Interest payments on foreign debt exceed budget allocation in 10 months

The government's spending on interest payments for foreign loans has already exceeded the budget allocated for the outgoing fiscal year. 

According to provisional data from the Economic Relations Division (ERD), the government spent nearly $1.15 billion (equivalent to Tk12,626 crore) on interest payments from July to April of the current fiscal year.

The amount has surpassed the budget allocation of Tk12,376 crore for interest payment and also marks a 102% increase from the same period last fiscal year.

ERD officials said the surge is due to external factors, including the Russia-Ukraine war, which has pushed up interest rates and strengthened the dollar.

The Secured Overnight Financing Rate (SOFR), a benchmark for short-term interest rates, has risen above 5% compared to less than 1% before the conflict, they mentioned. 

Bangladesh's growing reliance on market-based loans, which typically carry higher interest rates than concessional loans, is another contributing factor. 

Around 75% of the country's loans from the Asian Development Bank are market-based, along with some portions from the Asian Infrastructure Investment Bank and the World Bank. 

Besides, ERD officials said, the escalating government debt for development projects and budget support is intensifying the pressure on interest payments. 

Meanwhile, with the increase in interest rates, the government's overall debt servicing rate has also increased. 

According to ERD data, government debt repayments increased by 44% during July-April. The government cleared a total of $2.81 billion to various development partners, including interest and principal, as against $1.95 billion in the same period last fiscal. 

The ERD projects that Bangladesh's foreign loan repayments, including principal and interest, will reach $3.56 billion in the current fiscal year. 

Mustafa K Mujeri, executive director of the Institute for Inclusive Finance and Development, cautioned that while foreign loans are increasing, concessional loans are decreasing. 

"This shift towards market-based loans and bilateral loans with higher interest rates and shorter repayment periods is concerning," said the economist. 

He added that with many mega projects reaching the end of their grace periods, the pressure for principal repayment is expected to rise further. 

Mujeri further said there is a need for careful management of loan repayments. "We should focus on increasing revenue, remittance, and project selection based on viability." 

Sayema Haque Bidisha, professor in the Department of Economics, University of Dhaka, also said boosting revenue collection could ease the pressure of foreign loan repayment. 

"However, the government has not implemented reforms to improve revenue collection. Many wealthy individuals still evade tax payment, contributing to a rise in wealth accumulation across districts," she said. 

Loan commitment rise 37% 

Bangladesh secured $7.6 billion in commitments from development partners in the first 10 months of this fiscal year, marking a 37% increase from the same period last year, according to ERD data. 

Officials said this success is due to improved preparation to secure loan pledges. This fiscal saw the early signing of loan agreements for many projects, unlike the previous year where delays occurred due to inadequate preparation. 

The ERD has a target of $10.194 billion loan commitments from various development agencies by the end of the fiscal year. 

Among the loan pledges received, the Asian Development Bank leads with $2.69 billion, followed by Japan with $2.03 billion, and the World Bank with $1.41 billion.

Disbursement rise 6% 

In the first 10 months of the current fiscal, disbursement of foreign loans reached $6.28 billion, up from $5.91 billion in the same period last year. 

Japan leads in loan release, with $1.66 billion, followed by ADB with $1.49 billion, and the World Bank with $1.05 billion. Besides, Russia provided $857.8 million, and China $361.71 million during this period.