Why external debt jumped to $100b

An increasing trend in bilateral foreign loans such as debt from China and Russia in infrastructure projects, and vaccine support programmes from global lenders, including World Bank and International Monetary Fund to combat Covid-19, have pushed up the country’s external debt in recent years.

For the first time, Bangladesh’s external debt has crossed the $100 billion mark at the end of 2023.

A slowdown in the country’s domestic mobilisation might have poised to put a big dent in foreign exchange reserves which in turn place Bangladesh's public finances under more strain due to mounting loan repayments, forex crisis and growing fiscal burden, experts opined.

The central bank’s recent report shows that even just seven years ago in 2017, the country’s external debt was $50.31 billion, which doubled to $100.64 billion at the end of 2023. In last one decade, such loan jumped from $37.47 billion in 2014 to $100.64 billion last year.

Talking to The Business Post, World Bank Dhaka Office former lead economist Zahid Hussain said that external debt rose sharply due to a rising trend in bilateral loans for infrastructure projects such as Karnaphuli tunnel, Padma Bridge rail link, and Rooppur Nuclear Power Plant.

“We also see that since 2020, our external debt has surged for taking up vaccine support programmes from World Bank, International Monetary Fund, Asian Development Bank, European Investment Bank, and Japan International Cooperation Agency to tackle the pandemic crisis,” he said.

According to the Bangladesh Bank data, foreign debt stood at $60.29 billion in 2019 which increased to $72.94 billion in 2020 when the Covid-19 pandemic broke out and such loan rose to $90.79 billion in 2021 when the pandemic took a heavy toll on the economy.

Experts believe that during the Covid-19 pandemic, the interest rate dropped globally because of less demand for loan due to poor investment initiatives and slow progress of government or private sector projects.

So, the government itself borrowed from the global lenders– whose interest rate was comparatively lower than commercial debt– and it encouraged the private sector to bring foreign currency to boost investment. Borrowing from the global lender was easier for Bangladesh as its international credit rating was higher.

However, concern has mounted as bilateral debt is repaid in short-term with comparatively higher interest rate, and private sector’s debt cannot be used properly. As a result, the country cannot draw more investments and increase forex reserves through exports.

Economist Zahid Hussain says, “Our foreign debt to GDP ratio is not high. But concern arises mostly due to forex crunch in repayment and production has not been increased as much as debt increased. Even, if revenue collection is raised, it reduced budget deficit, which may lessen debt pressure.”

“If the country cannot increase goods and service production against external debt and marketing productivity, especially those productions which can help increase forex reserves through exports, fiscal pressure will worsen and macroeconomic stability may be jeopardised,” he stressed.

However, the source of loans and the terms on which these loans were taken are a cause for concern, he said. "If we fail to meet the conditions, we may face difficulties in future."

He also said, "We must ensure that loans are used properly and we generate income from them. Otherwise, we will not be able to repay loans on time. If we fail to implement projects on time and complete their work within the initial budget, we may face difficulties.”

"Therefore, we need to increase our USD income. Otherwise, it will be distressing in future."

Repayment pressure creates fiscal burden

During the pandemic period, the country has received foreign loans easily but now it is under pressure to repay it. On the other hand, the loans deferred by the private sector during the period also have to be repaid now.

As a result, debt servicing of Bangladesh has increased a lot. On the other hand, due to the USD crisis, some banks could not pay the LCs on time last year, as the credit rating of Bangladesh has moved down a notch. So, the cost of loan repayment is also increasing in the coming days.

External debt burden is putting pressure on the country’s overall balance of payments (BoP).

Despite the surplus of current account balance, financial account deficit hit an all-time high of $7.35 billion in the July-January period of FY24 due to the negative trend of foreign direct investment inflow and the rise in foreign loan repayments.

According to the BoP data, medium and long-term loan repayments increased by 26.23 per cent to $1.15 billion in the first seven months of FY24, while such loan inflow increased by only 8.2 per cent to $4.38 billion, compared to the same period of FY23.

Policy Research Institute (PRI) Executive Director Ahsan H. Manur said, “Now we need large amounts of foreign funding. We must make an effort to reschedule short-term loans. Besides, the due payments for oil and gas imports should be converted to debt instruments, so that those can be paid off in instalments.”

Meanwhile, net short-term loan repayments increased to around $1.36 billion in the first seven months of FY24, which was only $546 million in the same period of FY23. Trade credit repayment also increased to $9.22 billion in the July-January period of FY24.