88% of new loans diverted to repayments in H1

Infograph: TBS

Bangladesh's external financing situation is showing clear signs of stress. In the first half of the 2025-26 fiscal year, for every $100 received in foreign loans, $88 was used for debt repayment, leaving the country with only a marginal net inflow.

According to the latest Foreign Assistance Monthly Report published by the Economic Relations Division (ERD), total aid disbursement stood at $2.5 billion during the period, while debt servicing amounted to $2.2 billion. As a result, net foreign inflow was limited to just 12% of total disbursements, highlighting shrinking fiscal space and limited support for development expenditure.

On top of debt repayment pressure, a decline in foreign commitments and disbursements is compounding the situation.

Economists warn that when such a large share of foreign borrowing is absorbed by repayments, the government's ability to finance infrastructure and social programmes is significantly constrained. This underscores the urgent need for more prudent borrowing, faster project implementation, and diversification into concessional and alternative financing sources.

Mustafa K Mujeri, former director general of the Bangladesh Institute of Development Studies, noted that repayment pressure has increased as grace periods for several mega projects and budget-support loans taken by the previous government have started to expire.

Meanwhile, debt servicing obligations rose to $2.20 billion, up from $1.98 billion in the first half of FY2024–25. Both principal and interest payments increased, placing renewed pressure on foreign exchange reserves and reducing net aid inflows to only $300m.

Planning Adviser Wahiduddin Mahmud today (28 January) said at an event organised by the Economic Reporters Forum that despite having opportunities to borrow externally, the current government is limiting development project loans to reduce pressure from debt repayments.

Earlier, following a meeting of the Executive Committee of the National Economic Council (Ecnec), the planning adviser told reporters that foreign loans would only be taken for projects that are technologically complex, impossible to finance domestically, and capable of generating investment, exports, and foreign exchange earnings.

He said the government has decided to reduce dependence on foreign borrowing for social sectors such as education and health, opting instead for domestic financing.

As a result, several foreign-funded projects were recently sent back without approval at Ecnec meetings.

"Poorly prepared projects often face complications during implementation. For this reason, the government is refraining from negotiating with development partners on many projects," the ERD official said.

ERD officials added that grace periods for several projects – including the Rooppur Nuclear Power Plant – will expire over the next one to two years, which will significantly increase debt repayment pressure.

They said debt servicing is expected to approach $5 billion in the current fiscal year and will continue to rise in the coming years.

M Masrur Reaz, chairman and CEO of Policy Exchange Bangladesh, said, "The near-equalisation of loan disbursement and repayment is a growing concern for Bangladesh's fiscal health. Fiscal space is already tight, and as the country aims to move toward higher-middle-income status, significant public investment is needed in human capital, infrastructure, and institutional capacity. Sustaining growth requires expanding the public investment budget."

Past reliance on external loans for projects with poor feasibility or weak returns has increased debt service obligations, further constraining fiscal space, he said.

The government should also explore alternative financing beyond traditional borrowing, including local and international capital markets, he noted. "Diversifying financing channels will reduce fiscal vulnerability and strengthen resilience. A balanced approach combining better revenue, efficient spending, debt management, and diversified funding is critical for Bangladesh's sustainable growth and transition to higher-middle-income status."

Election behind the decline in foreign commitments?

Foreign aid commitments declined to $1.99 billion in the first half of FY26 from $2.30 billion a year earlier, while grant inflows fell sharply from $290m to just $95m. Loan commitments also declined slightly, indicating continued dependence on borrowing even as concessional aid dries up.

Mustafa K Mujeri said a major reason behind the decline in foreign commitments and disbursements is election-related uncertainty.

"During election periods and interim phases, new project approvals, fresh loan agreements, or renegotiations usually do not take place. Development partners are also reluctant to make new commitments, as they wait to see what policies and priorities the incoming government will set," he said.

He added that although the previous fiscal year was already challenging, the picture for commitments and disbursements in the first half of the current fiscal year is even weaker.

"In other words, although the overall situation may appear somewhat stable, this stability has not yet been reflected in foreign loan inflows."

Mujeri further said that until a new government formally assumes office, there is little chance of a significant improvement in foreign loan commitments or disbursements. Development partners want clarity on policy direction, project priorities, and reform agendas before engaging in new financing.

"Most of the current commitments and disbursements stem from earlier negotiations or pre-existing agreements," he said.

ERD sources said that foreign loan commitments were low last fiscal year due to the mass uprising, fall of the government, administrative instability, and a confidence deficit among development partners. This year, however, the government is deliberately reducing the number of foreign-funded projects to ease repayment pressure, which has contributed to lower loan commitments in the current fiscal year.

A senior ERD official told The Business Standard that foreign loan commitments declined in the first six months of the current fiscal year because the government is avoiding project loans without adequate preparation.