Rising pressure of foreign debt servicing

The sharp increase in public debt has become a matter of concern worldwide for the last few years, and different international organisations have already raised red flags in this regard. Last month, the World Economic Forum (WEF) released its 'Chief Economists Outlook'. It showed that most of the chief economists surveyed for the report believed that public debt threatens macroeconomic stability in both advanced and developing economies. Moreover, almost two-fifths of chief economists expected developing economies to face higher debt default next year.
In June, the UN Trade and Development (UNCTAD) released a report titled 'A World of Debt', painting a grim picture of the current debt situation. The report warns that while public debt is a necessary tool for development, its unchecked growth can become a crippling burden. This is the reality today in many developing nations, where global public debt has skyrocketed to a record high of US$97 trillion in 2023. Though the situation is not equally dire in every case, yet it's a cause for serious concern in several countries.
The growing concern on the global public debt is further echoed by the International Monetary Fund (IMF) last week. During the 2024 Annual Meeting of the IMF and the World Bank in Washington, which took place on October 21 and 26, the IMF formally released its Fiscal Monitor report. The report's theme is 'Putting a Lid on Public Debt', which focuses on the latest trends in global public debt. The report mentioned that the public debt is set to exceed $100 trillion, or about 93 per cent of global gross domestic product (GDP), by the end of 2024 and is likely to reach 100 per cent by 2030.
In other words, the total amount of global public debt will equal the size of the global economy in 2030, the terminal year of the Sustainable Development Goals (SDGs). So, when the planet should be a better place for people in terms of prosperity, peace, and partnership, it is going to be a debt-burdened place, and that debt is also unequally distributed.
Target 17.4 of the SDGs stresses assisting developing nations attain the 'long-term debt sustainability through coordinated policies.' Fostering debt financing, debt relief, and debt restructuring are the suggested tools to fulfill the target. It also underscores addressing the 'external debt of highly indebted poor countries to reduce debt distress.' The indicator to measure progress in this connection is the debt service ratio in terms of exports of goods and services.
It is to be noted that public debt is also known as public interest, government debt, national debt and sovereign debt. From sourcing consideration, there are two types of public debt: external and internal. The government's borrowing within the country is known as internal debt. The government usually borrows from banks and individuals inside the country and sometimes from other internal sources like business entities. The government creates public debt by handing out government bonds and bills. Again, the government's borrowing from abroad is known as external debt. Some external sources are bilateral borrowings, multilateral borrowings, loans from the Asian Development Bank (ADB), World Bank, etc.
For countries like Bangladesh, external public debt is generally considered a matter of concern. So, external debt repayment or servicing usually gets much attention. The latest statistics, released by the Economic Relations Division (ERD) under the Ministry of Finance, showed that foreign debt servicing stood at $1126.51 million during the first quarter of the current fiscal year (FY25). Two-fifths of the total debt servicing went to interest payments worth $441 million; the rest amounted to $685.50 million as principal repayments. The ERD statistics also showed that the total amount of external debt servicing was recorded at $870.46 million last fiscal year, of which $378.46 million was interest payments and a tiny amount of $92 million was repayments against the principal. The annual debt servicing stood at $3371.59 million in FY24, of which the principal amount was $2021.79 million, while interest payment was $1349.80 million.
Despite the rise in debt service liability over the years, Bangladesh's external debt sustainability is still strong when measured in terms of GDP and other indicators. For instance, the public external debt to GDP ratio increased from 13.90 per cent in FY19 to 18.10 per cent in FY24. By adding the private sector external debt with the public external debt, the total external debt to GDP ratio reached 22.60 per cent last fiscal year. The ratio is modestly below the 40 per cent threshold level, which is considered vulnerable. Again, the country's debt servicing as a percentage of remittance and exports of goods and services reached 5.60 per cent in FY23 from 4.47 per cent in FY19.
All these indicators do not necessarily should make one complacent as things may change dramatically within a short period, especially when pressure for repayments of foreign loans will increase in the near future. For instance, due to a shortage of foreign exchange earnings, Bangladesh has already been compelled to delay settling the scheduled payment for the Rooppur Nuclear Power Plant to Russia and Adani Power Ltd in India. For Rooppur, Russia approved $11380.0 million as a loan, and the amount has to be repaid with an interest rate based on LIBOR plus 1.75 per cent or at least around 7 per cent at this moment.
So, debt servicing will come under stress within a short period of time and the country has to struggle to finance it. The mismanagement and bad governance by the ousted regime of Hasina is going to take a huge toll in the near future. The increase in foreign exchange reserve through higher amount of foreign direct investment (FDI), rise in exports and higher inflow of remittance are necessary in this connection.
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