Sovereign credit ratings (SCR), determined based on a country's willingness and ability to pay its principal and interest obligations on time, are qualitative indicators that determine a nation's likelihood of default. Countries' borrowing costs from international financial markets depend on their SCR. A better SCR means more favourable cost of borrowing and lower SCR means higher cost of borrowing.

SCR also affects foreign direct investment (FDI). SCR provides a potential foreign investor a standardised outlook into the economic risk level of a target investment destination.

I am happy for my humble contribution in the process of Bangladesh's sovereign credit rating determination process. It was tough to convince the late finance minister Mr Kibria but the job was a little easier with the late finance minister Mr Muhith, who was keen on Bangladesh to access the international debt market instead of continuously depending on concessional debt.

Thanks to the contribution of various persons at home and abroad and our business leaders, we could get our first sovereign credit rating done smoothly.

Recently, Moody's Investors downgraded the country's credit rating from BA3 to B1. Besides that, while they did not downgrade the rating, S&P Global changed Bangladesh's long-term credit outlook from "Stable" to "Negative" in May 2023 due to rising risk pertaining to the country's external liquidity position.

Currently, Bangladesh receives concessional financing from development partners at rates ranging from 1-2 percent on an average. However, in the medium to long-run, this rate will surely increase.

With imminent LDC graduation being one of the reasons for a potential increase in the interest rate of concessional financing, SCR downgrade will also play a role. There are instances when downgrade in SCR is included as a covenant or pricing trigger in foreign loan facility documents. For external loans in Bangladesh with similar loan terms, future interest payment will rise.

Regarding FDI inflows, I believe empirical evidence from sub-Saharan Africa is relevant. One study on effects of credit rating on sub-Saharan Africa suggests there is significant correlation between SCR and FDI inflows to the countries analysed.

Besides, the study also indicates an interesting fact. After control measures for offsetting impacts of global financial crises are put into implementation by countries, the reliance in sovereign credit rating by the investors increases compared to periods without crisis.

It is important to analyse the reasons behind the rating downgrades to understand what the required interventions are and what are the indicators the rating agencies will monitor. S&P global expects Bangladesh economy to grow at 6-6.4 percent during 2024-2026.

In the recent past, Bangladesh witnessed shrinkage in foreign reserve and subsequent inability to pay for fuel imports. There also remains likelihood of lower current account receipts, increase in current account deficits and slow regeneration of foreign exchange reserve.

It is important for Bangladesh to promote transparency, improve governance, implement sound policy measures, and increase ease of doing business to attract foreign investment. Trade diversification is another avenue that is essential. New export destinations and new export products must be explored. Ways to decrease dependence on certain countries for importing raw materials and essential goods must also be looked at to safeguard against potential external shocks.

Keeping import restrictions imposed for a long-run will adversely affect the economy with an increase in scarcity for capital goods, machineries, and essential raw materials. Besides these, Bangladesh should also maintain an open dialogue with development partners and develop strong mid and long-term strategic plans.

The author is an economic analyst