladesh was last measured at 48.81 in 2012. In case of % of GDP from a low of about 3% of GDP in the early 1990s, it has increased to 20% of the GDP in 2007-08. It represents the growth of percentage of foreign debt over GDP which is an alarming notification. If it gets more than foreign power will manipulate our policies and govt.

In case of exchange rate, a higher level of foreign currency makes a country's exports more expensive and imports cheaper in foreign markets; a lower currency makes a country's exports cheaper and its imports more expensive in foreign markets. In case of debt, large scale of foreign debt kills the potential industry of our country and reduces the power of making policies. Foreign debt is very harmful for the national banking industry and especially in this situation where it is forecast that bank industry going to collapse in our country. In case of GDP, it is growing, so will business, jobs and personal income

Last of all foreign debt can be both curse & blessing for us. It will be curse if we can’t control it over our growth. Huge amount of grants/aid causes to loss control of the government over national policies. Beside this it will be blessing if we can use it appropriately when it is necessary for the country. Along with, country should reduce its dependency over the foreign debt because it creates inflation in the market & at the time of payoff get dollar with cheaper rate.

Index

Page no

Executive Summary Introduction Introduction

i

Rational of the study

i

Objective of the study

I

Scope of the study

ii

Methodology of the study

ii

Limitations of the study

ii

Body of the term paper Foreign Aid

1

Reasons Donor Countries DO Give Aid

2

Distribution of Foreign Aid

3

Forms of Foreign Aid

4

Understanding Foreign Aid

5

Sources of Foreign Aid

7

Factors Affected by Foreign Debt

8

Historical Analysis

9

Statistical Analysis

13

Findings

25

Introduction Foreign aid refers to the transfer of goods, capital or services from an international organization or a country to offer some benefits or help to the recipient country. This aid comes in several forms for example; military, emergency humanitarian or economic aid. Foreign aids are provided in a country in two forms. One is foreign grants and another is foreign aid. In this term paper we tried to show what factors are affected by foreign debt. Beside this we tried to show that how Exchange rate, GDP, Inflation, & Lending Rate (dependent variable) is influenced by Foreign Debt (independent variable). Independent variables in general put great impacts over the dependent variables. It may be increase or decrease the dependent variable in a period of time or over a period of time. To reveal we use SPSS software, and will find the influential nature of independent variables over dependent variable.

Rationale of the study The report is assigned by our course teacher Professor Dr. Md. Abu Misir as a part of our “International Financial Management” course. The topic of our report is “Is Foreign Debt a Problem for Bangladesh? Justify the Implication on Economy”. By conducting this study we can enhance our knowledge and skill to apply various research methods in professional life on higher educational life. The report has given us a chance to raise our quality in developing research instrument and its applications. By doing so, we can boost our acceptability in job market and develop our real life knowledge.

Objective of the report Primary objective To find the impact of foreign debt in the economy of Bangladesh by the calculation of SPSS. Secondary objective: The term paper has the following objectives:  To find out the impact of foreign debt on every dependent variables such as inflation.  To find out the explanatory power of independent variable.  To find the impact of foreign debt in economy through historical data analysis.

Scope There were huge scopes to work in the area of this report. Considering the dead line, the scope and exposure of the paper has been wide-ranging. The study “Is Foreign Debt a Problem for Bangladesh? Justify the Implication on Economy” has covered a scenario of Bangladesh economy. It has shown the impact of foreign debt in economy through both historical analysis & statistical analysis. The effect of foreign debt is clearer to us now.

Methodology Variables We use the following variables: Types of variable Dependent

Independent .

Names of the variable Exchange rate Gross Domestic Product (GDP) Inflation Lending rate Foreign Debt

Analysis of Data  The influential nature of the variables.  The relationship between the variables and significance on Exchange rate, GDP, Inflation, Lending Rate.  Calculation of Coefficient, ANOVA, Correlation etc. Statistical Tools We use the SPSS (Statistical Package for the Social Sciences) software, Version 16.0 Sources of Data Here the secondary sources of information were used. The secondary sources are:  Books.  Economic Relation Division.  Website.

Limitations While conducting the report on “Is Foreign Debt a Problem for Bangladesh? Justify the Implication on Economy”, some limitations were yet present there:  Because of time shortage many related area can’t be focused in depth.  Recent data and information on different activities was unavailable in some cases.  We used the SPSS version 16 for unavoidable limitations.

