Foreign Currency Bond: A Cart Before The Horse

Foreign currency bond will set a new course, Without true reform,this is just a cart before the horse.

News broke out that Bangladesh govt formed committee to issue bonds in foreign currencies across different international markets. Funds raised through such foreign currency bonds will be used to finance development projects(see "High Level Panel Formed To Assess Feasibility of Issuing Panda,other Foreign Currency Sovereign Bonds", Abul Kashem & Rafiqul Islam,Daily Business Standard, July 28,2026,https://www.tbsnews.net/economy/high-level-panel-formed-assess-feasibility-issuing-panda-other-foreign-currency-sovereign). This is the first time govt is exploring foreign capital markets to finance domestic initiatives.The news also says govt is mulling regulatory changes to allow purchase of such bonds by Bangladeshi nationals who under current regulatory set up cannot purchase such bonds.

Question is whether there is a drastic change in governance and macroeconomic indicators that [calls] for contemplating launch of such foreign currency bonds. The very same day this news came out another report says S&P Global Ratings revised Bangladesh's outlook on long-term sovereign credit rating from stable to negative. The agency attributed reasons for the revision to weak banking sector,poor revenue collection, external factors and high likelihood of delayed recovery (see "S&P Revises Bangladesh Outlook To Negative On Banking Sector,Fiscal Risks",The Business Standard, July 18,2026,https://www.tbsnews.net/economy/sp-revises-bangladesh-outlook-negative-banking-sector-fiscal-risks-1499791). The agency observed that non performing loan in the banking sector reached about 40% of total loans, govt revenue collection accounts for 8%-9% of GDP and interest payments represent 30% of govt revenue. That means revenue collection is still inadequate and more than a quarter of that revenue goes for paying up the the interest of govt debt.

In this backdrop, govt is pondering to draw money from foreign debt market. Govt is not increasing the pace of domestic revenue collection to meet the existing debt servicing obligation but embarking on issuing bonds that will require more revenue money to pay the interest/ coupon.

Proper use of the raised fund is another issue otherwise whole initiative will be jeopardized. Indonesia is an example. Foreign investors account for 14% of Indonesian govt debt and 40% [of] traded stocks(see "Patriot Bonds,An Indonesian Shakedown?", Philip Bowring,Asia Sentinel,October 06,2025,https://www.asiasentinel.com/p/patriot-bonds-indonesia-shakedown). Money raised through foreign bonds often goes to spending on public projects with inefficient outcomes and leakages. Free school meal program is marred with corruption as vendors ,contractors embezzled funds by submitting swollen bills and delivering poor quality food items that caused illness to the students. This kind of politically motivated projects plus subsidy already pushed up budget deficits beyond legal threshold of 3% of GDP,worrying foreign investors about sustainability of govt programs. They pulled out $3.9 billion from Indonesian market this year. Plus $46.1 billion of govt debt comes to fruition this year. This puts tremendous pressure on Indonesian Rupiah,which already witnessed [8%] depreciation against USD("Why Indonesia's Economy Is Under Pressure", Nik Martin, Deutsche Welle,July 15,2026,https://www.dw.com/en/indonesia-economy-prabowo-emerging-market-status/a-77847180).

Point is unaccountable public spending programs coupled with lack of regulatory checks may hurt the very spirit of the funding objective. In addition, when foreign currency bond will mature, it will put pressure on local currency Taka if macroeconomic situation is not in favor. Any rapid depreciation of Taka may result in worsening the inflation.

Foreign investors seek detail and clear information on bond issuer economy. They will certainly not bank on info like Bangladesh never fails to pay back its debt and its low debt-to-GDP ratio(38.9% according to CEIC data). They will certainly inquire about why the country fails to provide gas to the new factories. They will seek information about banking sector reform,distress asset management.Vital reforms should be carried out to draw attention of foreign investors to foreign currency bonds.

Indonesia's Patriot Bond allows undisclosed wealth to enter the economy. The govt even passed a law that says investors are not obliged to provide any info on investment on the bond that can be used to prosecute them later. Such provision is a boon for money laundering activity and poses risks for the financial sector(see "The Hidden Amnesty In Indonesia's Cut-Rate Patriot Bond",Ronny P Sasmita,Asia Times,June 24,2026,https://asiatimes.com/2026/06/the-hidden-amnesty-in-indonesias-cut-rate-patriot-bonds/). Bangladesh should avoid such provision in issuing foreign bonds. And greater transparency in issuing will thwart money laundering activity.

