Foreign loan interest payment surpasses $1b for first time
Bangladesh's interest payments on foreign loans have exceeded $1 billion for the first time, driven by a shift towards pricier market-based loans and a weakening taka.
According to the Economic Relations Division (ERD), the country paid $927 million in interest during the fiscal year 2022-23. This figure has already climbed to $1.05 billion in the first nine months of the current fiscal year (July-March).
An ERD report, released yesterday, highlights a significant rise in interest payments to development partners. From July to March, Bangladesh paid $1.05 billion, a staggering 117% increase from the $485.90 million paid during the same period last year.
ERD officials attribute the surge 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.
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Bangladesh's growing reliance on market-based loans, which typically carry higher interest rates than concessional loans, is another contributing factor. Roughly 75% of these loans come from the Asian Development Bank, with smaller portions from the Asian Infrastructure Investment Bank and the World Bank.
The increased interest burden has pushed total foreign loan repayments to $2.571 billion in the first nine months of the fiscal year, up from $1.73 billion during the same period last year.
The ERD projects that Bangladesh's foreign loan repayments, including principal and interest, will reach $3.56 billion in the current fiscal year.
Dr 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 raises concerns.
With many mega projects reaching the end of their grace periods, the pressure for principal repayment is expected to rise further, he said.
Dr Mujeri emphasised the need for careful management of loan repayments, advocating for increased revenue generation, remittance income, and project selection based on viability.
On a brighter note, Bangladesh has secured loan commitments of $7.24 billion from development partners in the first nine months of the current fiscal year, a significant 135% increase compared to the same period last year.
The ERD attributes this success to improved loan preparation efforts. Development partners have pledged a total of $10.194 billion for the entire fiscal year.
The Asian Development Bank has emerged as the largest contributor, committing $2.62 billion in the first nine months. Japan and the World Bank follow closely behind with commitments of $2.03 billion and $1.41 billion, respectively.
Foreign grants have also seen an increase. Bangladesh received $5.63 billion in grants during the first nine months of the current fiscal year, up from $5.36 billion in the same period last year.
The ADB provided the most grant aid ($1.40 billion), followed by Japan ($1.358 billion) and the World Bank ($967 million). Russia and China have also contributed grants, totalling $807.50 million and $361.71 million respectively.
