Challenges and Strategies for Managing Bangladesh’s External Debt: A Closer Look at Debt-Servicing and Debt-Carrying Capacity
Bangladesh’s Rising External Debt-Servicing Obligations Demand Strategic Management
Bangladesh’s outstanding external public and publicly guaranteed (PPG) debt, standing at $79 billion as of September 2023, may not be considered high when compared to economies of similar size. However, recent trends in the growth of external debt-servicing obligations have raised concerns regarding the management of the country’s external sovereign debt.
In the past four years, Bangladesh’s PPG debt has increased by 60 percent, reaching $70.8 billion. Interest payments have surged by 168 percent, while principal payments have also seen a significant rise. The country’s debt-servicing payments in the current fiscal year have increased by 49 percent compared to the previous year, with interest payments soaring by 117 percent.
The rising debt-servicing obligations can be attributed to various factors, including the country’s middle-income graduation in 2015, which led to the loss of highly concessional loans and transition to more stringent borrowing terms. Additionally, project cost escalations and higher interest rates have added to the burden of debt repayment.
As Bangladesh prepares for its LDC graduation in November 2026, challenges in the export sector and potential impacts on forex reserves need to be considered in estimating the country’s debt-carrying capacity. Efforts should be focused on maintaining the country’s current debt-carrying capacity classification and avoiding a downgrade.
To address these challenges, Bangladesh should explore opportunities for additional borrowings from new sources, diversify its loan portfolio, and carefully assess interest rates and lending terms. The quality of investments, completion of projects on time, and accountability in fund usage must be ensured. Non-concessional loans should be negotiated cautiously, and loans with unnecessary components should be monitored and discarded.
Furthermore, the country needs to strengthen its human resources and analytical capacities to effectively manage external debt and assess debt-carrying capacity. Regular reporting on debt status and debt service-related data should be improved to aid policymakers in making informed decisions.
In conclusion, strategic management of Bangladesh’s external borrowings and debt-servicing obligations is crucial to ensure sustainable economic growth and financial stability. By adopting a proactive and cautious approach, the country can navigate the challenges posed by its rising external debt burden and safeguard its economic future.