Time for a cautious approach to managing Bangladesh's external debt
Bangladesh's outstanding external public and publicly guaranteed (PPG) debt, at $79 billion as of September 2023, is not high when compared to economies of similar size. The amount, equivalent to about 17 percent of the country's GDP, is not an outlier when compared to corresponding figures for other developing countries and lower-middle-income countries (LMICs). However, if the recent growth trend of its external debt-servicing obligations is taken into consideration, the management of external sovereign debt should demand closer attention.
Indeed, in recent years, issues of external debt-servicing and debt-carrying capacity have emerged as a global concern in policy circles. A review of the literature shows that many low-income countries could face debt distress and fall into the dreaded middle-income trap for various reasons, including post-Covid recovery challenges, adverse implications of the Russia-Ukraine war on the domestic economy and balance of payments scenario, and the way external sovereign debt is being managed by some of these countries. In this context, and in view of emergent trends, there is a need for being strategic in managing Bangladesh's external borrowings, sovereign debt-servicing, and the country's debt-carrying capacity.
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To note, Bangladesh's PPG debt increased from $44.5 billion to $70.8 billion between FY2018-19 and FY2022-23—a 60 percent rise in four years. Over the corresponding period, interest payment increased from $0.48 billion to $1.31 billion, an increase of about 168 percent, while payment of the principal amount posted a rise of about 48 percent. The country's debt-servicing payments in the first nine months of the current fiscal year has gone up by 49 percent compared to the matched period of the preceding year, with interest payments rising by 117 percent and principal payments posting a growth of 22 percent. The pressure of external sovereign debt-servicing is set to rise further over the near future, given the current low levels of foreign exchange reserves, slowed growth of earnings from goods and service exports, higher costs of borrowings, and the grace period of some of the significantly large foreign loans for infrastructure projects coming to an end, like the Rooppur Nuclear Power Plant, commissioned in 2016, and the Padma Rail Link Project, commissioned in 2018.
A key factor driving the rising debt-servicing obligations of Bangladesh originates from the country's middle-income graduation. Bangladesh graduated from low-income country (LIC) to lower-middle-income country (LMIC) status in 2015, according to the World Bank (WB) classification. A recognition of the country's impressive economic achievements, middle-income graduation implied that it was no longer eligible for the highly concessional IDA (International Development Association) loans from WB (at about 0.7 percent annual interest, with grace period of up to 10 years, and maturity period of up to 40 years). Consequently, Bangladesh has transitioned from IDA-eligible country to a Gap Country, to the present status of a Blend Country, with terms of borrowings becoming increasingly stringent. The country is expected to graduate to the World Bank's relatively high-cost IBRD (International Bank for Reconstruction and Development) country category over the next few years. As a matter of fact, costs of borrowing from both multilateral and bilateral sources have already started to rise significantly.
Additionally, debt-servicing obligations have become more onerous for external-funded projects that generate income in local currency. Moreover, time and cost escalation, a rather common phenomenon in Bangladeshi project implementation, means that project cost ends up being considerably higher than what is initially planned.
Thus, a number of factors including increasingly large amount of external borrowings, higher interest rates, more stringent terms of borrowings, upward revision of project costs and others have combined to trigger a sharp rise in Bangladesh's debt repayment obligations.
It is true that the country's LDC graduation, set to take place in November 2026, does not have direct implications for access to, and the terms of, external borrowings. Country status for purposes of external borrowings is exclusively based on per capita GNI. However, the challenges that the export sector anticipates on account of LDC graduation, originating from preference erosion and the consequent impacts on export earnings and forex reserves, will have to be taken into cognisance in estimating the country's debt-carrying capacity. All efforts should be geared towards maintaining Bangladesh's current status as a country in the "Medium" category of the IMF's debt-carrying capacity classifications, and averting the likelihood of falling into the "Weak" category.
Bangladesh's future sovereign debt management strategy should be informed and guided, firstly, by the need to explore opportunities of additional borrowings from new sources, like the Asian Infrastructure Investment Bank or the New Development Bank—of which Bangladesh is a member, and from which it has already taken loans for a number of projects—and diversify its loan portfolio. Interest rates and lending terms should be carefully examined if this approach is taken. Particularly, loans with flexible interest rates must be weighed with due care to assess their future implications in terms of liabilities and debt-servicing obligations. Whether to go for fixed or flexible interest rates will need to be carefully weighed as well.
Both terms of borrowings and quality of investment will need to be carefully examined as well. The lender selection process must be rigorous. Every effort should be made to ensure that projects are completed on time, and that accountability is enforced.
Negotiation of loans that are of the non-concessional type must be pursued with caution and care. The Economic Relations Division (ERD) of the Planning Commission has developed a formula to assess the terms of loans: loans exceeding 25 percent threshold is considered to be non-concessional. Non-concessional loans must be appropriately justified when negotiated.
Outside of these sources, Bangladesh will also need to proactively pursue opportunities of getting support from target-oriented funds set up globally, such as the Loss and Damage Fund announced at COP28.
However, loans with components that include learning tours, unnecessary procurement, cash disbursement, etc need to be carefully monitored, and, whenever possible, discarded. Loans incurred by various government entities that are underwritten by sovereign guarantee needs to be carefully monitored. While loans that are taken to support the budget allow flexibility in undertaking expenditure, the government must ensure transparency and accountability in the usage of such funds. Loans with conditionalities such as single source procurement should be properly scrutinised to assess their implications for the economy—for example, whether the raw materials and intermediate goods are available locally, at lower prices, and ensure good value for money.
Finally, human resources, expertise and analytical capacities to deal with external debt management issues and assess the country's debt-carrying capacity will need to be further strengthened in view of the anticipated challenges, now and in the future. It is good that the Ministry of Finance, Bangladesh Bank and the ERD prepare periodic reports on the country's debt status and debt service-related data, including those concerning external borrowings. The usability of these reports for policymakers may be further improved by raising the quality of data generated, standardising the reporting process, and undertaking evidence-based rigorous analyses and projections.
Dr Mustafizur Rahman is distinguished fellow at the Centre for Policy Dialogue (CPD).
Views expressed in this article are the author's own.
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