Interest payments on Bangladesh's foreign loans have skyrocketed by 6.67 times over the past 8 years, reaching $1.35 billion in the fiscal year 2023-24, compared to $202 million in the fiscal year 2015-16.
This steep rise in interest expenses is largely attributed to the government’s borrowing spree for several major infrastructure projects, including the Ruppur Nuclear Power Plant, metro rail networks, and the construction of tunnels under the Kornaphuli River.
However, the increase in interest costs has far outpaced the growth in foreign debt.
While the overall foreign debt has increased by 2.69 times during this period—from $29.19 billion in FY 2015-16 to $78.66 billion in the last fiscal year—the interest payments have surged by a much higher multiple.
According to the government’s Economic Relations Division (ERD) publication titled "Flow of External Resources in Bangladesh", this sharp rise in interest costs is due to several factors.
Key among these are the increase in global interest rates, the shortening of the maturity and repayment periods of loans, and the government’s shift towards borrowing at floating rates instead of fixed interest rates.
The report indicates that the weighted average interest rate on foreign loans has climbed from 0.92% in 2016 to 2.27% in FY 2023, leading to a 147% increase in interest expenditure on the same amount of debt.
Additionally, the average time to maturity of these loans has decreased by approximately 12% over the last seven years—from 13.1 years in 2016 to 11.47 years in 2023.
Furthermore, the average repayment period has dropped by about 28%, from 12.3 years in 2016 to 8.9 years in 2023, increasing the pressure on the government’s debt management.
ERD’s review also highlights the growing tendency to borrow at floating interest rates as a significant factor behind the rising interest expenses.
As of 2016, only 12.3% of the government’s external debt was subject to floating interest rates.
By 2023, this figure had risen to 29.13%, an increase of 16.83 percentage points.
This shift has exposed the government to higher costs as global interest rates, including the London Interbank Offer Rate (LIBOR), Secured Overnight Financing Rate (SOFR), and Euro Interbank Offered Rate (EURIBOR), have surged due to the contractionary monetary policies adopted by global central banks in response to crises like the COVID-19 pandemic and the Russia-Ukraine war.
Moreover, the volatility in exchange rates, coupled with the potential for further increases in reference rates such as LIBOR and SOFR, poses a significant risk of escalating borrowing costs in the coming years.
The report also points to the rising trend of securing non-concessional loans, which has further driven up interest costs. In 2023, the government mobilised $2.57 billion in non-concessional loans, accounting for 30.68% of the total loans committed.
Scope for mobilising foreign assistance on concessional terms has diminished as most development partners have adjusted their financial terms—either by shortening maturity and grace periods or by raising interest rates—following Bangladesh’s graduation to a Lower Middle-Income Country (LMIC).
For instance, the World Bank increased its service charge on loans from 0.75% to over 2%, JICA raised its rate from 0.01% to over 1%, and South Korea introduced a new loan window for Bangladesh with a 1% interest rate, which is 100 times higher than the existing Economic Development Cooperation Fund (EDCF) loan rate of 0.01%.
In its "Medium-Term Macroeconomic Policy Statement", the Finance Division identified the recent monetary tightening by major economies as a key factor behind the rapidly rising interest costs on Bangladesh’s foreign loans.
The report also warned that these costs are likely to increase further after the country’s graduation from Least Developed Country (LDC) status, which will reduce access to lower-cost loans.
Additionally, the report projected increased pressure on foreign debt management due to further surges in reference interest rates like LIBOR and EURIBOR.
