Revenue lags, costly mega projects raise external debt risks
Although external debt inflows continue to rise, government revenue growth has failed to keep pace, pushing key debt indicators closer to risk thresholds
Highlights:
- Non-competitive infrastructure projects increase external debt risks
- Debt-to-revenue ratio nears IMF threshold amid weak revenues
- External debt rose 377% since 2009
- Many mega projects faced 70% average cost overruns
- Direct G2G contracts over 400% costlier than competitive bids
- Study warns debt-to-GDP could reach 70% by 2030
High-cost infrastructure projects awarded largely through non-competitive contracts, coupled with weak revenue mobilisation, are increasing Bangladesh's exposure to external public debt risks, according to official data and a new independent study.
Although external debt inflows continue to rise, government revenue growth has failed to keep pace, pushing key debt indicators closer to risk thresholds.
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According to the Economic Relations Division's (ERD) latest Flow of External Resources into Bangladesh report, the debt-to-revenue ratio climbed to 16.92% by the end of FY2024-25, up from 16.53% a year earlier. The IMF's indicative threshold for this ratio is 18%.
The ERD cautioned that without faster revenue growth, Bangladesh may lose its current "comfortable position" in servicing external debt.
Key debt indicators edging upward
Other external debt indicators present a mixed picture.
The debt-to-exports of goods and services plus remittances (XGS) ratio improved slightly, falling to 105.87% at the end of FY2024-25 from 110.09% a year earlier, well below the IMF's 180% threshold.
The debt-to-GDP ratio, though still low by international standards, is rising gradually. It stood at 18.99% at the end of FY2024-25, up from 17.03% in FY2023-24, against a 40% benchmark.
Bangladesh's total medium- and long-term (MLT) external debt reached $77.279 billion as of 30 June 2025, compared with $68.822 billion a year earlier — an increase of $8.457 billion. Net government external borrowing during the year amounted to $5.832 billion.
Exchange rate movements also played a role. The appreciation of the US dollar against the SDR and other currencies added $2.510 billion to the debt stock in dollar terms. Meanwhile, depreciation of the taka increases debt servicing costs in local currency.
Liquidity indicators show mounting pressure. The interest service ratio for MLT debt rose to 2.96% in FY2024-25 from 2.87% the previous year. The total debt service ratio — principal and interest payments as a share of exports — increased from 7.16% to 8.12%, reflecting the beginning of principal repayments on several loans.
The debt service-to-revenue ratio rose sharply from 9.17% to 11.41%, underscoring the strain created by rising obligations and sluggish revenue mobilisation.
While these metrics still indicate manageable liquidity risk, they suggest growing pressure on fiscal space.
External debt up 377% since 2009
Concerns over longer-term sustainability were amplified by a recent study by researchers from SOAS University of London, supported by the Open Society Foundations and Change Initiative.
The study found that Bangladesh's external debt increased from $23.5 billion in 2009 to nearly $112 billion in 2025 — a 377% rise.
Over the same period, one out of every Tk5 in government revenue is now spent on interest payments alone, before repayment of principal.
Analysing 42 mega infrastructure projects undertaken between 2009 and 2025, the study found that 29 projects experienced average cost escalation of 70.3%. Around 35% of infrastructure project costs were estimated to have been lost to corruption and inefficiency.
The study, titled "Corruption in Infrastructure Projects in Bangladesh and Sri Lanka: Implications for Public Debt," found that projects awarded through direct government-to-government (G2G) arrangements were, on average, more than 400% costlier than those procured through transparent competitive bidding.
It warned that unrestricted G2G contracts and weak oversight significantly increase long-term debt burdens and macroeconomic risks.
Speaking at a discussion in Dhaka this week, development economist Mushtaq Khan of SOAS said even small differences in contract pricing — particularly in power sector projects — can translate into hundreds of millions of dollars in long-term liabilities.
"Once the project is awarded, the inflated benefits are shared among insiders. This is not unique to Bangladesh; it is a global phenomenon," he said, adding that easier access to large external lenders has enabled many developing countries to accumulate infrastructure-driven debt at unsustainable levels.
Lessons from Sri Lanka
The study draws parallels with Sri Lanka, which pursued a similar infrastructure-led growth strategy and eventually defaulted in 2022.
Around 2008, both countries shifted toward high-value infrastructure investments, including ports, highways and energy facilities, often financed by external partners such as China and India.
In Sri Lanka's case, roughly 65% of foreign debt accumulated during that period was linked to energy infrastructure, much of it underutilised or poorly planned, generating insufficient economic returns.
The result was mounting debt without corresponding growth dividends — a dynamic that ultimately contributed to its crisis.
In FY2024-25, Bangladesh's outstanding MLT external debt stood at 152.7% of export earnings, up from 146.12% a year earlier. While this does not yet signal acute solvency risk, the upward trend is notable.
The study warns that if corruption-driven overpricing and governance weaknesses persist, Bangladesh's debt-to-GDP ratio could rise to 65–70% by 2030.
It characterises Bangladesh as having moved from a "low-risk stability phase" to a "moderate-risk acceleration phase."
"Sri Lanka's 2022 default could not be predicted simply from gradual trends. Crisis happens when a country suddenly cannot meet a day's interest or principal payment," the study notes.
While Bangladesh remains in a comparatively safer position, the researchers warn that 2028–2032 could become a vulnerable period if corrective measures are delayed.
They recommend tighter expenditure management, stronger tax collection and improved project governance to prevent rapid debt acceleration.
Legacy projects weigh on fiscal space
Former Planning Commission member and ex-secretary Arastoo Khan also acknowledged the risks posed by high-cost, less essential infrastructure projects.
Although the interim government has curtailed new borrowing, he said current debt pressures largely stem from liabilities linked to large projects undertaken in the past decade.
"Bangladesh was previously in a relatively comfortable debt position, but taking multiple high-cost projects simultaneously has created pressure on debt management," he said.
He cited the $12 billion nuclear power plant project, which requires annual interest payments of around $400–450 million.
The challenge, he added, is not borrowing per se, but abnormal cost escalation and overpricing. In many cases, project costs reportedly increased by 25–30%, significantly inflating debt burdens.
While international agencies generally consider a debt-to-GDP ratio of up to 40% manageable, he warned that continued investment in high-cost, low-return projects could make the situation "highly risky" in the coming years.
The study concludes that infrastructure-driven debt accumulation is fundamentally a governance issue, arguing that genuine economic competition — rather than additional layers of rules — is essential to break collusive arrangements and strengthen accountability.
