Debt-to-revenue ratio rises – Can Bangladesh manage the pressure?
The government's external debt burden is rising at a pace far outstripping revenue growth, pushing the debt-to-revenue ratio dangerously close to the IMF's 18% threshold by the end of fiscal 2023-24, according to a recent Economic Relations Division (ERD) report.
The debt-to-revenue ratio surged to 16.53% in FY24, up from just 12% a year ago, as the government turned to foreign loans without adequately assessing expected returns.
ERD data shows the government's foreign debt stock increased by nearly $6.5 billion, reaching $69 billion in FY24. In 2027 and 2028, principal repayments will exceed $3 billion each year.
But the challenges run deeper. The government is now shifting toward market-based loans denominated in US dollars and Japanese yen, while concessional loans under the Special Drawing Rights (SDR) basket are declining.
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This transition escalates repayment pressures, as these market-based loans come with higher interest rates and greater exchange rate risks, further straining the country's fiscal space.
Experts are sounding the alarm, warning that an increasing share of government spending will be consumed by interest payments, leaving fewer resources for critical investments in infrastructure, education, and healthcare – sectors vital for long-term economic growth.
Zahid Hussain, former lead economist of the World Bank's Dhaka office, told The Business Standard, "Bangladesh's external debt situation is heading towards distress, with increasing pressure. What was once a concern is now evident in the FY24 final statistics of the ERD. Signals already indicate rising pressure to repay the debt, with challenges emerging on both sides of the debt-to-revenue sector."
He said, compared to the size of the economy, debt has grown faster than revenue. The rise in interest rates post-Covid has led to higher interest payments.
"The grace and maturity periods for recent loans have shortened. Previously, loans from the World Bank and Asian Development Bank had a 40-year repayment period, but now it is down to 30 years," the economist explained.
Where there was once a 10-year grace period, now it is limited to just over five years. Interest rates on all loans, including those from the WB, ADB, and Japan International Cooperation Agency (Jica), have also risen, he pointed out.
"While increasing revenue is crucial, changes in debt management are also necessary. A major issue with debt management is that many projects have not yielded the expected returns. If a project financed by hard loans doesn't generate income, how can revenue increase?"
SDR weakens in debt stocks
According to ERD data, the share of Special Drawing Rights in external debt stocks has weakened by the end of FY24, dropping to 35.1% from 38.1% a year ago, when SDR debt stocks were the highest.
As SDR declined, the dollar's share of debt stocks increased, rising to 38.4% in FY24, up from 36.4% the previous year. This includes market-based or Secured Overnight Financing Rate (SOFR)-based loans.
To mitigate high interest rates on dollar-denominated loans, the government has recently taken several budget support and project loans in Japanese yen. As a result, the yen's share of debt stocks rose to 17.4% by FY24, up from 16.7% the year before.
ERD officials said the pressure on debt repayment will increase due to the decrease in SDR. SDR-denominated debts can be repaid in any currency from the SDR basket – the US dollar, euro, Chinese renminbi, Japanese yen, or British pound sterling – which reduces debt servicing pressure.
However, officials also noted that the rise in Japanese currency debt will contribute to increased repayment pressure. "There's concern that the yen will strengthen against the dollar, which would result in significantly higher payments," one official told TBS.
"We've taken loans in various currencies, and our currency mix has diversified based on market conditions, not by choice. There is both good and bad news here," Economist Zahid explained.
"The good news is that currency diversification helps protect the debt burden from exchange rate fluctuations, preventing an increase in our debt burden."
He said the dollar has become more expensive recently, thus increasing the debt burden. It has strengthened significantly since Covid, and although it's said to have been corrected, it appears highly overvalued at present.
"If this overvaluation persists, the debt burden in taka will continue to rise," he said, cautioning that heavy reliance on the dollar poses a significant risk.
The economist said the bad news is the decline in SDR stock, a basket of five currencies that offers less fluctuation than the dollar or yen. However, multilateral development partners are offering loans in other currencies, leading to a shift from SDR.
"Along with interest rates, non-interest rates must also be considered. While currency diversification is beneficial, the intended risk reduction has not been achieved," he added.
According to the ERD, the government recently borrowed in Japanese currency to reduce dollar exchange rate risk. As a result, the average interest rate on foreign loans in fiscal 2023-24 decreased to 2.25%, down from 2.27% in the previous fiscal year. The average rates in FY22 and FY21 were 2.11% and 1.35%, respectively.
The ERD report also shows that Bangladesh will need to repay over $3.5 billion in principal annually from 2029 to 2032.
Bangladesh's debt liabilities increased to $68.821 billion by the end of fiscal 2023-24, up from $62.4 billion the previous year.
The World Bank held the highest outstanding debt at $20.622 billion, followed by ADB with $15.74 billion, Japan with $11.25 billion, and China with $5.837 billion.
