How weaker taka inflates Bangladesh's foreign debt costs

A weakening local currency is poised to increase the government's foreign debt service obligations by nearly 11% from the amount kept aside in the ongoing fiscal year, according to the Economic Relations Division (ERD).

At a recent meeting, the division said an additional Tk4,020 crore would be required to meet principal and interest payments on the foreign loans in FY24, attributing this demand to the devaluation of taka. 

Factoring in this supplementary amount, Bangladesh's foreign debt service payment will mark a staggering 52% increase from the previous fiscal. The allocation for debt service in the initial FY24 budget was Tk37,076 crore. 

In the preceding fiscal year, Bangladesh spent Tk26,928 crore in external debt servicing. 

An ERD official told The Business Standard that the additional money was sought in the revised budget based on the assumption that a dollar may cost Tk115 by the end of this fiscal.

The current allocation was made considering exchange rate at Tk104 per US dollar, the official said, adding that the government is now repaying external debt at Tk110 per dollar, the official said.

According to the central bank data, the exchange rate was Tk86 per dollar in February last year. The rate began to rise after the Ukraine war and has now jumped by 28% to Tk110 per dollar. 

External debt scenario is a stark example of how fluctuations in the exchange rate are eroding the government's fiscal capacity amid lower-than-expected revenue collection. 

In October, the government's revenue collection amounted to slightly over Tk27,000 crore, falling short of the Tk31,000 crore target, according to the National Board of Revenue. 

To address the mounting debt burden, the government will opt to secure additional funds from external sources, intensifying its dependence on higher-cost borrowing, experts said.

Zahid Hussain, a former lead economist at the World Bank's Dhaka office, said the rise in loan repayment cost is due to adjusting exchange rates, which is inevitable and should not be a cause for much worry. 

However, there is reason for concern regarding the recent trend of escalating foreign debt servicing costs, he warned. 

The economist pointed out that repaying foreign debt requires dollars, and getting those dollars is a challenge due to limited government revenue. 

He said the government needs to tackle both issues to handle the pressure of foreign debt repayment. To address this, he suggested controlling government spending and increasing income through exports and money from expatriates.

Dr Ahsan H Mansur, executive director of research firm Policy Research Institute, said the debt burden will further shoot up on the inclusion of Bangladesh's annual fees and share investments as a member of international organisations. 

"If we don't have a steady currency exchange rate, it's tough to keep things in balance in the economy, especially when it comes to foreign transactions," said the economist.

He cautioned that if this situation persists, Bangladesh may need to seek annual adjustments to the budget every year for foreign debt repayments.

Dr Ahsan Mansur said the devaluation of the taka has already led to a substantial rise in the private sector's external liabilities, amounting to nearly Tk1,00,000 crore.

He advised letting the market decide the exchange rate and increasing export and remittance income. Besides, returning all foreign earnings and managing import expenses wisely must be ensured.

Principal and interest 

The allocation for debt service in the initial FY24 budget was Tk37,076 crore. 

At the ERD meeting, an additional Tk1,596 crore has been sought in the revised budget to pay the principal of foreign loans, a 6.46% increase from initial allocation of Tk24,700 crore.

For interest payment, extra Tk2,424 crore has been sought. This is a 19.59% jump from the initial Tk14,800 crore. 

For perspective, Tk17,491 crore was spent on repayment of loans in the last financial year. 

The government's outstanding external loan was $55.602 billion as of 30 June 2022. It was $62.57 billion at the start of the current fiscal year.