Bangladesh's external debt has recently become a hot-button issue, and with good reasons. While the International Monetary Fund (IMF) deems the country's debt levels manageable in their November 2023 report, several factors raise concerns in recent times.

Only last week, the country’'s external debt reached a new milestone, exceeding $100 billion for the first time. This significant increase is attributed largely to government borrowing to finance development projects throughout the country.

The Bangladesh Bank reported that the total external debt stood at $100.64 billion as of December 2023. This marks a rise from $96.55 billion recorded just three months prior.

Analysts point to government initiatives as a key driver of this debt surge. These initiatives involve large-scale infrastructure projects intended to propel Bangladesh's development. The borrowed funds are being used to finance these projects.

While the government ramps up borrowing for development, the cost of servicing this debt has also grown considerably. In the first eight months of the current fiscal year, Bangladesh has already surpassed the $2 billion mark in foreign debt repayments, a significant increase driven by rising interest rates.

According to the latest data from the Economic Relations Department (ERD), the government has shelled out a significant sum for interest and principal repayments between July and February of FY24.

The total paid to international lenders stands at a staggering $2.03 billion, a hefty 43% increase compared to the $1.42 billion paid during the same period in the previous fiscal year. This surge is primarily driven by a significant rise in interest payments, which have more than doubled year-on-year.

The government has already paid $806 million in interest over the eight-month period, compared to just $403 million for the same timeframe last year, says the ERD data.

Increased debt repayments squeezes development funds

These ballooning debt repayments are raising concerns among experts. They warn that this trend is squeezing the government's ability to fund other critical areas.

The issue stems from the fact that a growing portion of new loans are being used to service existing debt. This reduces the amount of money available for essential government spending on healthcare, education, and infrastructure.

Zahid Hussain, former lead economist of the World Bank’s Dhaka office points out a double-edged sword for the government.  While budgetary spending on essential services is rising, so too are debt repayments, Hussain said, adding that this squeeze on resources translates to a decrease in "net financing," meaning less money is available for new development projects.

According to the former WB economist, the crux of the issue lies in the rising principal repayments on past foreign loans. He said these repayments are a result of the long-term structure (often 30 years) of loans from institutions like the World Bank and Asian Development Bank (ADB).

“While these loans offered lower interest rates and long repayment periods, they also include a back-loaded repayment schedule, meaning larger principal payments occur later in the loan term,” Hussain told Bangla Outlook.

However, Hussain emphasizes the long-term benefits of these loans. The initial lower repayments allowed Bangladesh to invest in crucial projects, fostering growth. The current rise in repayments is simply part of the predetermined amortization schedule, he added.

Development researcher and writer Faiz Ahmad Taiyeb meanwhile believes escalating debt level poses significant risks to the country's long-term financial health and economic growth.

In one of his columns for The Daily Star, he wrote that a significant portion of Bangladesh's foreign currency earnings, crucial for imports and maintaining a stable exchange rate, is now being diverted towards servicing existing debt.

He pointed out that this trend can strain the country's balance of payments, leaving less money available for essential areas like healthcare, education, and infrastructure development.

Megaprojects come with hefty price tags

As per Taiyeb’s analysis, one of the key drivers of this escalating debt is the government's push for megaprojects and investments in the power and energy sector.

Rooppur Nuclear Power Plant project–the largest ever infrastructure project with nearly $12 billion price tag exemplifies the challenges. The loan structure includes a 10-year grace period given by the lender Russia, with repayments starting in 2026.  Bangladesh had already paid $500 million for land acquisition, and installments on that loan are ongoing. The upcoming principal and interest payments for the entire project will place a significant strain on the country's finances.

Meanwhile the loan repayment for the iconic Padma bridge presents a different scenario.  Bangladesh funded the construction with a domestic loan from Bangladesh Bank.  However, the Padma Bridge Authority is responsible for repaying this loan. Additionally, the contract with China Major Bridge Engineering, the construction firm, involved dollar-denominated payments, further pressuring Bangladesh's foreign exchange reserves.

“While intended to stimulate economic growth and enhance infrastructure, these mega initiatives have come with hefty price tags,” Taiyeb said, adding that while some of these projects may yield long-term benefits, the immediate debt servicing requirements  are putting a significant strain on the government's financial capacity.

Talking with Bangla Outlook, Dr Fahmida Khatun, Executive Director of Center for Policy Dialogue (CPD) said, a significant portion of Bangladesh's external debt is linked to floating interest rates, previously tied to the London Inter-Bank Offered Rate (LIBOR) but now transitioned to the Secured Overnight Financing Rate (SOFR). 

“These rates have climbed noticeably in recent years, with the current SOFR exceeding 5% - a stark contrast to the previous level below 1%.  This translates to a looming increase in Bangladesh's debt servicing obligations in the short and medium term,” she said.

She also said that Bangladesh's low foreign exchange reserves and a volatile exchange rate have caused further problems. “This combination makes it harder for the country to manage upcoming debt repayments effectively, especially with reserves experiencing an ongoing decline,” she said.