Bangladesh Faces Mounting Debt Servicing Costs: A Looming Economic Challenge
Bangladesh is bracing for a substantial financial burden as it prepares to spend over $30 billion this fiscal year on debt servicing – encompassing both principal repayments and interest on loans, both domestic and foreign. Projections from the International Monetary Fund (IMF) paint a concerning picture, highlighting increasing “rollover risks” if revenue collection doesn’t significantly improve.
The Rising Debt Burden: Numbers and Trends
The IMF estimates public debt servicing will reach $30.59 billion this fiscal year, a jump from the previous $26.63 billion. This figure is projected to climb further to $33.84 billion in the next fiscal year. Bangladesh’s total public debt currently stands at $188.79 billion, representing 41% of the country’s GDP as of the 2024-25 fiscal year, up from 39% the year before.
This debt is comprised of $101.24 billion in domestic borrowing and $87.55 billion in foreign loans. In FY25, domestic debt repayments accounted for 4.2% of GDP, while external debt servicing remained relatively stable at 1.2%.
Strain on Government Finances
The pressure on government finances is already severe. In the 2024-25 fiscal year, domestic debt represented 22.6% of GDP, with servicing that debt consuming a staggering 89.4% of government revenues – a significantly higher proportion than observed in comparable nations. Both of these ratios are expected to continue their upward trajectory.
IMF Warnings and Recommendations
The IMF has cautioned that Bangladesh’s elevated debt service-to-revenue ratio poses significant rollover risks over the medium term. All public debt indicators are trending upwards, driven by higher borrowing costs and slower economic growth. The IMF emphasizes the critical need to raise the revenue-to-GDP ratio to mitigate growing domestic debt vulnerabilities.
Currently, Bangladesh’s tax-to-GDP ratio remains below 7%, hindering its ability to effectively manage its debt. The current government has stated its intention to increase this ratio to 8% in the upcoming budget.
Risks of Over-Reliance on Domestic Borrowing
The IMF warns that heavy reliance on domestic borrowing, particularly from banks, could stifle private businesses by reducing available capital. This could also strain the financial system’s capacity to absorb government debt, potentially leading to increased borrowing costs. Reliance on the central bank to support struggling banks could jeopardize control over short-term interest rates, potentially triggering currency devaluation and inflation.
Debt Risk Downgrade and Expert Opinions
Former finance advisor Salehuddin Ahmed has acknowledged a downgrade in Bangladesh’s debt risk, moving from low to moderate. While still considered tolerable by IMF benchmarks, he stresses the importance of caution, noting that loan repayments are outpacing both export earnings and government revenue. He advises strengthening revenue collection and avoiding high-interest, non-concessional loans.
Mitigation Strategies and Reforms
To address these challenges, the IMF recommends diversifying the investor base for government securities and implementing a liability management framework to address increasing rollover risks. Authorities are already working on reforms, including improvements to the primary dealer system – an arrangement where authorized financial intermediaries trade directly with the government to facilitate the issuance and distribution of securities.
Frequently Asked Questions (FAQ)
Q: What are “rollover risks”?
A: Rollover risks refer to the difficulty and expense the government may face when trying to borrow new money to pay off existing debts as they mature.
Q: What is the current tax-to-GDP ratio in Bangladesh?
A: It’s currently below 7%.
Q: What is a primary dealer system?
A: It’s a system where select financial institutions are authorized to trade government securities directly, supporting their issuance and distribution.
Q: What is the IMF’s overall assessment of Bangladesh’s debt-servicing capacity?
A: The IMF states that overall risks to Bangladesh’s debt-servicing capacity are “notable and rising.”
Did you know? Delayed banking sector reforms and slow revenue growth could significantly impact Bangladesh’s economic activity in the near and medium term.
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