Bangladesh's external debt is mounting at a pace far exceeding revenue growth, bringing the debt-to-revenue ratio dangerously close to the IMF's 18% threshold by the end of the 2023-24 fiscal year, according to a recent report by the Economic Relations Division (ERD).
The debt-to-revenue ratio surged to 16.53% in FY24, up from 12% the previous year, as the government increasingly relied on foreign loans without a comprehensive assessment of expected returns.
ERD data reveals that Bangladesh's foreign debt stock swelled by nearly $6.5 billion, reaching $69 billion by the end of FY24.
Principal repayments are projected to exceed $3 billion annually in both 2027 and 2028.
The situation is further exacerbated by a strategic shift towards market-based loans denominated in US dollars and Japanese yen, while concessional loans under the Special Drawing Rights (SDR) framework are on the decline.
This transition is significantly escalating repayment pressures, as market-based loans carry higher interest rates and are vulnerable to exchange rate fluctuations, constraining the country’s fiscal manoeuvrability.
Debt Repayments Set to Peak at $5.3bn in FY27
Experts have raised concerns that a growing portion of government expenditure will be allocated to debt servicing, reducing funds available for critical infrastructure, education, and healthcare investments—sectors crucial for sustainable economic growth.
Zahid Hussain, former lead economist at the World Bank’s Dhaka office, highlighted the looming fiscal distress, noting that Bangladesh’s external debt burden is now materialising as a pressing issue rather than a distant concern.
Loans from the World Bank and the Asian Development Bank (ADB) previously had a 40-year repayment tenure, they are now limited to 30 years.
The grace period, which once extended to a decade, has now been reduced to just over five years.
Additionally, interest rates on loans from the World Bank, ADB, and Japan International Cooperation Agency (JICA) have climbed, adding to the financial strain.
SDR Declines, Dollar and Yen Gain in Debt Stock
ERD data indicates that by the end of FY24, the share of SDR in Bangladesh’s external debt stock had diminished to 35.1%, down from 38.1% a year prior.
As a result, dollar-denominated debt increased to 38.4% from 36.4%, including market-based and Secured Overnight Financing Rate (SOFR)-linked loans.
To mitigate the high interest rates associated with dollar-denominated loans, the government has recently secured budget support and project loans in Japanese yen.
Consequently, the yen’s share of external debt rose to 17.4% in FY24, up from 16.7% in the preceding year.
ERD officials have cautioned that the reduced SDR allocation will heighten repayment pressures, as SDR-denominated debts can be repaid in any of the five major global currencies—US dollar, euro, Chinese renminbi, Japanese yen, or British pound sterling—thus easing the impact of exchange rate fluctuations.
However, officials also noted concerns that a strengthening yen could substantially increase repayment obligations.
Managing Future Debt Obligations
In an effort to mitigate dollar-related risks, the government has increased its borrowing in Japanese yen, leading to a slight decline in the average interest rate on foreign loans.
According to ERD figures, the average interest rate stood at 2.25% in FY24, down marginally from 2.27% in the previous fiscal year. In contrast, the average rate was 2.11% in FY22 and just 1.35% in FY21.
The country’s repayment burden is set to intensify, with principal repayments projected to exceed $3.5 billion annually between 2029 and 2032.
Bangladesh’s total external debt liabilities climbed to $68.82 billion by the end of FY24, up from $62.4 billion in the previous fiscal year.
The World Bank remains the largest creditor with an outstanding debt of $20.62 billion, followed by ADB at $15.74 billion, Japan at $11.25 billion, and China at $5.84 billion.
As Bangladesh navigates a precarious fiscal landscape, experts stress the urgent need for prudent debt management and revenue expansion to ensure long-term economic stability.
