Projects funded with debt need to be selected prudently, and implemented timely
Bangladesh might have a moderate debt-to-GDP ratio on paper, but repayment capacity is of paramount importance and needs to be examined closely
Bangladesh has consistently shown moderate performance in debt servicing with the external debt-to-GDP ratio hovering at around 11%. According to the Bangladesh Bank, the total external debt of the country stood at around $95.85 billion at the end of June 2022.
However, as the lesson from Sri Lanka shows, the servicing or repayment capacity is more important for nations instead of the debt-to-GDP ratio or the total external debt.
The increase in debt servicing implicates a lower level of resources to spend for necessary sectoral expenditure. Of the total outstanding foreign debt of Bangladesh, around 78.5% is of long-term nature as of FY22, which provides the country with enough space to plan regarding the debt servicing process.
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Moreover, most of the debt burden of the nation has been infrastructural development loans taken on projects, meaning spent on productive purposes instead of consumption. Nonetheless, the amount of debt service has been increasing consistently over the years.
The foreign debt scenario of Bangladesh requires closer inspection and prudent steps due to the state of various macroeconomic indicators including inflation, foreign reserve, and import and export, among others.
For instance, the country is facing a rising inflation rate of around 9% as of October 2022, according to the Bangladesh Bureau of Statistics (BBS), making external debt servicing costlier. Moreover, due to the Russia-Ukraine war, countries across the world are facing high inflation rates. Hence, Bangladesh needs adequate planning to curb the negative impacts of the rising inflation rate on debt servicing.
On the other hand, the devaluation of the local currency against the US dollar has resulted in additional payments to repay external debts in 2022. According to the calculation by the Economic Relations Division, the country had to pay an additional Tk500 crore due to currency depreciation towards debt servicing.
In addition, as projects funded by external debt generate income in local currency, currency depreciation poses a significant adverse impact and lessens real income generation. On that note, S&P Global Ratings has cautioned Bangladesh that further depreciation of its currency would result in external debt servicing costs being more expensive.
The structure of external debt is also changing in Bangladesh, the short-term loans are increasing in proportion compared to the total external debt, from 14.6% in FY20 to 21.5% in FY22.
The maturity period of short-term debts pose risk for the foreign exchange reserve, according to the financial stability report 2021 of the Bangladesh Bank. During the time period of FY16 to FY22, the ratio of forex reserves to total debt is decreasing while the ratio of external debt to current account receipts is increasing.
Due to the graduation from a lower-income country to a lower middle-income country, Bangladesh is no longer eligible for borrowing exclusively on soft terms from the World Bank. Similarly, both ADB and Japan, the largest bilateral donor of Bangladesh, have hardened their lending terms since the graduation. Thus, graduation from LDC will further reduce the capacity to borrow soft-termed loans from various bilateral and multilateral donors.
The country has been historically experiencing revenue constraints due to the low tax-GDP ratio, coupled with recent events including comparatively lower export and remittance, and higher import payment resulting in falling forex reserves during 2022, threatening the debt servicing capacity.
These constraints along with the recent increase in interest rates and decrease in grace period by various donors are causing the country to resort to non-concessional and hard-termed loans. On top of that, the increase in external debt solicited by the private sector, standing at around $24.9 billion as of March 2022, which is 27.1% in FY22 from 20.5% in FY20, is also a concern for stakeholders.
In conclusion, although Bangladesh has had a good history regarding the debt servicing process and managing external debt, being cautious in selecting and implementing projects and replenishing the foreign exchange reserve by dealing with the current forex crisis is mandatory to ensure the continuation of such good history.
To ensure efficient use of external debt, the projects conceived with debt need to be selected prudently, ensuring the generation of adequate income and higher return on investment.
Moreover, the implementation of these projects needs to be timely and in an efficient manner rather than on an ad-hoc basis, avoiding both cost overrun and time overrun, so that the debt repayment starts at a comfortable period.
Last but not the least, acknowledging the changing pattern of the external debt scenario of the nation and preparing ahead is crucial.
The author is a senior research associate at the South Asian Network on Economic Modeling (SANEM)
