In April 2022, soon after the government of Sri Lanka unilaterally defaulted on its debt for the first time, triggering the worst economic crisis in its history, Bangladesh Prime Minister Sheikh Hasina hosted a presentation titled "Review of Bangladesh's macroeconomy against the backdrop of Sri Lankan economic crisis" at her official residence Ganabhaban.

The presentation by the National Board of Revenue (NBR) and the Finance Division discussed the reasons for the crisis in Sri Lanka, alongside reviewing various indicators of Bangladesh's economy compared to other countries in South Asia. Although the analysis indicated Bangladesh's situation was far more robust compared to Sri Lanka, the prime minister still felt compelled to instruct officials to make sure Bangladesh could maintain its low risk position with regards to servicing its external debt.

Two years on, it would be difficult to contend the country is in a better position today compared to back then.

On the one hand, Bangladesh's stockofforeign debt has surpassed $100 billion, reaching $100.64 billion by the end of December 2023, according to Bangladesh Bank. It marked an increase of around $4 billion (net) from a year earlier. This in itself is not a cause for headaches. But when viewed in combination with the diminishing value of the Taka in recent times, the dwindling of foreign exchange reserves, chronically low revenue collection and the rate of increase in foreign debt, it may just be time for yet another presentation at Ganabhaban.

Following the release of the latest figures, Md Mezbaul Haque, executive director and spokesperson of Bangladesh Bank, said: "The amount of foreign debt is $100 billion, but it is not much compared to the size of the country's GDP. External debt is about 23% of total GDP-meaning we still have a lot of external borrowing capacity."

The Economic Relations Department (ERD) revealed that key lenders to Bangladesh in the 2022-23 fiscal were the World Bank, Japan, Asian Development Bank (ADB), and China, with Chinese financing witnessing significant growth recently.

The government is implementing several big projects with foreign funding. These include the Rooppur Nuclear Power Plant, Padma Bridge Rail Link Project, metro rail (Line-6), third terminal of Hazrat Shahjalal International Airport, Karnaphuli Tunnel, Matarbari Coal Power Plant, and Chittagong-Cox's Bazar Railway.

Besides foreign debt, the government also must service its debt from various domestic sources, with the International Monetary Fund (IMF) reporting government debt at $147.8 billion by the end of the last fiscal.

Within days of the news about foreign debt crossing $100 billion, the ERD revealed that Bangladesh spent $2.03 billion on external debt servicing, including paying off the principal and interest on foreign debt, in the first eight months of the 2023-24 fiscal. Of the total, the interest payments amount to $805.9 million, while the payments towards principal were $1.22 billion.

In the first 8 months of the last fiscal, 2022-23, debt servicing stood at $1.42 billion. It means the amount has gone up by $610 million in the space of a year, or 43% year-on-year.

According to officials at ERD, the sharp increase witnessed in debt servicing was driven mainly by increased interest payments on the debt. The $805.9 million that has gone towards paying the interest on foreign loans is double what the government paid towards interest in the corresponding period of the last fiscal, when it was $403 million.

ERD records indicate loan commitments with development partners increased in the first eight months of the current fiscal. These development partners pledged a total of $7.2 billion in various loan commitments from July 2023 to February 2024, the first 8 months of the current fiscal, which is up significantly from the $1.78 billion in loan commitments secured from July 2022 to February 2023, the first 8 months of the last fiscal.

What may surprise some observers, given the alarm raised in some quarters over the country's growing portfolio of foreign debt, is that rather than ease off for a period, ERD officials are determined to realise a target of $9.92 billion in loan commitments for the 12-month period.

That means they are looking to secure a further $2.7 billion in loan commitments in the four months (Mar-Jun) that remain of the current fiscal, mainly from the various development aid organisations and multilateral lending agencies.

The government has always maintained that the rising foreign debt burden will have to be met by the increased capacity of the Bangladesh economy, that is now close to half-a-trillion in size (Bangladesh GDP $460 billion, 1 trillion = 1000 billion).

While Bangladesh's foreign debt has indeed surged in the last decade or so, it is equally true that the economy too has surged equally, if not more, and that has built up the country's capacity to not renege on repaying its loans. It is to be noted that the country's debt-to-GDP ratio, the globally accepted indicator of a country's capacity to repay its debts, has remained remarkably stable at a very safe level through all these years.