Without serious commitment to implement reform in financial sector, revenue collection and governance, the initiative of issuing foreign currency bond seems like cart-before-the-horse case. In this era of free-flow-of-information govt backed assurance will not convince the foreign investors to rest their trust on Bangladeshi foreign currency bonds. Deeper reform,fiscal prudence and accountable public spending may set the context for any such future initiative.

Need For More FTAs

Tariff debate also risks new export market, FTA appears to be a solution perfect.

Bangladesh and the USA have started final round of negotiations to ink a deal on tariff. Reciprocal tariff on Bangladeshi items have already declined to 20% from 35%. There is room for further reduction. I think it will be within 10% and 15% range. If further tariff reduction really happens, Bangladesh may get a significant share of US apparel market.

Bangladesh has already increased cotton and LNG import from the USA. Previous year Bangladesh imported $600 million worth of US cotton. This year that cotton import [from the USA] has reached more than $200 million in two months and we still have 10 months to go. But the EU market ,where half of our apparel export goes, is offering a tough competition. All the exemption of duties will be gone if Bangladesh is graduated from the LDC countries. In addition, the UK and India signed Free Trade Agreement (FTA), which is heralding boost in Indian export and investment in the UK. In this backdrop, both export earnings and remittances may shrink. There is more! As US dollar becomes weaker and the Euro getting appreciated , the total export of the Eurozone may shrink, casting shadow over their apparel import from Bangladesh.

Bangladesh's emerging apparel export market may bring bad news too. Bangladesh's apparel export to Russia has crossed $1 billion mark long ago. Russian apparel market is estimated to be $32 billion. India's growing ties with the Russia says the country may get a big chunk of this Russian apparel market, mitigating the loss of US export market resulting from the US punitive tariff. Furthermore, India has access to cheap Russian oil. And its processed petroleum export to the Netherlands and the UAE almost doubled in one year. Cheap Russian oil and weakened Rupee(which registers fall in recent weeks) mean its export items will be more competitive in years down the line. Relationship between China and India thawed recently. It may further boost bilateral trade between the two countries. In addition, diplomatic relationship between Canada and India resumed. Canada is a major destination of Bangladeshi apparel export. China's weak consumer spending,fall in industrial production and troubled real estate market mean Bangladesh's export to China may not see dramatic improvement in the next one or two year. So latest development indicates that there may be significant market share gain to the US market but there are serious challenges in Bangladesh's traditional destinations like UK and Canada and emerging destinations like Russia and China.

Another challenge lies in revenue generation. The main theme of this tariff debate is about narrowing down the trade deficit/surplus. In doing so, Bangladesh has to lower tariff so that more American goods & services enter the country. Previously Bangladesh got huge import duty [revenue] from LNG ,Soybean, cotton etc. As these items are coming from the USA in large amount, there is a loss in tariff revenue. If it is not compensated from other sources,then this loss in tariff revenue will stay and complicate the budget deficit. Two quick solutions are to impose tax on remittances and export and to depreciate Taka even more. Both are likely to augment tariff revenue. NBR can also aim 500000 shops scattered across the country. Most of them lack proper documentation of transaction and very frequently ownership of these shops gets changed,contributing nothing to govt coffer. NBR remains in the dark about the volume of transaction and owners of these shops. Similarly, a large sum of money originated from Dhaka's footpath/mobile vendors [falls into hands of vested quarters every year]. A study put the figure between Tk 15 -20 billion. Often it falls into wrong hands. I argued here several times that if NBR mops up part of the money by issuing special [tax] certificates worth Tk 500/1000 for 6 months/1 year then it will give them some sort of legitimacy and ensure that part of the money collected from them enters govt coffer.

But these are tiny drops to fill the growing budget deficits. We have to wait to see whether gains of reciprocal tariffs outweigh the losses. Best approach is to go for Free Trade Agreement with some major trading partners. Indonesia is a trillion dollar economy. We have almost finalized a preferential trade agreement (PTA) with them. We have to revive it. Similarly if we have FTA with Thailand, Malaysia, Brunei,Myanmar,Sri Lanka and Bhutan in the neighborhood ,then we will get cheap coal, palm oil,rice,aluminum, locomotive, oil, tea from these countries .It will keep the inflation low at one hand , and on the other our apparel,light engineering and agro products export will augment manifolds. To consolidate our apparel export, we need to ink FTA with South Korea,UK, Canada,Japan,Brazil and Australia. This will increase our export market share,remittances and FDI. In post WTO world where multiple trading systems and blocs [are becoming a reality], it seems more and more FTAs could secure export and FDI.