Loans to state-owned enterprises and government guarantees are increasing

The government must guarantee every financial year the increasing amount of loans of state-owned enterprises, especially for power generation, import of fertilizers and fuels, and purchase of aircraft.

The government provides these “state guarantees” in respect of loans negotiated by various state-owned financial and non-financial enterprises, as stated by the Ministry of Finance in its Medium Term Macroeconomic Policy Statement for 2024-25 to 2026-27.

According to the statement, state guarantees, intended to help implement public policies and programs, are provided mainly to entities operating in the commercial aviation, energy and public goods sectors, and fertilizer plants.

If entities do not repay their loans on time, there is a risk that they will use the guarantee and the liabilities will be transferred to the government, which will inevitably have future fiscal consequences, he added.

As per the budget documents of the Ministry of Finance, as of the current financial year 2023-24, state guarantees have secured loans worth Rs 1,17,094 crore.

In the last fiscal year 2022-23, it was Tk 98,591 crore, while in fiscal year 2021-22, it was Tk 92,601 crore.

This amount grows by an average of about 19 percent per year.

State power agencies currently have the highest loan amount at Tk 53,596.26 crore.

The Bangladesh Agricultural Development Corporation earned Tk 18,985.48 crore and the entire amount was used to import fertilizers.

Besides, the loan for the Ghorashal-Palash urea fertilizer plant, which was inaugurated in Narsingdi in November last year, is Tk 10,113 crore.

Biman Bangladesh Airlines had loans of Tk 8,543.45 crore, energy sector had loans of Tk 7,660.18 crore and Trading Corporation of Bangladesh had loans of Tk 2,432.11 crore.

One way in which state-owned enterprises were linked to the government’s fiscal position was that the loans they provided exposed the state to potential financial losses, a statement from the finance ministry said, according to a partial analysis.

Moreover, the government had to inject additional capital to keep many companies afloat, he said.

Economists suggest privatizing loss-making entities instead of running them with taxpayers’ money.

As of February, 30 state-owned enterprises were indebted to state-owned commercial banks worth Tk 65,089.48 crore, according to the Bangladesh Economic Review 2024.

Of this amount, Tk 183.62 crore was classified.

According to a statement by the Ministry of Finance, there have been no defaults on loans secured by state guarantees so far.

However, the government plans to amend existing guidelines to streamline this process and further strengthen the debt repayment capacity of state-owned enterprises, he added.

Loan defaults by state-owned enterprises are a serious problem in terms of preserving the country’s trust and image as it generally does not happen anywhere in the world, said M. Masrur Reaz, chairman of the Policy Exchange of Bangladesh.

When state-owned enterprises default on loans, the fallout falls on the private sector and raises questions about the government’s capacity, he said.

Most public enterprises are incurring losses, but the government is not closing them for political reasons, said Ahsan H. Mansur, executive director of the Policy Research Institute.

Instead, the government continues to run these companies by providing subsidies and repaying their loans using taxpayers’ money, he said.

According to him, the final solution is the privatization of state-owned enterprises to avoid debts for years.