Foreign debt repayments: Govt faces double whammy

The government will face two types of pressure regarding foreign loans in the upcoming fiscal year — firstly, it will have to pay a higher amount in interest and principal repayments and secondly, due to the increase in foreign loan interest rates and the depreciation of the currency, the government will have to pay an additional amount in local currency.

Finance Minister Abul Hassan Mahmood Ali in his budget proposal for FY25, presented before the parliament today, mentioned these challenges facing the government.

"It is observed that the capital outflows in the external sector are showing a bullish trend as opposed to the reduced inflow of capital. This opposite trend increases the deficit in financial accounts on the one hand and creates the burden of repayment of foreign loans on the other," said the finance minister.

The government allocated Tk36,500 crore for the repayment of the principal amount of the debt while Tk20,500 crore was earmarked for the payment of foreign debt interest in FY25.

The pressure to repay interest will increase primarily due to the rise in SORF rates in the international market, officials say. Simultaneously, the government will face pressure to repay the principal amount as the grace period for several mega projects and budget support loans comes to an end, they say. 

The government's spending on interest payments for foreign loans has already exceeded the budget allocated for the outgoing fiscal year.

Provisional data released by the Economic Relations Division (ERD) shows that the government spent nearly $1.15 billion (equivalent to Tk12,626 crore) on interest payments in the first 10 months of the current fiscal year, surpassing the annual allocation of Tk12,376 crore and revised allocation of Tk15,800.

The government repaid $1.67 billion in principal and $1.14 billion in interest to various development partners during the first 10 months of FY24. During this period, the repayment rate for principal loans increased by 20%.

ERD officials said Bangladesh repays principal in various currencies. As a result, the amount of principal repayment will also fluctuate due to changes in the value of the dollar against various currencies.

"If the forecast that the interest rate will decline in the USA and in other developed nations is not correct, this trend will continue in the future as well," said the finance minister.

Debt Management – A critical issue for budget FY25

Debapriya Bhattacharya, a distinguished fellow at the Centre for Policy Dialogue, said the debt stress in the budgetary framework for the fiscal year 2024-25 (FY25) is showing up. 

"It is manifested most in the financing framework of the Annual Development Programme (ADP). The size of the ADP has been fixed at 5% of the GDP, down from 5.5% in FY24. Yet, the government is currently not able to contribute any revenue surplus in financing the ADP. As a result, the full ADP has to be underwritten by borrowed resources. Two-thirds of this is expected to come from domestic savings. Banking sector is expected to provide 60% of the domestic borrowing. 

"The loan-dependent development financing ultimately gets reflected in the increased debt servicing liability of the government. In FY25, almost a quarter of the government operating expenses was attributable to interest payment. Curiously, domestic sources are to account for 85% of the government's debt servicing liability in FY25. 

"On the other hand, annual foreign debt servicing liability is increasing quite dramatically. In FY25, the country would need to pay back almost USD 2 billion. Indeed, we are failing to pay back outstanding foreign dues amounting to more than USD 5 billion given the overall fragile situation of the external balances. As reflected in the depleting foreign exchange reserve of the country, debt management would be one of the crucial issues in the upcoming fiscal year," he said.