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Post-LDC foreign debt servicing a concern

JASIM UDDIN HAROON | June 15, 2025 00:00:00


Ballooning external debt-servicing liabilities claim a king's ransom from the budget for the outgoing fiscal year.

Such a concern is reflected in the official budget documents as the interim government presents next fiscal's budget for Bangladesh.

The government is projected to repay nearly 30-percent higher or US$2.615 billion in servicing external debt in the outgoing FY2024-25, up from $2.02 billion in the previous fiscal year, the documents show.

The finance ministry notes that the weakening of the Bangladesh Taka (BDT) against the US dollar has substantially increased the cost of foreign-debt repayments.

"The Taka has lost a considerable portion of its value in recent years, exacerbating the issue of rising debt-servicing costs," the finance adviser notes in the budget document.

Data from the Bangladesh Bank show that the taka depreciated by 3.28 per cent in exchange with the dollar during July-April of FY25, compared to a 1.49-percent depreciation in the same period of FY24.

The budget papers caution that managing external-debt obligations is essential to maintaining financial stability and avoiding liquidity pressure.

Nevertheless, the government remains optimistic, asserting that debt service will stay within tolerable limits, aided by efforts to diversify financing sources and strengthen foreign-exchange reserves through higher export earnings and remittance inflows.

Economists say the primary driver behind the rising external -repayment burden is a continued devaluation of the local currency.

Dr Zahid Hussain, former lead economist at the World Bank's Dhaka office, says, "A continued depreciation of the taka, unless arrested through sound macroeconomic policies, will inevitably inflate external debt -repayment burdens. This adds stress to the balance of payments and fiscal planning."

Talking to the FE about this one of major macroeconomic concerns, he also warns that external borrowing will become more expensive once Bangladesh graduates from the least-developed country (LDC) category in November 2026 as concessional and semi-concessional loan access diminishes thereafter.

Despite rising repayments, the Finance Division has conducted a Debt Sustainability Analysis which concludes that Bangladesh remains at a low risk of both external and overall debt distress.

The report states that all key external debt indicators are currently below the threshold levels under the baseline scenario.

However, it flagged one concern: the ratio of external debt to exports has reached 140 per cent -- well above the comfort zone -- signaling vulnerability in foreign-exchange earnings relative to obligations.

Echoing these concerns, Dr M. Masrur Reaz, Chairman and CEO of Policy Exchange Bangladesh, says, "While external borrowing is often necessary for infrastructure and development, the cost of servicing that debt can quickly escalate if exchange-rate management and export performance remain weak."

He adds the future burden will likely increase as Bangladesh transitions out of LDC status and begins to borrow at higher, market-based interest rates.

Looking ahead, government estimates suggest that while the nominal value of annual debt repayments will continue to rise, the pace of increase will moderate over the next few years. Repayments are projected to reach $2.9 billion in FY2027 and $3.34 billion in FY2028.

Finance experts emphasize close monitor of exchange-rate trends and the terms of new external loans to minimize fiscal risks and maintain long-term debt sustainability.

jasimharoon@yahoo.com


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