Debt payment burden to intensify further

A spike in the already-increasing debt servicing burden is imminent as the country's debt to gross domestic product (GDP) ratio remains far from growth-reducing thresholds, according to the white paper on the state of the economy.

The paper said debt distress can arise even at "low" levels when debt servicing competes for domestic and foreign currency amid a liquidity shortage.

"Inattention in policy and practice to value for money in decisions to borrow from domestic and external sources has been the Achilles heel of public debt management in Bangladesh in the last decade and a half," the paper said.

According to the paper, by the end of June this year, the total debt is estimated to have reached 41.3 percent of the GDP, up from 35.6 percent just two years ago.

The bulk of the $166.7 billion equivalent public and publicly guaranteed (PPG) debt at the end of FY23 was domestic debt denominated in local currency, which accounted for 55.6 percent of the PPG debt stock. In FY23, interest and amortisation on domestic debt totalled $19.4 billion, or 11.7 percent of the GDP.

According to the white paper, treasury bonds and bills, a majority of which are owned by banks, make up nearly half of the nation's debt. Less than one-fifth is owned by the Bangladesh Bank (BB), with non-bank financial institutions holding the remaining shares.

Around 23 percent of the total domestic debt is made up of National Saving Certificates (NSCs).

It said the trends in debt intensity appear much less comfortable, especially on metrics not contaminated by data fog.

According to the paper, external debt was 44.4 percent of the PPG debt stock and 17.7 percent of the GDP in FY23 compared to 15.1 percent in FY21.

External PPG debt is predominantly owed by the central government to multilateral and bilateral lenders, accounting for 52 percent and 34 percent respectively at the end of FY23.

The rest are short-term, sovereign bonds held by non-resident Bangladeshis and guaranteed state-owned enterprises' debt.

Private sector external debt stood at 5 percent of the GDP in FY23 and declined by another 7.5 percent by the end of June this year relative to the same point in time in 2023.

Total interest and amortisation related to external debt in FY23 amounted to $3.9 billion, or 0.9 percent of the GDP.

Regarding the reason for growing public debt, the white paper decried an overall sense of comfort among policymakers and multilateral institutions on the intensity of public debt.

This is rooted in two sets of facts.

First, including guarantees, PPG debt is lower in Bangladesh than in India, China, Thailand, and Vietnam, recent increases notwithstanding. Second, as before, a joint debt sustainability analysis (DSA) by the International Monetary Fund (IMF) and World Bank (WB) in June 2024 assessed that there was a "low risk of external and public debt distress".

The IMF-WB analysis found a baseline with 7 percent long-term average economic growth, primary budget deficits averaging 2.6 percent of the GDP, 5-6 percent inflation and stable exchange rates, it explained. The paper said such a happy conjunction of macroeconomic conditions is increasingly looking farfetched going into 2025.

Growth projections for the current year have already been drastically revised down to between 4 and 5 percent and the timing of projected recovery is highly uncertain, the white paper pointed out.

All other variables have moved in directions incongruent with the baseline. These include contingent liability, financial market, natural disaster and export shock.

However, the paper said the IMF-WB debt sustainability analysis is beginning to gather a reputation of often underestimating economic downturns, leading to delayed debt relief and hurriedly designed increases in austerity measures.

It also said it is not very assuring that a decline of long-term growth to 6.5 percent does not change external and overall debt risk ratings.

Fogs in the integrity of GDP data suggest maybe even 6.5 percent is no more than an upside risk and certainly not a downside risk as tagged in the Digital Security Act.

Bangladesh may never have exceeded 5 to 5.5 percent annual growth except in the volatile decade of the 70s, the white paper committee believes.

The reported rise in the extent of indebtedness could be understated and the favourability of debt dynamics overstated because of significantly rising upward bias in GDP growth and perhaps even the level of nominal GDP estimates.

Moreover, there is a limit to the extent to which favourable debt dynamics can reduce indebtedness in the face of large primary deficits or below the line adjustments, the latter often making a big difference.

Key factors weighing on Bangladesh's debt vulnerability are its growing exposure to foreign currency-denominated non-concessional debt for mega-projects, elevated refinancing risks, and low fiscal and external buffers.

Given doubts about the veracity of data on real GDP growth and nominal GDP levels, the external debt to foreign exchange earnings metric has better credibility.

It has also gained more currency as Bangladesh struggled to manage the recent crunch in foreign exchange liquidity, the white paper mentioned.

But the white paper committee suggested transformative debt management reforms would be needed to make a credible case for renegotiations supported by global lenders such as the IMF and the WB.