The debt-to-GDP ratio is the metric comparing a country's public debt to its gross domestic product (GDP). By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that particular country's ability to pay back its debts, according to Investopedia.

Bangladesh's debt-to-GDP ratio was just 35.6% in 2023, up from 33.2% in 2022, according to Fitch, the American credit ratings agency. Fitch estimated it would reach 36.4% over the course of 2024, which would still be the lowest in the entire Asia Pacific region among emerging markets. For comparison, when Sri Lanka defaulted on its debt, its debt-to-GDP ratio stood at a whopping 121%.

Despite the rosy picture painted by the debt-GDP ratio, Dr Ahsan H Mansur, executive director of the Policy Research Institute (PRI), believes it will be difficult for the government to repay its debts.

The eminent economist said that simply analysing the debt, or foreign debt-to-GDP ratio is insufficient when assessing the nation's economic reality. Instead, in the case of Bangladesh, we need to compare debt levels with government revenue.

While a debt-to-revenue ratio of 200-250% is generally deemed acceptable, Bangladesh's ratio exceeds 400%, Dr Mansur said. In fact, at the end of the 2022-23 fiscal, Bangladesh's debt-to-revenue ratio stood at 461%. That number is similar to neighbouring countries like India.

The debt burden of the government has been increasing in comparison to the revenue collection. The government has been borrowing from domestic and foreign sources over half of the revenue the National Board of Revenue (NBR) collects almost every year.

The development and non-development expenditure of the government is also increasing every year. But the government has to borrow to meet the additional expenses due to insufficient collection of revenue. This is leading to the increased debt ratio for the government. This is also increasing the debt repayment pressure.

Dr Mansur believes it would be impossible to pay off this debt even by reducing government expenditure; the only solution is raising revenue generation.

"The pressure to pay instalments on foreign debt will increase from this year. If the supply of dollars does not increase, the situation can take a very bad turn," he explained.

The tax-GDP ratio in Bangladesh is an abysmal 8%. It has always remained very low. But somewhat unexpectedly, it has lagged even as the country has grown more prosperous. In fact, as a result tax revenue in comparison to the GDP size has worsened in recent times. Revenue collection is not increasing in comparison to the pace the size of GDP. Bangladesh is one of the lowest-ranking countries in the world in terms of tax-GDP ratio.

Red flags

Several related indicators paint a similarly concerning picture when it comes to Bangladesh's external debt situation. The ratio of external-debt-to-exports, indicating the ability to earn its way out of trouble, surged from 56.3 percent in FY2016 to 116.6 percent in FY2023. It highlights slower export growth compared to the increase in external loans. This escalation is particularly worrying as it implies that there may be a shortfall in resources to meet forthcoming payment obligations. The ratio of external debt to revenue collection, meanwhile, has risen from 133.3 percent in FY2016 to 192.3 percent in FY2023, according to Dr Fahmida Khatun, executive director of the Centre for Policy Dialogue.

That only reinforces the need for increased revenue generation. With demand for foreign loans likely to remain high (as can be seen from the ERD's continuing efforts to seek more funding) as long as infrastructural gaps are not filled, Bangladesh is likely to continue depending on both domestic and external borrowing.

However, with the tax-to-GDP ratio remaining around eight percent, the government's constraints on development spending from domestic sources highlight the necessity for higher external borrowing, according to Dr Khatun.

With the growth in external debt, repayment of foreign loans, or debt servicing, has also surged, escalating from approximately $3 billion in FY2013 to $4.78 billion in FY2023, an almost 60 percent increase over a decade. Given exchange rate fluctuations and the potential for further interest rate hikes on foreign loans, the repayment amount is likely to keep burgeoning.

At the same time, the situation is exacerbated by the government's continuing difficulties in dealing with repayment obligations while grappling with its dwindling forex reserves and a volatile exchange rate. Bangladesh's forex reserves have more than halved since that April 2022 screening at Ganabhaban, when it stood at $44 billion. What the government would give to have them restored to that position. Today they are closer to $20 billion - with optimistic estimates of climbing back up to $24 billion by the end of the year. But so far, there has been little indication of the government being able to arrest the slide in reserves, let alone climb back up.

Unless it is able to do that, through increasing exports and remittances, the country may well face some difficult hurdles in managing its debt servicing in the forthcoming years. There is also the possibility of taka devaluing further against the dollar in the coming years. The government should therefore plan very prudently when it comes to pursuing foreign loans, experts advise. It entails eschewing loans with stringent conditions, proper prioritisation of foreign-loan-funded projects, and ensuring good governance in implementing publicly funded projects.