Foreign Aid Foreign aid refers to the transfer of goods, capital or services from an international organization or a country to offer some benefits or help to the recipient country. This aid comes in several forms for example; military, emergency humanitarian or economic aid. It is aimed at providing help in terms of crisis or disaster. Foreign aid in economic terms is served basically for infrastructural development. There are four types of foreign aid mostly practiced and Bangladesh get all four types of aid as per its need. Those are given below:

Foreign Aid

Bilateral aid

Multilateral aid

Tied aid

Project aid

Bilateral aid – when the capital flows from a developed nation to a developing nation. Multilateral aid – when the capital flows to developing nations from a world agency such as the World Bank. Tied aid – when funds are used to buy imports from the donor country or for a specific project. Project aid – when the funds are used to finance a particular project.

Reasons Donor Countries DO Give Aid Donor countries generally give aid because it is in their own interest to do so. Undoubtedly some aid is given with humanitarian motives in mind; however, most foreign aid is given for variety of political, strategic and economic reasons that benefit the donor countries in the longer term.

Political Reasons Official Development Assistance (ODA) is often designed to achieve political objectives other than increasing prosperity in recipient countries. In the United States, national security considerations often influence foreign-aid decisions. During the 1980s, Cold War considerations caused a sharp escalation in U.S. aid to Central America and the Caribbean even, as aid to Africa declined. More recently concern over Middle East instability has made Israel, Egypt, and Jordan the largest recipients of U.S. foreign aid. Other donors have their own objectives. For many years Sweden targeted aid toward 'progressive' societies. In France, governments have sought to promote the maintenance and spread of French culture and the French language as well as the preservation of French influence. In Japan, aid has historically flowed disproportionately to neighboring Asian nations in which Japan has the greatest commercial interests, and has often been tied to purchases of Japanese products.

Economic Reasons Official Development Assistance (ODA) is often designed to achieve economic objectives rather than political reasons.  Filling Gaps  Self-interest of Donor Country

Filling the gaps Providing aid to Less Developed Countries (LDCs) ensures that the savings gap and the foreign exchange gap are filled. For domestic investment to take place domestic savings must also occur. If these are absent then a flow of development assistance can help finance investment projects. Likewise, there should also be technical assistance to ensure that the capital is efficiently used. For some economists, development is synonymous with the creation of a sizable, modern manufacturing sector, as opposed to reliance on exports of primary products. The international product life cycle theory suggests that as countries industrialize they off-load more labor-intensive industries to countries in earlier stages of industrialization. This theory provides some support for the notion that the development of manufacturing industries frequently accompanies increasing prosperity in the developing world. However, others argue that aid for capital investment can be anti-developmental as more capital intensive production in countries may contribute to increasing levels of unemployed and consequential poverty.

An inflow of foreign exchange may also enable LDCs to import foreign capital considered necessary for economic growth and development. In the case of Zambia, where there have been considerable shortages of foreign exchange earning due to falling commodity prices and debt servicing, inflows of foreign exchange through aid have enabled the capital investment needed to maintain the copper industry. It should also be mentioned however, that debt relief would be more effective than aid in reducing the foreign exchange gap.

Self Interest of Donor Countries Less and less development assistance is given in the form of outright grants and increasingly interest is being charged albeit at concessionary rates. Tied aid is also becoming more prevalent. Tied aid occurs where conditions are place by the donor upon the recipient about what they use the aid assistance for. Usually the recipients are required to purchase the exports of the donors. This may be a more expensive option than purchasing the capital from sources other than the donors. Tied aid may help fill savings and foreign exchange gaps; however, it may not always be in the best interests of the recipient country.

Distribution of Foreign Aid Grant ($ in Million)

Purpose

Loan ($ in Million)

Total ($ in Million)

Food Aid

5,997.883

762.557

6,760.440

Commodity Aid

5,650.833

5,257.007

10,907.840

Project Aid & Budget Support

13012.642

28,630.735

41,643.377

Total

24,661.358

34,650.299

59,311.657

Chart: Foreign Aid to Bangladesh (1971/72-2012/13)

