New worries as interest payment for debt doubles in 5 months

The government's spending on interest payments against the mounting foreign debt surged 136.70 percent year-on-year to $562 million in the first five months of the current fiscal year as disbursements surged in recent years.

The interest payment stood at $237 million in July-November of the previous financial year of 2022-23, data from the Economic Relations Division (ERD) showed.

The fund release for the mega projects such as the Dhaka Metro Rail, Matarbari Coal Power Plant, and Rooppur Nuclear Power Plant has increased in recent times as their implementation has entered the last phase.

Besides, the government has received sizeable budgetary support in the last three years after development partners accelerated lending to help the economy make a turnaround from the impacts of the coronavirus pandemic and the Russia-Ukraine war.

The repayment of the principal amount of the funds begins after the maturity of the loans, whose tenure range from 20 years to 30 years. The interest repayment starts after the disbursement is made. So, interest expenses for Bangladesh are rising.

Another factor for the higher interest expenses has been the elevated cost of funds from the international sector, driven by a spike in the interest rate for Libor and SOFR-linked loans.

The London Interbank Offered Rate (Libor) was the global reference rate for unsecured short-term borrowing before it was replaced in June by the Secured Overnight Financing Rate (SOFR).

Because of a 25 percent depreciation of the taka against the US dollar in the past 18 months amid a sharp fall in the foreign currency reserves, the government's foreign loan repayment in terms of the local currency has soared.

In July-November of 2023-24, the government spent Tk 14,644 crore for servicing debts, which is 74 percent higher than the Tk 8,430 crore paid in the identical period of FY23.

The higher interest payments pushed up the external debt payment by 51 percent year-on-year to $1.33 billion in July-November, compounding pressure on the foreign currency reserves, according to the ERD. It was $880 million in the same period in FY23.

The servicing of principal amounts increased to $770 million from $642 million, an increase of 19.75 percent. In the entire FY23, Bangladesh serviced external debt worth $2.67 billion.

Meanwhile, the utilisation of foreign loans is not rising despite a ballooning of such funding in the pipeline. Rather, disbursement declined 14 percent to $2.12 billion in July-November.

This prompted the Bangladesh Bank and the finance ministry to continuously pursue ministries and divisions to use external funds so that it helps the government maintain a healthy foreign currency reserve.

The net reserves stood at $21.45 billion on December 27, way lower than the record high of $46.4 billion in 2020-21, central bank data showed.

An ERD official said the use of funds is witnessing a slow pace due to the parliamentary elections slated for January 7. "The pace will accelerate after the polls."

However, he said, one of the positive sides in FY24 is commitments made by development partners increased significantly. They have pledged to lend $5.86 billion so far in the financial year, which is 12 times higher than in the same period of FY23 when commitments totalled $461 million.

The government's total debt amounted to $166.65 billion in FY23. Of the volume, external debt stood at $74 billion, which is predominantly owed to multilateral and bilateral creditors, at $38.81 billion and $25.35 billion, respectively.

As a result, the risk of external debt distress and the overall risk of debt distress has remained low for Bangladesh, according to the latest IMF debt sustainably analysis report.

However, the persistently low revenue receipts have not only limited the government's ability to spend but are also posing a threat to the country's debt sustainability.

A spike in interest rates owing to the global monetary policy tightening and the sharp depreciation of the local currency have also deepened the risk, the IMF said.