Bangladesh's foreign debt payments hit $3.36b in FY24

Infographics: TBS

Bangladesh's foreign debt servicing surged nearly 26% to $3.36 billion in the fiscal year ending 30 June 2024, according to the latest report from the Economic Relations Division (ERD) published today.

This increase is bolstered by a record 44% rise in interest payments, which reached nearly $1.35 billion, driven by a significant rise in borrowing costs.

Principal repayments are rising as the grace periods for loans taken for various mega projects end. Additionally, high interest rates have increased the pressure on debt servicing, according to ERD sources.

Experts warn that the significant rise in debt servicing, especially in interest payments, will strain Bangladesh's fiscal budget, potentially restricting the government's capacity to invest in critical sectors such as infrastructure, education, and healthcare.

Zahid Hussain, former lead economist at the World Bank's Dhaka office, told The Business Standard, "Our debt is increasing, and so are the repayments."

"Over the next two to three years, debt repayment is expected to rise to $5-6 billion. If revenue collection and foreign exchange supply are not increased, the debt repayment pressure may lead to distress in the economy," he voiced concerns.

Bangladesh paid development partners $2.67 billion – $1.73 billion in principal and $935.66 million in interest – in the fiscal 2022-23.

In FY24, principal and interest payments increased to $2 billion and $1.34 billion, respectively.

According to EDR officials, borrowing costs have risen due to an increase in interest rates driven by the Russia-Ukraine war and the appreciation of the dollar.

They noted that the Secured Overnight Financing Rate (SOFR) has surged because of the conflict, climbing to over 5% from pre-war levels of around 1%. Additionally, Bangladesh's market-based loans are gradually increasing, resulting in higher interest payments.

Approximately 75% of Bangladesh's loans from the Asian Development Bank are market-based. The country also borrows from the Asian Infrastructure Investment Bank (AIIB) at market-based interest rates and, to a lesser extent, from the World Bank.

In response to high interest rates, ERD officials said a strategy of changing the currency for market-based loans or taking loans in alternative currencies to the dollar has recently been adopted.

Loan disbursements up 7%

Foreign loan disbursements also increased in the last financial year. Foreign loan and grant disbursements during the fiscal 2023-24 stood at $9.891 billion, representing a 7% year-on-year increase.

ERD officials said the government took in $2 billion in budgetary support to tackle the current economic crisis, the second highest amount in a single fiscal year.

Budget assistance has played a major role in increasing foreign loan disbursements. The money was released as soon as the commitment for budget support was received or the loan agreement was signed.

Previously, the maximum budget assistance of $2.597 billion was released in FY22. In FY23, $1.76 billion was released in budget support.

According to ERD data, in the last fiscal year, the World Bank and the Asian Development Bank each disbursed more than $2 billion. The World Bank disbursed $2.154 billion, and the ADB disbursed $2.135 billion.

Additionally, in FY24, Japan disbursed $1.91 billion, Russia $1.29 billion, the AIIB $644 million, China $390 million, and India $297 million.

Commitments rose 22%

In FY24, commitments from development partners increased by 22% compared to the previous fiscal year, rising to $10.723 billion from $8.79 billion.

According to ERD data, the majority of commitments came from three development partners: ADB, the World Bank, and Japan.

Bangladesh received the highest commitment of $2.94 billion from ADB, followed by $2.61 billion from the World Bank and $2.03 billion from Japan.

Bangladesh did not take any development project loans from AIIB in the outgoing financial year due to high interest rates but did receive $400 million in budget support from the lender. Additionally, the country did not receive any loan commitments from China.