Forms of Foreign Aid The term 'Foreign Aid' is broad one. It refers to any money or resources that are transferred from one country to another without expecting full repayment. Official Development Assistance (ODA) includes all grants and concessional or soft loans that are intended to transfer resources from More Developed Countries (MDCs) to Less Developed Countries (LDCs) with the intention of fostering economic development. Most studies consider concessional loans as those that have a grant element at 25% or more. It does not include commercial or non-concessional loans, private foreign direct investment such as inward investment by multilateral corporations, nor does it include preferential tariff reductions offered by MDCs to LDCs enabling them easy access for their exports into the markets of the MDCs. To be considered foreign aid a flow of funds should meet two simple criteria: 1. It should be non-commercial from the donors point of view 2. It should be concessional so that the interest and repayment is less stringent or softer than commercial terms. Foreign aid includes all grants and concessional or soft loans that are intended to transfer resources from MDCs to LDCs with the intention of fostering economic development. Most studies consider concessional loans are those that have a grant element at 25% or more. Foreign aid can be divided into Public Development Assistance and Private Development Assistance:

Foreign Aid

Public or Official Development Assistance

Individual government assistance, known as bilateral aid

Multilateral donor agencies such as the IMF and World Banks offering multilateral aid

Private Development Assistance

Private non-governmental organizations (NGOs) such as the Red Cross, Oxfam

Chart: Forms of Foreign Aid

A considerable amount of foreign aid is tied aid. Here the grants or concessionary loans have conditions laid down by the donor country about how the money should be used. Tied aid by source means that the recipient country receiving the aid must spend it on the exports of the

donor country. Tied aid by project means that the donor country requires the recipient country to spend it on a specific project such a road or a dam. Often this might be to the commercial or economic benefit of the firms in the donor country. For example their engineers might be the designers of the project.

Understanding Foreign debt External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or citizens of that country. The debt includes money owed to private commercial banks, other governments, or international financial institutions such as the International Monetary Fund (IMF) and World Bank. One relative measurement of foreign debt safety is that foreign exchange reserves should not be less than outstanding short-term foreign debts. Governments can lower their foreign debts by rescheduling their obligations or simply by paying them off. Total reserve % of total external debt in Bangladesh was last measured at 48.81 in 2012. In our country it is less than half which shows the poor scenario of our country. The main indicator of foreign debt is foreign debt to GDP and foreign debt to GNI. External debt percentage of Gross national income. Year 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

% of GNI 6.15 10.08 8.67 19.8 24.31 21.27 19.07 21.59 20.94 26.84 30.26 27.43 29.69

Year 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

% of GNI 36.65 39.98 39.12 38.39 39.94 41.08 41.32 41.43 44.46 40.22 36.2 32.62 34.05

Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

% of GNI 34.79 31.92 30.69 33.43 33.56 33.02 29.12 30.49 29.07 26.5 25.25 23.48 22.58

 It represents a quite domination of foreign debt over our income which represents a high proportion of debt service cutting our income.  The rate is getting reduced over a few years which is a good decision sign for the total income.  It represents dependency over policy making.

Foreign Debt Percentage of GDP

 Total debt as percent of GDP has been on a relatively continuous upward track until 1993-94, when it reached a peak of 53.5% of GDP. It fell to 42.8% in 1997-98, but increased in the following year to average around 50%. It means debt has a productive contribution to GDP also showing dependency on it.  Foreign debt as percent of GDP closely mirrored the developments in total debt until the mid 1990s. Since then, an increasing share of the total debt has been finance by domestic debt. From a low of about 3% of GDP in the early 1990s, it has increased to 20% of the GDP in 2007-08. It represents the growth of percentage of foreign debt over GDP which is an alarming notification. If it gets more then foreign power will manipulate our policies and govt.  In recent years, the share of foreign assistance was been shrinking while that of domestic debt is on the increase. It is a praiseworthy policy taken by the Govt. but Padma Bridge project will change the situation.

Sources of Foreign Debt There are three sources of foreign debt. That’s are Food, Commodity & Project Aid. An aggregated sum are as follows. Food

In Million

Countries name

Grant

Loan

Total

OECD

3130.465

709.100

3839.565

OPEC

116.050

0

116.050

Multilateral agencies

2594.833

0

2594.833

Other Countries

156.535

53.457

209.992

Commodity

In Million $

Countries name

Grant

Loan

Total

OECD

4802.004

1842.004

6644.276

OPEC

316.108

116.888

432.996


298.671

3204.546

3503.217

Other Countries

234.050

93.301

327.351

Project Aid

In Million $

Countries name

Grant

Loan

Total

OECD

8725.216

3617.666

12342.882

OPEC

191.269

812.291

1003.560


3949.141

21142.256

24878.208

Other Countries

147.016

3058.522

3205.538

 It represent our country is getting help mostly from OECD countries.  So OECD countries have more contract and willingness to invest in our country.

