Foreign debt servicing cost to go up in next 3 fiscals: ERD projects

Additional budgetary allocations will be required in the coming fiscal years to pay the interest on foreign loans taken for various mega projects including the Rooppur nuclear power plant, Mass Rapid Transit and Matarbari, the Economic Relations Department (ERD) has projected.

Bangladesh's foreign debt servicing cost will go up in the next three fiscal years when both commitments and disbursements of low-cost flexible foreign loans are projected to decline, but overall repayment pressure will be within tolerable limits until 2033, it said in a report prepared for the budget management meeting scheduled for Wednesday.

According to the ERD calculations, the total expenditure on foreign debt principal and interest during the July-February period of the current fiscal year was $1.42 billion while the amount was $1.33 billion in the same period previous fiscal year.

An amount of $330 million dollars in principal and interest on two loans against the Rooppur Nuclear Power Plant project remains unpaid due to the payment complications caused by the war in Ukraine.

"The implementation of other mega projects including the MRT and Matarbari is going on in full swing. As a result, disbursements in these projects are increasing. So will the interest payment of the project loan in the current fiscal year. Besides, the interest of the budget support received last fiscal year is also being paid," the report said.

"On the other hand, interest payments may increase due to increase in LIBOR and SOFR rates and depreciation of taka against the dollar," the ERD added. 

According to the ERD report sent to the Finance Division, Bangladesh's foreign debt pipeline as of last February was $42.08 billion and the debt position was $59.21 billion.

The ERD said the current fiscal year's budget allocation for principal and interest payments on external debt is $1.84 billion and $0.94 billion respectively. The interest payments in the first eight months of the fiscal year have increased as compared to the same period of the last fiscal year.

The disbursement of foreign loans and grants has decreased in the current fiscal year till February as compared to this period of the last fiscal year. The amount of disbursements at this time last fiscal year was $5.90 billion, which in this year is $4.87 billion, 29.72% of the target. By the end of the current fiscal year, foreign aid collection may exceed $6 billion, ERD said.

The amount of foreign loan disbursement last fiscal year was about $11 billion, which was the highest in the history of Bangladesh. It was over $10 billion in the previous fiscal year. In the current fiscal year too, the commitment amount is $6 billion dollars, which in last fiscal year was $10.95 billion.

According to the ERD report, foreign loan and grant disbursements are estimated at $9.85 billion, $10.88 billion and $10.77 billion respectively from 2023-24 to 2025-26 fiscal years. Foreign aid commitments are estimated at $6 billion annually through fiscal year 2025-26.

Analysing the trend of disbursements and the current pipeline position, the ERD in its report predicts that the amount of flexible loans and grants may decrease and the amount of floating rate loans may increase.

Finance Minister AHM Mustafa Kamal will chair the meeting of the coordination council on budget management and finance and currency exchange rate. Besides reviewing the forex rate, foreign currency reserve, savings, inflation rate, public and private sector investment, import-export, revenue collection, the meeting will discuss various targets of the next fiscal year's budget, said officials of the finance department.

Economists call for speedy implementation

Economists say after LDC graduation in 2026, Bangladesh will have to take foreign loans at commercial interest rates or at higher interest rates than now. Therefore, it is necessary to speed up development activities with more loans at low interest before graduation. But due to the failure of project implementation, the foreign loan money is being returned every year. As a result, foreign debt commitments and disbursements are not increasing.

Former Finance Secretary Mahbub Ahmed expressed disappointment over the decrease in the disbursement of foreign aid.

He said that even though it was decided to form a pool with project managers to increase the disbursement of foreign aid, ensure their position in the project area and not to transfer PDs. But none of those has been implemented.

During budgeting, it is said that there is no money. But in reality we don't have the spending power. This is more so in case of foreign funds. Because, in the case of spending foreign funds, many rules and regulations have to be followed, many forms have to be filled. PDs are not aware of that.

"Foreign funds are returning due to inability to spend money. Although there have been many decisions and discussions for many years to increase the efficiency of project implementation, there has been no success," said this former senior secretary.

He said it will not be possible to increase the speed of development if foreign funds cannot be spent. Internal resources are very low at the moment. Last time investment was slightly higher than domestic savings, which are mainly foreign assets. If the interest rate of bank loans increases from the next fiscal year, domestic savings may increase slightly.

The former lead economist of the Dhaka office of the World Bank Zahid Hossain said that if foreign aid is to be released according to the target, the housing rate should be taken above 20% of the initial pipeline. Current means this rate is between 12-15%. Considering this, this goal of exempting foreign aid seems ambitious.

He said that if the $6 billion commitment is added to the money in the pipeline and $11 billion is discounted, the size of the pipeline will be reduced by $5 billion per year. As such it won't take long for the money in the pipeline to run out.

The question here is whether it will be possible to deduct $11 billion per year. To do this, project implementation problems must be addressed.

He said the duration of some projects is increasing to four-five years. Lately it has been seen that it takes anywhere from 6-18 months for ECNEC to approve after approval from the board of the donor agency.

He asked how will a $6 billion commitment and $11 billion disbursement happen If this continues.

"We are getting stuck in the early stages. After approval, a lot of time is spent on various preparatory work including contract signing, setting up of project office, appointment of project manager, procurement related work, land acquisition," said,

"The $11 billion relief target will remain too ambitious unless the causes of delay in these cases are removed," he added.

Like in other years, foreign aid allocation has been cut during the revision of the annual development program as the implementing agencies failed to spend part of the foreign aid.

In the current fiscal year's annual development program of Tk 2,46,066 crore, the foreign aid allocation was around Tk93,000 crore. In the revised ADP, there is no cut in the domestic source allocation, while Tk18,500 crore has been deducted from the allocation.

Out of the RADP allocation of Tk74,500 crore, the expenditure on foreign aid till February was Tk33,190 crore and the implementation rate during eight months stands at 44.55%.