Foreign debt repayment up 43%, surges past $2b in 8 months

In the opening eight months of the ongoing fiscal year, the government's foreign debt servicing soared past the $2 billion mark, primarily propelled by surging interest rates.

As per the Economic Relations Department (ERD) latest data, the government paid a staggering $2.03 billion in interest and principal payments to international lenders between July and February of FY24, up by 43% from $1.42 billion paid out during the equivalent period in the previous fiscal year.

The significant escalation in debt servicing expenses is chiefly attributed to the substantial increase in interest payments, which skyrocketed to $806 million over the course of eight months – doubling from the previous year's figure of $403 million for the same timeframe.

Experts have pointed out that this trend is constraining the government's fiscal capacity, as a portion of these loans is being used for repayment. To address the potential burden of future payments, they recommend that the government re-evaluate projects in the pipeline and assess their expected returns and timelines. Also, they advised the government to boost revenue, exports, and the inflow of remittances to counter dependency on foreign loans.

Zahid Hussain, former lead economist of the World Bank's Dhaka office, said while the government's operating expenses are increasing in the budget, so too are its debt repayments. Consequently, net financing is decreasing, with foreign principal payments from earlier loans rising. Consequently, a portion of the country's new foreign debt is being allocated to repayment.

Hussain elaborated on the structure of loans taken earlier from institutions like the World Bank and Asian Development Bank (ADB), highlighting their 30-year tenures and amortisation schedules. These loans, although involving higher repayments towards the end, were acquired for their long-term benefits and cost-effectiveness. According to the amortisation schedule, repayment begins with lower amounts and gradually increases over time.

"Currently, global interest rates are high. The cheap loans available from the World Bank and the ADB should be used first. However, it is essential to use these loans transparently and responsibly. Market-based loans with burdensome terms should be minimised. For instance, since the Asian Infrastructure Investment Bank (AIIB) provides fully commercial loans, less reliance should be placed on it. By opting for ADB loans with market-based terms, longer repayment periods can be secured. Therefore, we should seek the most cost-effective loans with extended repayment periods," he suggested.

The noted economist said, "The main point here is whether the purpose for which we are taking the loan is justified. We have to consider the usefulness of the projects financed by these loans. That is the key point. Even cheap loans become burdensome if we face challenges in selecting and implementing projects. It's evident that this will lead to economic burdens."

Investing in "vanity" projects with foreign debt is not justified, he said, pointing out, "The Hambantota port project in Sri Lanka was a vanity project. Similarly, our Karnaphuli tunnel is also a vanity project."

He said, in the current situation, importance should be given to selecting projects wisely. Projects that will help increase productivity, such as service projects, should be prioritised. Additionally, projects aimed at enhancing export productivity should be chosen, as they will bring in dollars. Therefore, priority should be given to the development of logistics systems and projects related to energy supply, as they will directly contribute to the increase in foreign exchange.

Zahid Hussain said, "When there is an opportunity for long-term repayment, that type of loan should be pursued. Additionally, all loan commitments for projects in the pipeline need to be re-evaluated. Projects that will not contribute to the economy should be scrapped, and instead, projects should be undertaken that will contribute to foreign exchange earnings through debt reprogramming."

Ahsan H Mansur, executive director at the Policy Research Institute of Bangladesh, expressed concern over the rapid increase in foreign debt repayment, which has become a pressing issue for the country. The primary reason for this concern is that some loans have short repayment periods and are subject to market-based interest rates.

Furthermore, rising interest rates have resulted in higher interest payments. Additionally, stricter terms from bilateral development partners such as China and Russia have intensified the pressure to repay loans, he said.

"For instance, projects like Russia's Rooppur Nuclear Power Plant and the Padma Bridge Rail Link, funded by China, are notable examples. There will be no return from the Padma Bridge project, while the timeline for electricity production from the Rooppur project remains unclear," he expressed concerns.

He said the bridge is being constructed on the Jamuna River, but the government lacks the funds to create double lines on both sides. This means that while the bridge is nearly completed, the government does not have the funds to acquire the necessary land. Consequently, the anticipated benefits will not materialise.

"At this time, we should focus more on increasing exports, remittances, and revenue collection to procure dollars. Currently, we have neither money nor dollars," he pointed out.

In the current situation, the government should only consider loans from providers offering favourable terms, such as Japan or the World Bank. The economist believes that the decision on taking foreign loans should be reassessed for projects where implementation has not yet commenced.

Why interest on the rise 

ERD officials said the benchmark secured overnight financing rate (SOFR) has increased due to the Ukraine-Russia war. Currently, the SOFR is above 5%, compared to less than 1% before the outbreak of the conflict.

On the other hand, Bangladesh's market-based loans are gradually increasing. Consequently, the country now has to pay more money in terms of interest.

About 75% of Bangladesh's loans from the ADB are market-based. Additionally, it takes loans from the AIIB at market-based interest rates. Moreover, the country acquires market-based loans on a smaller scale from the World Bank, the officials added.

Loan commitments increased by 304%

According to ERD data, loan commitments by development partners increased by 304% to $7.20 billion in the first eight months of the current fiscal year, compared to $1.78 billion in the corresponding period of the previous year.

Officials at ERD said the preparation process for obtaining loans has been efficient. Since the beginning of the financial year, it has been possible to enter into loan agreements with development partners for many projects.

This contrasts with the previous financial year, where, due to a lack of preparation, many projects could not be contracted at the beginning, the ERD officials added.

ERD officials said the target is to achieve commitments of $9.92 billion from various development agencies for the current fiscal year.

According to ERD data, in the first eight months of the current fiscal year, the highest commitment, amounting to $2.62 billion, came from the ADB. Additionally, pledges of $2.02 billion from Japan and $1.41 billion from the World Bank have been recorded.

Disbursements increased by 2%

According to ERD data, in the first eight months of the current financial year, foreign loan disbursements have reached $4.99 billion, compared to $4.87 billion in the equivalent period a year ago.

The ADB has released the highest amount, reaching $1.30 billion during the period, followed by Japan at $1.04 billion. Additionally, the World Bank has released $877.87 million, Russia $807.50 million, and China $361.71 million.

Projection on foreign loan repayments

In the last fiscal year, Bangladesh repaid $2.67 billion – $935.66 million as interest and $1.73 billion as principal – to development partners.

ERD projects repayments to increase to $3.56 billion in the current fiscal year, and they are expected to rise to $4.21 billion and $4.72 billion, respectively, in the next two fiscal years.