Factors affected by Foreign Debt

Exchange rate The price of a nation’s currency in terms of another currency. An exchange rate thus has two components, the domestic currency and a foreign currency, and can be quoted either directly or indirectly. In a direct quotation, the price of a unit of foreign currency is expressed in terms of the domestic currency. In an indirect quotation, the price of a unit of domestic currency is expressed in terms of the foreign currency. An exchange rate that does not have the domestic currency as one of the two currency components is known as a cross currency, or cross rate.

Foreign Debt External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or citizens of that country. The debt includes money owed to private commercial banks, other governments, or international financial institutions such as the International Monetary Fund (IMF) and World Bank.

GDP The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

GDP = C + G + I + NX Where: "C" is equal to all private consumption, or consumer spending, in a nation's economy "G" is the sum of government spending "I" is the sum of all the country's businesses spending on capital "NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports).

Inflation The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.

Lending rate The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual (APR). The assets borrowed could include, cash, consumer goods, large assets, such as a vehicle or building. Interest is essentially a rental, or leasing charge to the borrower, for the asset's use. In the case of a large asset, like a vehicle or building, the interest rate is sometimes known as the "lease rate". When the borrower is a low-risk party, they will usually be charged a low interest rate; if the borrower is considered high risk, the interest rate that they are charged will be higher.

Historical Data Analysis Exchange rate

Comment  The exchange rate growth represents the weak buying capability of USD.  A higher currency makes a country's exports more expensive and imports cheaper in foreign markets; a lower currency makes a country's exports cheaper and its imports more expensive in foreign markets. Our currency is in a lower position in foreign market.  We have a high debt. A large debt encourages inflation, and if inflation is high, the debt will be serviced and ultimately paid off with cheaper real dollars in the future.  If a government is not able to service its deficit through domestic means (selling domestic bonds, increasing the money supply), then it must increase the supply of securities for sale to foreigners, thereby lowering their prices. This is happening in our country.

Foreign Debt

Comment  The effects of foreign debt and the policies adopted to address them on the full enjoyment of all human rights, in particular, economic, social and cultural rights in developing countries in our country due to corruption this facility get voided.  Large scale of foreign debt kills the potential industry of our country and reduces the power of making policies.  Foreign debt is very harmful for the national banking industry and especially in this situation where it is forecast that bank industry going to collapse in our country.  The higher growth of debt means the higher amount of debt service. This is in our country too high to cope with in our country.  Higher debt is killing the potentiality to impose barriers on foreign investors.

GDP (Current Prices, US Dollar)

Comment  The GDP growth rate is driven by retail expenditures, government spending, exports and inventory levels. Rises in imports will negatively affect GDP growth.  GDP is growing, so will business, jobs and personal income.  A Growing GDP in Bangladesh represent Growth of Net Export, Investment, Consumption, Govt. spending.  In our country GDP doesn’t incorporate Housework, Volunteering, Higher Education, crime, corruption, and change in leisure time.

Inflation CPI

Comment  Volatility of inflation represent the unstable situation of economy.  It has gone two digit for a few times and it represent lower purchasing power of people.  Higher inflation attracts FDI upto some limit and this situation occurs in our country.  It represent highly volatile political situation and failure of administrations.

Lending Rate/interest rate

Comment:  Higher lending rate representing lower bargaining power.  Higher lending rate volatile situation over foreign market.  Higher lending rate represents volatile relationship with allies’ state.  Stable lending rate representing failure of bargaining and policies to reduce rate at the time of higher amount of foreign debt.

Statistical Analysis using SPSS

The equation of regression of Exchange Rate on Foreign Debt (Impact of Foreign Debt in Exchange Rate)

Coefficientsa Unstandardized Coefficients

Model

B 1

(Constant)

-.630

Foreign Debt .048 a. Dependent Variable: Exchange Rate

Std. Error 4.294

Standardized Coefficients Beta

.005

.858

t

Sig.