Medium-term outlook

The Finance Ministry recently prepared a report on foreign loans and their servicing over the medium term. It was prepared when the foreign loans stood at $70.76 billion (only government debt). Of this, $62 billion had been taken for development projects, which has increased by two and half times in ten years.

According to the Finance Ministry report, the amount of outstanding foreign loans will keep increasing for the government. It would increase to $85.24 billion in the next fiscal (2024-25). However, the loan burden would then decrease to $72.91 dollars by the 2029-30 fiscal. However, In this assessment, the assumption was that no fresh loans would be taken, although loans in the pipeline but not yet disbursed were included. Some $44 billion in loans is reported in the pipeline, in the report.

As for annual spending on debt serving, Bangladesh paid $2.68 billion in the 2022-23 fiscal. According to the Finance Ministry's estimate, that would rise to $3.28 billion in the current fiscal. The amount may even exceed $4 billion now, given the latest figures. The payments towards debt servicing loans keep rising in the following years, rising to $5.15 billion in 2029-30. After that, it may start coming down. But that convenient assumption of no new loans being taken out in the coming years makes this report hard to take very seriously.

Meanwhile, loan repayment of some big projects has started or is about to start soon, one of them being the Rooppur Nuclear Power Plant. The loan for this power plant, some $11.35 billion, was taken in 2016. Its grace period is 10 years. After which the loan has to be paid in 10 years. Earlier, $500 million was taken for land acquisition. That is being paid off as we speak. Loan repayment for the Rooppur Nuclear Power Plant will begin in 2026.

After the attack on Ukraine, the West dropped Russian banks from the widely popular 'Swift System'. As a result, the instalments on the land acquisition loan were held up. However, the amount in each instalment has been held in escrow in a special account of Bangladesh Bank. Some $330 million dollars has been deposited in the account till now.

On the other hand, Bangladesh will get at least 30 years to pay loans taken from JICA to build Metro Rail-6.

"To deal with the situation effectively, it is important to stop the supplier credit being taken from China and Russia," Dr Mansur said.

Meanwhile the loan for the Padma Bridge was structured a bit differently. The Finance Ministry has given Tk 326.05 billion to the Bridge Authority to build the Padma Bridge. The Bridge Authority is paying off the loan. The contractor, China Major Bridge Engineering, has been paid about a third of the amount so far in dollars. Ultimately, as is the case with a number of issues in the economy, whether or not Bangladesh manages to emerge unscathed from this discomfiting situation in the days ahead, will depend on its ability to stock up on the greenback.

From the IMF Staff Report

Excerpts from the Debt Sustainability Analysis carried out by the IMF staff delegation, that released its report last November.

Bangladesh remains at a low risk of external and overall debt distress. Bangladesh's debt-carrying capacity is unchanged from the previous debt sustainability analysis (DSA). External and overall debt indicators are below their respective thresholds under the baseline. Under a standard stress test, the present value of debt-to-export ratio temporarily breaches the threshold of external debt sustainability indicator. This short duration breach of low magnitude is discounted via judgement.

Despite increased external borrowing projected in the near-term, favourable debt dynamics in the medium term keep the public and publicly guaranteed (PPG) external debt-to-GDP ratio on a declining path. Risks are tilted to the downside and include persistent inflation, increasing interest burden, revenue mobilisation constraints, slowdown in major trading partners, slow implementation of macro-critical structural reforms, amplified foreign exchange (FX) pressures, elevated non-performing loans (NPLs), and climate related events.

External PPG debt stood at US$74 billion, accounting for about 17.7 percent of GDP, in FY23. External PPG debt is predominantly owed by the central government to multilateral and bilateral creditors, at about 52 percent and 34 percent of outstanding external PPG debt respectively, with the rest being short-term, others (sovereign bonds held by non-resident Bangladeshis), and guaranteed SOE debt.

External project financing disbursements in FY23 were lower than projected previously. Global inflationary environment and supply chain disruptions, and inability of banks to open letters of credits (LCs) due to FX shortages, contributed to increased import costs and delayed project execution, reducing disbursements from donor partners. Private sector debt was 5 percent of GDP in FY23, declining marginally from FY23.