The Centre for Policy Dialogue (CPD) in a study on ‘Bangladesh’s External Public Borrowings and Debt Servicing Capacity’ has expressed concern about the sharp rise in the share of costly foreign loans in the country's overall debt portfolio in recent years.
The recent study released on Tuesday (July 16) said Bangladesh’s track record of debt servicing concerning public and publicly guaranteed (PPG) external debt has been impeccable till now. However, the study argues that there are reasons to be concerned about raising short-term costly external debt.
The CPD’s study revealed several reasons for this – rising foreign borrowings of recent years, more stringent terms of loans, higher share of non-concessional loans in the backdrop of Bangladesh’s middle-income graduation, significant depreciation of the taka, delays in project implementation resulting in cost escalation and higher debt servicing obligations, grace period of some of the mega-projects coming to an end, and others.
The study measures the debt-carrying capacity of Bangladesh by deploying a modified and calibrated version of the IMF-WB framework and concludes that the country’s position in this respect has indeed weakened in recent years.
The study offers several policy suggestions for better PPG debt management in Bangladesh. The study argues that in going forward Bangladesh should be more selective in incurring borrowings for externally funded projects, take adequate preparation to carry out complex negotiations and develop the needed human resources and expertise in this regard, keep a sharp eye on the status of credit rating, forex exchange movements and forex reserve situation, and closely monitor the trends in private sector borrowings.
The study reinforces the need to develop a comprehensive debt management strategy with a view to strengthening Bangladesh’s debt carrying capacity and ensuring debt sustainability of the country.
The amount of both principal and interest payments has been rising at a fast pace. Whereas in June 2019, the interest amount stood at US $487.5 million, in June 2023 this stood at $1307.1 million. Indeed, this trend has accelerated in recent times, as the amount earmarked under interest almost doubled in just 12 months from June 2022 to June 2023.
Similarly, the principal amount rose from $2.33 billion to $3.47 billion over the corresponding period.
Over the recent past years, the amount of public debt servicing, both in terms of interest and principal, is growing at a fast pace as the grace period of some of the larger, and relatively more hard-term loans, is coming to an end. The rate of rise has been higher than the GDP growth rate in recent times, leading to a rising share of PPG debt in GDP. To recall, the GDP (in USD terms) has posted a rise of 35.3 percent between FY2018-19 and FY2022-23 (in current USD terms), whereas outstanding PPG borrowings and debt servicing have grown by 62.8 percent and 69.3 percent respectively over the matched period. In view of the depleting forex reserves, this trend is even more disquieting.
For example, in June 2021, forex reserves stood at $46.4 billion when the corresponding sovereign debt servicing amount stood at $3.3 billion, equivalent to 7.1 percent of the corresponding reserves.
But the share was equivalent to 19.4 percent in June 2023. This would mean that debt servicing equivalent reserves stood at $19.45 billion on March 27, 2024, according to the IMF’s BPM6 method, at a time when sovereign debt servicing obligations were set to rise over the near and medium-term future.
The composition of the debt portfolio of Bangladesh has also changed sharply in recent years. The share of concessional, IDA-type loans, is coming down, while the share of non-concessional, including market interest-based bilateral and multilateral loans, has been on the rise. As is known, IDA-type loans have annual interest rates of, on average, 0.7 percent, with a grace period of 5-10 years, and a maturity period of 30-40 years.
Bangladesh's more recent loans were incurred at more stringent terms, with higher interest rates (over 2 percent), shorter grace periods (5-7) years, and maturity periods of 15 to 20 years.