Surging interest payments eat into net foreign loan inflow

Infographics: TBS

Bangladesh has been experiencing a decline in foreign loan inflows while grappling with skyrocketing interest payments, which have nearly tripled in the last three years. Principal repayments have gone up as well, albeit modestly by 32% during the same timeframe.

This growing financial burden can be attributed to a shift in the country's borrowing practices. Concessional loans, which typically carry interest rates of 2% or less, have become less accessible, compelling Bangladesh to depend more on market-based loans.

These loans, particularly those tied to the Secured Overnight Financing Rate (SOFR), have seen a dramatic increase in interest rates – from below 1% two and a half years ago to around 5.5%, putting more strain on the country's debt obligations.

Data from the Economic Relations Division (ERD) shows that in the first three months of the current fiscal year, Bangladesh's foreign loan repayments exceeded the new loans it received from development partners – receiving $846 million during the July-September period and repaying $1.13 billion in principal and interest.

In the fiscal 2021-22, the country paid $491 million in interest, which surged to almost $1.35 billion by FY24. Over the same period, principal repayments rose from $1.5 billion to just over $2 billion. Consequently, Bangladesh's net foreign loan inflows after considering principal and interest payments decreased from $8.15 billion two years ago to $6.5 billion in FY24.

The sharp rise in debt servicing costs stems from the growing reliance on market-based loans, which accounted for 28.1% of Bangladesh's total loans in FY24, up from 15.8% in FY20.

Bangladesh borrows from development partners through two main channels: fixed-rate loans, where the interest remains unchanged; and market-based floating-rate loans, which fluctuate based on rates like SOFR and the Euro Interbank Offered Rate (EURIBOR).

Three years ago, market-based loans posed little concern, as SOFR was under 1%. However, the rate surged in the aftermath of the Ukraine-Russia war, reaching 5.5% last year, though it has recently eased to 4.8%. As a result, Bangladesh has been paying interest rates of 6% to 7% on SOFR-linked loans.

EURIBOR has also increased significantly over the past three years, from -0.55% in early 2021 to over 3% by mid-2024.

According to ERD data, the principal repayment of foreign debt is rising at an annual rate of 15%. However, interest payments increased significantly by 45.59% in FY24, following an even steeper rise of 88.71% in the previous fiscal year.

ERD officials say the gradual loss of concessional elements in financial support received from development partners leads to increased debt servicing costs.

Monzur Hossain, research director at the Bangladesh Institute of Development Studies (BIDS), told TBS, "Rather than focusing solely on whether net foreign inflow is increasing or decreasing, we must prioritise caution regarding foreign debt financing in the future. It's essential to carefully evaluate the types of loans we accept and their interest rates."

Additionally, debt financing should support effective projects while preventing corruption and waste, he added.

Half of ADB loans are market-based

According to ERD sources, Bangladesh borrows the most foreign loans from the Asian Development Bank (ADB) at a market-based rate. In the last fiscal year, the country paid $518.74 million in interest to the ADB due to the higher rates on these loans. 

The total loan agreement with the ADB in FY24 reached $2.94 billion, 49.45% of which are market-based loans.

Additionally, $90 million of the loan obtained from the World Bank last fiscal year was also at a market-based interest rate.

All loans from the Asian Infrastructure Investment Bank (AIIB) to Bangladesh are market-based; That is why, no project loans were taken from this organisation last fiscal year considering the higher rates. However, Bangladesh borrowed $400 million in budget support at market-based rates to support its reserves.

Q1 net flow turns negative

According to ERD data, in the first three months of the current fiscal year, Bangladesh's repayment of foreign loans surpassed the amount disbursed by development partners.

During this period, after interest and principal repayment, the foreign aid flow to Bangladesh was minus $279 million roughly.

ERD data show foreign loan repayments rose by 29% in July-September compared to the same period last year.

Principal repayments rose to $685.5 million in the period, compared to $492 million during the same period last year.

Interest repayments also increased to $441 million from $378.46 million in the same period, data show.

The share of foreign loans at floating rates in Bangladesh's total external debt will climb to over 82% in 2041 from 26% in 2020, an earlier forecast of the ERD and the General Economic Division (GED) said.

According to an ERD report, the loss of concessional elements in financial support received from official donors will also lead to increased debt servicing costs.

In recent years, Bangladesh has moved to blend financing with a mix of concessional loans from the World Bank's International Development Association (IDA) and the ADB's Ordinary Capital Resources (OCR).

According to the report, after the World Bank and the ADB, other multilateral development partners will also gradually decrease the disbursal of concessional loans to Bangladesh in the coming years.