Debt servicing to peak at $5.3b in FY27, remittance could provide cushion

Infograph: TBS

Bangladesh's foreign debt servicing amount, including principal and interest, will reach a historic high of $5.3 billion in FY27 before starting to fall in the following year. This financial burden can be offset by three months of inward remittance, according to a finance ministry document.

In FY27, Bangladesh will have to pay $1.9 billion in foreign debt interest payments. At that time, the country will need to repay around $3.4 billion in principal, according to officials at the Economic Relations Division (ERD) which tracks foreign debt inflow and repayment trends. 

As of June 2024, Bangladesh's foreign debt principal and interest payments are expected to approach $5 billion in FY26 with interest payments estimated at about $1.7 billion and principal repayments at $3.3 billion. The country will have to pay more than $4.5 billion in FY25, according to ERD officials.

"Although the servicing of foreign debt will reach a peak in FY27, repayments will gradually decrease from the next fiscal year onwards," reads the finance ministry document seen by The Business Standard.

In recent months, inward remittances surged, with Bangladesh receiving $4.63 billion in remittances during August and September.

According to the finance ministry report, based on Bangladesh's loan commitments up to the last financial year, interest and principal payments are expected to rise for the next three years, after which they will begin to decline starting in FY28.

The report said that it is safe to assume that with around three months of remittance inflow, the country will be able to repay all its external debt liabilities of the whole year even during the peak.

The external repayment has been on the rise over the years given the volume of foreign funds used in major infrastructure projects and repayment schedules beginning gradually.

Low risk of debt distress

However, Bangladesh is at low risk of debt distress in IMF's assessment and its low public debt-GDP ratio offers space to borrow more from external sources, officials said.

Bangladesh's foreign debt servicing surged nearly 26% to $3.36 billion in the fiscal year ending 30 June 2024. During this time, Bangladesh paid principal of $2 billion and interest of $1.347 billion.

The report said that according to the external debt redemption profile estimated by the ERD, the largest amount of external debt (principal plus interest) will be due in FY27. In that fiscal, the total amount of external debt (principal plus interest) will be around $5.3 billion (based on June 2024 debt stock).

If interest is added to the debt that Bangladesh is taking in the current financial year, the interest payment will be $2 billion in FY27. This time the principal repayment will not increase. Because every foreign loan has a grace period of at least three years to 10 years.

According to the finance ministry report, although the servicing of foreign debt will reach a peak in FY27, the repayments will gradually decrease from the next fiscal year onwards.

Under all adverse situations, Bangladesh, recently, is being assessed as at low risk of external and overall debt distress by the IMF. It is found from the IMF report, June 2024, debt remains at a low risk of debt distress which indicates that Bangladesh's external debt lies far below the threshold level and the government has adequate repayment capability.

Officials said Bangladesh has done exceptionally well in attracting external assistance and ensuring the proper utilisation of such resources. Furthermore, its ability to manage external debt prudently and sustainably has also been praised by development partners, and the country has been assessed at low risk of external and overall debt distress in the Debt Sustainability Analysis conducted by the IMF and the World Bank.

Comfortable in debt servicing

Another report of ERD said that despite a phenomenal increase in external debt, Bangladesh has been comfortably servicing its debt with an impeccable reputation as a "non-defaulting party" because of the prudent borrowing policy pursued by the government. Bangladesh has been able to maintain a comfortable debt sustainability position in considering the internationally used indicators.

According to the ERD report, as of 30 June 2023, the public sector external debt stock was 15.59% of GDP against the 40% threshold, reflecting a strong solvency position. Additionally, the government's external debt service obligation in FY22 was 5.81% of the export of goods and services, compared to the 15% threshold, indicating Bangladesh's solid liquidity condition.

Rising external pressures

Bangladesh's economy recovered rapidly from the Covid-19 pandemic, but the Russia-Ukraine conflict brought new challenges. External pressure has risen because of elevated global commodity prices, while synchronised global monetary policy tightening has raised the cost of external financing.

The report mentioned that in response to this situation, the government has been borrowing additional amounts as budget support and project support to address the war's adverse situation and finance the economic recovery-related projects and programmes out of regular borrowing.

Concessional terms vanishing

Moreover, the scope of mobilisation of foreign assistance in concessional terms has become less than in previous years because most of the development partners have already adjusted their financial terms and conditions either by shortening maturity and grace period or by increasing interest rates as Bangladesh graduated to Lower Middle-Income Country.

On the other hand, to meet the investment needs, especially for some big and nationally important projects, borrowing on non-concessional terms from bilateral sources has increased, the report says.

According to ERD data, external debt outstanding has risen by 242.56% over the last 15 years, driven by increased reliance on external borrowing. Foreign debt repayments surged by 283.42% during the same period.

In 2009, the government paid $875.58 million in principal and interest, which increased to $3.357 billion over the 15-year span.

According to ERD data, principal repayments have increased by 193% and interest payments by 609% over the past 15 years. In FY10, the government made $685.74 million in actual repayments to development partners, rising to $2.009 billion last fiscal year. Meanwhile, interest payments grew from $189.84 million in FY10 to $1.347 billion in the last fiscal year.