External debt servicing: Payment to peak at $5.15b in 2030
While the external debt situation remains comfortable, the government should still be careful in project selection with foreign funding. Zahid Hussain
Bangladesh's foreign loan servicing burden will peak in fiscal 2029-30 with repayment of $5.15 billion, which experts deem to be very much within the safe territory -- quelling fears that the country might become the next emerging economy after Sri Lanka and Pakistan to run into external debt distress.
The projection was made by the Economic Relations Division, which manages foreign debt repayment activities, in May-June as part of the government's updated medium-term debt strategy (MTDS).
This fiscal year, $2.78 billion would be paid against foreign loans, up from $2.45 billion last year. Repayment amounts would progressively increase and hit a peak in fiscal 2029-30.
After that, it would successively decline. For instance, in fiscal 2034-35, it would be $4.45 billion.
Similarly, the country's external debt to GDP ratio would also be contracting.
For instance, it would be 13.4 percent in fiscal 2031-32, down from 18.1 percent in fiscal 2021-22, said the International Monetary Fund in its most recent Debt Sustainability Assessment that was published in March.
Historically, Bangladesh's average external debt to GDP ratio has been 18.7 percent. It is projected to come down to 15.1 percent, according to the IMF's DSA calculations.
"Bangladesh remains at a low risk of external and overall debt distress," the IMF said in the report.
External and domestic debt indicators are below their respective thresholds under the baseline and stress test scenarios, it added.
Subsequently, one of the four strategies earmarked in the government's MTDS, which was finalised this month, entails increasing external financing.
The strategy envisages meeting 36 percent of gross financing needs through external financing at concessional and semi-concessional interest rates.
Semi-concessional financing comes with floating interest rates and concessional financing has a fixed interest rate.
Another strategy entails doubling the share of semi-concessional loans from the current level while maintaining the share of traditional concessional financing.
The updated MTDS also ruled out the possibility of issuing any international bonds, which tipped Sri Lanka's debt burden over the hill.
The publication was presented to the IMF staff mission that concluded its nine-day tour of Bangladesh on July 21. The mission endorsed the strategy, it said in its concluding statement.
"Bangladesh's external debt-GDP ratio is so low that even if the cost of debt rises, the chances of the debt burden becoming unsustainable are minimum," said Zahid Hussain, a former lead economist of the World Bank's Dhaka office.
However, there are tail risks, which are events with a small probability of happening.
Tail risks mostly come from endogenous factors such as the ongoing Russia-Ukraine war, which has sent the prices of commodities spiralling in the global market, causing a drain on Bangladesh's foreign currency reserves and widening the current account deficit.
"Such a situation cannot be written off," Hussain said.
In future, if exports or remittance, the two main sources of foreign currency for Bangladesh, plummet or imports soar, there would be cash flow constraints on the government.
This would make it tricky to service debt on time.
"Austerity measures might be needed then to maintain debt repayment such that the country does not face any problem in getting loans in future," he said.
Since independence, Bangladesh has been able to repay its foreign loans on time and has never applied for rescheduling of instalments, according to the ERD.
To prevent such a scenario, Hussain advised caution in project selection with foreign funding.
"If the mega projects are not commercially viable, they may end up being mega liabilities. We need to select projects that would have a visible contribution to the economy, which could be in production, export earnings or import cost savings. There must be a concrete contribution, there must be commercial viability."
The source of foreign funding must also be assessed carefully too such that the terms are favourable to the country.
"Are we ensuring all concessional facilities? Do the funds come with conditions that the procurement must be done from a select source, or do we have to make a high down payment? Do we have to take all our advice from them; do the contractor must come from them? These things must be considered."