-.147

.884

10.415

.000

The required equation is Y= a+bX Where, Y= Exchange Rate, a= Constant, X= Foreign Debt

Y= -.630 + .048X

The equation indicates that  If all the variables remain zero then there will be higher value of the money (Taka) that means exchange rate per dollar will be decreased at TK 0.63 per 1 US$.  If the Foreign Debt increases for $ 1, Exchange Rate of the country will increase by TK 0.048 per US $

R= Coefficient of multiple correlation It determines the extent or degree of relationship among the variables: Range

Degree of relationship

0

Absences of relationship

.01-.29

Very low degree of relationship

.30-.49

Low degree of relationship

.50-.69

Moderate degree of relationship

.70-.89

High degree of relationship

.90-.99

Very high degree of relationship

1

Perfect relationship

Model Summary R Square Adjusted R Square 1 .858a .736 .729 a. Predictors: (Constant), Foreign Debt Model

R

Std. Error of the Estimate 11.09133

As we find that R= 0.858 from the table. So, there exist a high degree of relationship between the variables under the study

R2= coefficient of multiple determination We know that if R2 is more than 50% or .50 then the independent variables are very influential


R


As we find that R2= 0.736 from the table. It indicates that Foreign Debt explain 73.6% variation in the exchange rate. So the variables are very influential.

Correlations Exchange Rate Pearson Correlation

Exchange Rate Foreign Debt Exchange Rate Foreign Debt Exchange Rate Foreign Debt

Sig. (1-tailed) N


Model

B 1

(Constant)

-.630


Foreign Debt

1.000 .858 . .000 41 41

Std. Error 4.294 .005

Standardized Coefficients Beta .858

.858 1.000 .000 . 41 41

t

Sig.

-.147

.884

10.415

.000

As b, is significant at .048 level, there is significant relationship between foreign debt and exchange rare. As we know less than 5% is significant.

Model 1

Regression Residual Total

Sum of Squares 13343.352 4797.690

ANOVAb df 1 39

18141.042

40

Mean Square 13343.352 123.018

F 108.467

Sig. .000a

a. Predictors: (Constant), Foreign Debt b. Dependent Variable: Exchange Rate

The result of ANOVA table indicates that the relationship between foreign debt and exchange rate are statistically significant. As the test is significant at .000 level which is less than .05

Descriptive Statistics Mean Std. Deviation Exchange Rate Foreign Debt

40.2905 8.4452E2

N

21.29615 376.94008

41 41

Influential variables Coefficientsa Unstandardized Coefficients

Model

B 1

(Constant)

-.630


Std. Error 4.294 .005


t

Sig.

-.147

.884

10.415

.000

It can be understand by beta coefficient that that the variable are influential.

The equation of regression of GDP on Foreign Debt (Impact of Foreign Debt in GDP)

Model

1

(Constant)

Coefficientsa Unstandardized Coefficients Standardized Coefficients B Std. Error Beta -18485.207 5977.116

Foreign Debt 72.242 a. Dependent Variable: GDP (Current Price, US$)

6.476

.873

t

Sig.

-3.093

.004

11.155

.000

The required equation is Y=a+bX Where, Y= GDP, a= Constant, X= Foreign Debt

Y= -18485.207 + 72.242X

The equation indicates that  If foreign debt remain zero then there will be loss of GDP (Current Price) amounting US$ 18485.207 Million.  If the Foreign Debt increases for $ 1000000, GDP of the country will increase by US$ 72242000.

R= Coefficient of multiple correlation It determines the extent or degree of relationship among the variables:

Range


0


.01-.29


.30-.49


.50-.69


.70-.89


.90-.99


1



R


As we find that R= 0.873 from the table. So, there exist a high degree of relationship between the variables under the study

R2= coefficient of multiple determination We know that if R2 is more than 50% or .50 then the independent variables are very influential Model Summary R Square Adjusted R Square 1 .873a .761 .755 a. Predictors: (Constant), Foreign Debt Model

R


As we find that R2= 0.761 from the table. It indicates that Foreign Debt explain 76.1% variation in the GDP. So the variables are very influential.

Correlations

Pearson Correlation Sig. (1-tailed) N


Model

1

GDP (Current Price, US$) Foreign Debt GDP (Current Price, US$) Foreign Debt GDP (Current Price, US$) Foreign Debt

(Constant)

B -18485.207

Std. Error 5977.116


6.476

GDP (Current Price, US$) 1.000 .873 . .000 41 41


Foreign Debt .873 1.000 .000 . 41 41

t

Sig.

-3.093

.004

11.155

.000

As b, is significant at 72.242 level, there is no significant relationship between foreign debt and GDP. As we know less than 5% is significant.

