Rehman Sobhan calls for clear inclusion of climate costs in Bangladesh's debt planning

Noted economist and Chairman of the Centre for Policy Dialogue (CPD) Rehman Sobhan has stressed the need to explicitly link climate-related costs and fiscal management within Bangladesh's debt sustainability framework.

Speaking at a discussion on debt sustainability and climate change at Mohakhali BRAC Centre in the capital yesterday, he said that while the Centre for Policy Dialogue (CPD) study provides an important foundation, it needs to go further in assessing how climate-related expenditures are being financed and utilised.

"The study has presented annual estimates of climate-related costs, which are very useful," he said. "However, we must determine whether these costs are structurally rising over time and how much of them are actually being covered through the national budget."

Rehman Sobhan said that although around 4–5% of Bangladesh's development budget is allocated to climate-related programmes, "we still lack sufficient analysis on how effectively those allocations are utilised."

He pointed out a recurring weakness in Bangladesh's fiscal analysis. "We tend to focus on budgetary allocations and expenditures in numeric terms, but not on the effectiveness or outcomes of those expenditures," he said, calling for studies linking climate expenditure data with actual climate adaptation and mitigation outcomes.

Addressing climate financing sources, Dr Sobhan stressed the importance of distinguishing between domestic and external financing, saying this would help policymakers identify which areas require more foreign support and which can be managed through domestic resources.

He further warned that Bangladesh's debt servicing costs are likely to rise as the country graduates from LDC status and begins accessing costlier forms of finance. Therefore, he argued, grant-based climate finance should be prioritised, since most climate-related projects are not revenue-generating.

Referring to global dynamics, Dr Sobhan noted that potential policy shifts in the United States could significantly affect international climate financing flows. "If the world's most influential economy takes a dismissive position on climate change, it will reshape global funding behaviour, both public and private," he observed.

He added that global financial structures are undergoing major transformation, with Asia emerging as a new source of capital, particularly through China and other regional funds. "These alternative sources should now be considered as part of Bangladesh's strategy for climate finance," he said.

Concluding his remarks, Dr Sobhan praised the CPD study as a "valuable and thought-provoking contribution," but said it could be "deepened and amplified" to better reflect how funds are used and what outcomes they generate.

He also cautioned against overly pessimistic assumptions in debt models, adding, "It is reasonable to project slower export and GDP growth, but not an absolute decline. Bangladesh has never faced such a scenario, and I hope it never will."

CPD's study linking climate and debt

At the high-level dialogue titled "Achieving Debt Sustainability in the Face of Climate Change," the CPD presented an in-depth research paper highlighting how climate vulnerabilities could threaten Bangladesh's debt sustainability despite current assessments indicating a manageable debt situation.

The paper, titled "Navigating Debt, Development and Disasters: Making Debt Sustainability Analysis Work for Bangladesh," was presented by Afrin Mahbub, a research associate at CPD, and co-authored by Fahmida Khatun, executive director of CPD, and Sedat, an economist from Boston University and CPD.

During her presentation, Afrin Mahbub said Bangladesh's macroeconomic management is facing significant challenges due to structural deficiencies, weak policy implementation, poor governance practices, and delayed reforms. She noted that external sector weaknesses and uncertainties in external balances have further intensified the pressure.

"As Bangladesh prepares to graduate from LDC status in 2026, the country must transform its development strategy substantially," she said, adding that climate change compounds these challenges, as Bangladesh remains one of the world's most climate-vulnerable nations.

The study used the IMF-World Bank's Low-Income Country Debt Sustainability Framework (LIC-DSF) to assess Bangladesh's debt burden under both baseline and stress-test scenarios. It analysed four key debt indicators – two focused on long-term solvency and two on short-term liquidity.

Findings revealed that while Bangladesh's long-term debt outlook (solvency) remains stable, short-term liquidity indicators show signs of distress under adverse conditions such as climate-related shocks, export losses, or rising international interest rates.

Under the climate loss and damage scenario, the study found Bangladesh's solvency indicators to be within safe limits but warned that liquidity ratios – especially external debt service to revenue – already breach sustainability thresholds, indicating a high short-term risk.

The paper further demonstrated that converting climate loans into grants would substantially reduce the debt burden, while the implementation of the EU's Carbon Border Adjustment Mechanism (CBAM) could negatively impact export revenues, leading to increased debt servicing pressure.

In addition, the study cautioned that variable international interest rates pose a growing risk, as even a 0.5% increase could push Bangladesh's debt service ratios beyond sustainable thresholds.

Summarising the findings, Afrin said, "In the long run, Bangladesh's debt may appear sustainable, but in the short term, the country faces liquidity risks arising from climate-related shocks, export vulnerabilities, and external borrowing conditions."

The paper offered several policy recommendations, including integrating climate risk into debt analysis, prioritising grant-based climate finance, managing variable interest rate loans, strengthening domestic resource mobilisation, and effectively utilising the Loss and Damage Fund established under COP28.

She concluded that without stronger fiscal management, better climate finance governance, and proactive international engagement, Bangladesh risks falling into a debt trap amid increasing climate-related pressures.