Tackling the debt-servicing challenge of Bangladesh

A citizen of Bangladesh makes, on average, an annual interest payment of nearly Tk7,500 on a debt. No, it is not a payment on his or her personal debt. It is the debt that the government owes both inside and outside of Bangladesh.

In fact, on average, a Bangladeshi holds a total debt of more than Taka one lakh. Again, this is not his or her personal debt, it is the debt stock of the government. In other words, these notional figures represent the average individual liabilities for a public debt. In the fiscal year of 2024-25, Bangladesh paid a record of nearly Tk135 crore (equivalent to nearly $16 billion) on interest payment. In fact, debt-servicing would amount to 21% of the total government budget expenditure, meaning that one-fifth of the budget would be eaten up by debt servicing. Over the past ten years, debt-servicing expenditures of the government have gone up by more than 4 times - from Tk32 crore in the fiscal year of 2016 to nearly Tk135 crore in the fiscal year 2025, rising continually in every year in-between. 

Of the debt-servicing expenditures during the fiscal year 2024-25, payments on domestic debts dominated the total payments. A total of nearly Tk117 crore (nearly $14 billion) was spent on servicing domestic debts - a 17% increase over the preceding year. Interest payments on foreign debts was about Tk18 crore ($2 billion) - a 25% increase over the preceding year. 

Two observations are pertinent - first, domestic debt-servicing expenditures constitute nearly 88% of the government's total debt-servicing spending and second, debt-servicing expenditures on foreign debts are increasing at a faster rate. In fact, the foreign debt stock of Bangladesh over the past three years has nearly doubled to more than Tk8 lakh crore. As of March, 2025, the government's total debt-stock reached a record Tk20 lakh crore. The latest debt-sustainability analysis indicates that the country's external debt to export ratio stands at 140%, which is within the IMF's 'safe zone'. But the rapid pace of debt accumulation is a concern. 

In the context of these scenarios, the three relevant questions on rising debt-servicing expenditures of Bangladesh are: what caused it, what may be the impacts and what can be done about the problem. The two issues which are at the core of the problem are rising public expenditures and slow-paced revenue generation. On the expenditure side, government expenditures in Bangladesh have been rising at a fast rate. For example, the government expenditure of the first quarter of the fiscal year 2025-26 has been more than Tk1 lakh crore, while during the same period of the fiscal year 2024-25, it was Tk95 thousand crore. And while the development expenditures of the government were curtailed, its operating costs have gone up.

Following the June budget announcements, the expenditures of the government have gone up amid new demands. For example, the government plans to inject Tk20,000 crore in capital into a new bank formed through the merger of five troubled Islamic banks. Three education-related ministries and divisions spent nearly Tk14,000 crore, largely under the non-development budgets for MPO-listed institutions. The raising of house-rents for MPO-listed teachers alone would cost the exchequer Tk4,000 crore. Fertiliser subsidies and incentives would amount to nearly Tk8,000 crore. About Tk3,000 crore would be needed for the upcoming election. An additional cost is on the horizon if the interim government plans to partly implement the recommendations of the pay commission. 

While the government expenditures have risen sharply, its revenue collection has failed to keep pace. The tax-GDP ratio in the country is still about 8%, far below the ratio of 17% in Nepal and 12% in India. The country still predominantly depends on indirect taxes such as import duties, excise taxes for its revenue generation, and necessary reforms have not happened as yet to mobilise revenue through more direct taxes, such as income tax. The tax administration, for example, the NBR, is yet to be adequately reformed, and such reforms are expected to improve the direct tax collection in the country.  As the fiscal space in the country over time has shrunk, the government has to borrow to meet its operating expenses. 

Now what are the impacts of rising debt-servicing? First, in the coming years, the external debt sustainability in the external debt position of Bangladesh may face vulnerabilities because of rising debt stock, principal and interest payments. Second, with the graduation of Bangladesh into the developing country category next year, the country will lose access to grants and concessional loans from bilateral and multilateral development partners and will have to rely more on commercial loans, associated with higher interest rates and shorter repayment periods.

Consequently, the already growing debt pressure is expected to increase sharply.  Third, the cost of borrowing from commercial lenders has been increasing due to global monetary tightening, higher domestic inflation and depreciation of the local currency. Therefore, Banks have also raised their interest rates, which have pushed the government's interest payment obligations to new levels. Over the past four years, Taka has depreciated from 1dollar equalling Tk84 to over Tk123. So more local currency would be needed to repay the same amount of foreign debt. It would further squeeze the resource envelope of the country. 

What could be done? First, a robust reform in resource mobilisation. On one hand, Bangladesh would need to raise the tax-GDP ratio to a comparable level consistent with other developing countries, with a big push for more dependence on direct taxes, rather than indirect ones; but on the other, it would also require institutional reforms in tax administration. The process of separating tax policy units from tax collection units within the revenue mobilisation structure needs to be settled. Second, a policy of export diversification and import rationalisation and a proactive policy for channelling more remittance would help build better foreign reserves. Similarly, smart policies with a conducive investment environment would attract more foreign direct investment. Both these measures would decrease the need for foreign loans.

Third, stricter expenditure controls are needed. For example, except for the education and the health sector, new allocations for physical infrastructures can be postponed; spending for land acquisition under the non-development budget can be halted. Restrictions can be imposed on vehicle purchases, foreign travel, entertainment costs and other discretionary expenses. Fourth, prudent debt management is vital. Careful selection of new projects, improved project implementation, are important. Huge projects, prestige projects, projects without clear economic and social benefits should be stopped. In terms of tackling the rising debt-servicing of Bangladesh, a clear pathway should be chalked out for the next government. The idea is to ensure a long-term debt sustainability for Bangladesh. 

Selim Jahan is former director, Human Development Report Office, UNDP