Model 1


Sum of Squares 2.966E10 9.296E9

ANOVAb df 1 39

3.896E10

40

Mean Square 2.966E10 2.384E8

F 124.435

Sig. .000a

a. Predictors: (Constant), Foreign Debt b. Dependent Variable: GDP (Current Price, US$)

The result of ANOVA table indicates that the relationship between foreign debt and GDP are statistically significant. As the test is significant at .000 level which is less than .05

Descriptive Statistics Mean Std. Deviation GDP (Current Price, US$) Foreign Debt

4.2524E4 8.4452E2

N

31207.61011 376.94008

41 41


Model

1

(Constant)

B -18485.207

Std. Error 5977.116


6.476


t

Sig.

-3.093

.004

11.155

.000

It can be understand by beta coefficient that that the variable are influential at .873.

The equation of regression of Inflation on Foreign Debt (Impact of Foreign Debt in Inflation)


Model

B 1

(Constant)

Foreign Debt a. Dependent Variable: Inflation CPI

4.159

Std. Error 1.630

.002

.002


t

Sig.

2.551

.017

1.384

.179

The required equation is Y=a+bX Where, Y= Inflation, a= Constant, X= Foreign Debt

Y= -4.159 + .002X

The equation indicates that  If foreign debt remain zero then there will be positive inflation under consumer pricing index of 4.16%  If the Foreign Debt increases for $ 1000000, country will loss $ 2000 from $ 1000000 meaning that for $ 1 increase in foreign debt will induce 0.2% inflation rate.


Range


0


.01-.29


.30-.49


.50-.69


.70-.89


.90-.99


1



R


As we find that R= 0.267 from the table. So, there exist a very low degree of relationship between the variables under the study


R


As we find that R2= 0.071 from the table. It indicates that Foreign Debt explain 7.1% variation in the inflation rate. So the variables are relatively low influential.

Correlations Inflation CPI Pearson Correlation

Inflation CPI Foreign Debt Inflation CPI Foreign Debt Inflation CPI Foreign Debt

Sig. (1-tailed) N

B 1

1.000 .267 . .089 27 27


Model

(Constant)


Foreign Debt

4.159

Std. Error 1.630

.002

.002

.267 1.000 .089 . 27 27


t

Sig.

2.551

.017

1.384

.179

As b, is significant at .002 level, there is significant relationship between foreign debt and inflation. As we know less than 5% is significant.

Model 1

Regression Residual

Sum of Squares 11.228 146.618

ANOVAb df 1 25

157.845

26

Total

Mean Square 11.228 5.865

F 1.914

Sig. .179a

a. Predictors: (Constant), Foreign Debt b. Dependent Variable: Inflation CPI

The result of ANOVA table indicates that the relationship between foreign debt and inflation are statistically not significant. As the test is significant at .179 level which is more than .05

Descriptive Statistics Mean Std. Deviation Inflation CPI Foreign Debt

6.3204 1.0302E3

N

2.46394 313.21647

27 27


Model

B 1

(Constant)


4.159

Std. Error 1.630

.002

.002


t

Sig.

2.551

.017

1.384

.179

It can be understand by beta coefficient that that the variable are influential at .267 level.

The equation of regression of Lending Rate on Foreign Debt (Impact of Foreign Debt in Lending Rate/Interest Rate)


Model

1

(Constant)

B 16.162

Std. Error 1.369

Foreign Debt -.001 a. Dependent Variable: Lending Rate/Interest Rate

Standardized Coefficients Beta

.001

-.430

t

Sig.

11.802

.000

-1.349

.214

The required equation is Y=a+bX Where, Y= Lending Rate, a= Constant, X= Foreign Debt Y= 16.162 - .001X

The equation indicates that  If foreign debt remain zero then there will be positive lending rate in the country at 16.16%  If the Foreign Debt increases for $ 1000000, lending rate upon $ 1000 will be reduce meaning that for increasing $1 as foreign debt will reduce 0.1 % lending rate.


