The government, in a bid to meet budget deficits, continues to borrow heavily from domestic sources – especially from the banking sector.
Bangladesh’s outstanding domestic debt position rose by 87 per cent in the last five years, and stood at Tk 8,00,580 crore at the end of FY23. This figure is over 18 per cent of the country’s GDP.
In FY19, the outstanding domestic debt position was only Tk 4,28,262 crore, which was 14.51 per cent of the GDP.
Economists say no significant reforms have been taken by the country to boost revenue, and foreign debt utilisation lacked efficiency, this in turn led to an increase in government borrowing from domestic sources.
They add that the rising domestic debt compared to GDP may not be an issue for Bangladesh, as it is normal for a country’s debt positions to grow along with its economy. However, proper utilisation of borrowed funds and the government’s growing interest payments are key issues.
Speaking to The Business Post, Centre for Policy Dialogue Distinguished Fellow Prof Mustafizur Rahman said, “The debt position is not a major issue by itself. But there are mentions of lack of proper utilisation and overspending borrowed funds.
“Moreover, the debt position is putting pressure on the people, because they will ultimately have to shoulder the burden.”
Former lead economist of World Bank Dhaka office Zahid Hussain said, “If we compare our debt-to-GDP ratio with other countries, the domestic debt of Bangladesh is not concerning. But the biggest issue for us is that the increase in debt is raising our interest expenditure, which in turn is shrinking the government’s fiscal space.”
In the FY23 revised budget, the government earmarked an allocation of Tk 80,691 crore for domestic debt repayment, which was an increase by Tk 7,000 crore in the proposed budget. In the same period, Tk 9,322 crore was earmarked for foreign debt interest repayment.
These figures are 20.8 per cent and 2.4 per cent of the country’s tax revenue in FY23. Bangladesh had a budget deficit of 2.27 lakh crore that year, which was 5.1 per cent of the country’s GDP.
Commenting on the shrinking fiscal space, Zahid Hussain said, “Since the government is unable to increase tax collection, it has introduced proportional spending cuts on public services, such as education, health, and social safety net programmes.”
What’s behind rising debt?
Economists say revenue is not increasing compared to the budgets every year. Bangladesh's revenue as a proportion of GDP is still below 10 per cent, which is even lower than the neighboring nations.
As a result, the government needs to tackle two specific sources of budget deficits, one is internal, and the other is external. Borrowing from foreign sources comes with many conditions, and this is why the government is unable to utilise more cheap loans.
Zahid Hussain said, “The debt amount is increasing as a result of the government’s financing strategy to meet the budget deficit. As an alternative, the government could have increased foreign sources or revenue. But no reforms have been made to achieve this goal.
“Wasteful expenditures have not been curbed. There are no administrative reforms to mitigate the leakages and loopholes in raising revenue. On the other hand, the fiscal policy has not been reformed to generate more revenue.”
As a result, the government is increasingly relying on loans from domestic sources – as those are relatively easier options. It has also moved towards a much easier option that is printing money.
In FY23, the government took Tk 1,01,826.90 crore in loans from banks to meet the budget deficit, of which Tk 98,000 crore was taken directly from the Bangladesh Bank. This move equals printing money.
Economists believe that such debt is fueling inflation. Bangladesh witnessed over 9 per cent inflation since last FY.
Outstanding foreign debt Tk10.48 lakh crore
In addition to borrowing from domestic sources, foreign borrowing in the public and private sectors is also increasing. Until March this year, this debt rose to $95.71 billion. Exchange rate currently stands at Tk 109.5 per USD, so the loan amount was Tk 10,48,024 crore.
Of the external debt, the public sector amount was $73.53 billion or Tk 8,05,153.5 crore, while the amount in the private sector was $22.18 billion or Tk2,42,871 crore.
Zahid Hussain said, “The government’s source of foreign debt to finance the deficit was a good option. In many cases, such loans are cheap and long term. But it is not applicable for the private sector.
“A large amount of foreign assistance is stuck in the pipeline due to the government's inability to properly implement foreign-funded projects. This amount currently stands at nearly $48 billion.”
The ongoing USD shortage is compounding our liability to repay foreign loans. We must ensure that the projects that are completed or underway help boost exports, said CDP’s Mustafizur Rahman.