Range


0


.01-.29


.30-.49


.50-.69


.70-.89


.90-.99


1



R


As we find that R= 0.430 from the table. So, there exist a low degree of relationship between the variables under the study


R


As we find that R2= 0.185 from the table. It indicates that Foreign Debt explain 18.5% variation in the lending rate. So the variables are low influential. Correlations

Pearson Correlation Sig. (1-tailed) N


Model

1

Lending Rate/Interest Rate Foreign Debt Lending Rate/Interest Rate Foreign Debt Lending Rate/Interest Rate Foreign Debt

(Constant)

B 16.162

Std. Error 1.369


.001

Lending Rate/Interest Rate 1.000 -.430 . .107 10 10

Standardized Coefficients Beta -.430

Foreign Debt

-.430 1.000 .107 . 10 10

t

Sig.

11.802

.000

-1.349

.214

As b, is significant at -.001 level, there is no significant relationship between foreign debt and lending rate. As we know less than 5% (positive) is significant.

Model 1


Sum of Squares 2.550 11.210

ANOVAb df 1 8

13.760

9

Mean Square 2.550 1.401

F 1.820

Sig. .214a

a. Predictors: (Constant), Foreign Debt b. Dependent Variable: Lending Rate/Interest Rate

The result of ANOVA table indicates that the relationship between foreign debt and lending rate are statistically not significant. As the test is significant at .214 level which is more than .05

Descriptive Statistics Mean Std. Deviation Lending Rate/Interest Rate Foreign Debt

14.3850 1.2884E3

N

1.23649 385.92495

10 10


Model

1

(Constant)

B 16.162

Std. Error 1.369


.001

Standardized Coefficients Beta -.430

t

Sig.

11.802

.000

-1.349

.214

It can be understand by beta coefficient that that the variable are influential at .214 level.

Findings From the above analysis we can summarized that the foreign debt has great impact in the economy in Bangladesh. External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or citizens of that country. The main indicator of foreign debt is foreign debt to GDP and foreign debt to GNI. In % of GNI it represents a quite domination of foreign debt over our income which represents a high proportion of debt service cutting our income. The rate is getting reduced over a few years which is a good decision sign for the total income. Total reserve % of total external debt in Bangladesh was last measured at 48.81 in 2012. In case of % of GDP from a low of about 3% of GDP in the early 1990s, it has increased to 20% of the GDP in 2007-08. It represents the growth of percentage of foreign debt over GDP which is an alarming notification. If it gets more than foreign power will manipulate our policies and govt. In case of exchange rate, a higher level of foreign currency makes a country's exports more expensive and imports cheaper in foreign markets; a lower currency makes a country's exports cheaper and its imports more expensive in foreign markets. In case of debt, large scale of foreign debt kills the potential industry of our country and reduces the power of making policies. Foreign debt is very harmful for the national banking industry and especially in this situation where it is forecast that bank industry going to collapse in our country. In case of GDP, it is growing, so will business, jobs and personal income. In our country GDP doesn’t incorporate Housework, Volunteering, Higher Education, crime, corruption, and change in leisure time. Although GDP is growing along with the foreign debt. If it is so, it is an alarm for the country that is the dependency with other nation. Beside this foreign debt induce inflation in the market because of availability of money supply in the market. When a large number of foreign debt comes from debtor it always induce partial inflation in the market. Although foreign debt control the lending rate in the country beside that government of the nation should avoid it until local debt is available & less costly compare to foreign debt. From the equation of regression of Exchange Rate on Foreign Debt we found that there is a positive relationship of exchange rate & foreign debt with high degree of relationship. There also exist a significant relationship between them. If foreign debt reduces the country will face deflation in local currency and vice versa. From the equation of regression of GDP on Foreign Debt we found that there is a positive relationship of GDP & foreign debt with high degree of relationship. There also exist no statistically significant relationship between them. If foreign debt reduces the country will face low GDP. Although this is alarming for present day, but if the nation can increase its production from local supply without foreign debt dependency it will be huge in near future. At present this is alarming for Bangladesh that most of its GDP portion financed by foreign debt. From the equation of regression of Lending Rate on Foreign Debt we found that there is a negative relationship of lending rate & foreign debt with low degree of relationship. There also exist no significant relationship between them. If foreign debt reduces the country will face higher lending rate offered by the respective organizations. Higher lending rate represents volatile relationship with allies’ state. Last of all foreign debt can be both curse & blessing for us. It will be curse if we can’t control it over our growth. Huge amount of grants/aid causes to loss control of the government over national policies. Beside this it will be blessing if we can use it appropriately when it is necessary for the country. Along with, country should reduce its dependency over the foreign debt because it creates inflation in the market & at the time of payoff get dollar with cheaper rate.

Is foreign Debt a Problem for Bangladesh.pdf

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