External debt service: payment will peak at $5.15 billion in 2030

While the external debt situation remains comfortable, the government should still be cautious in selecting projects with foreign financing. Zahid Hussein

former chief economist of the WB office in Dhaka

Bangladesh’s foreign loan servicing burden will peak in the 2029-30 fiscal year with a repayment of $5.15 billion, which experts say is well within the safe zone – quelling fears that the country could become the next emerging economy after Sri Lanka and Pakistan to encounter external debt distress.

The projection was made by the Economic Relations Division, which manages external 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 on foreign loans, up from $2.45 billion last year. Reimbursement amounts would gradually increase and peak in fiscal year 2029-30.

After that, it would successively decline. For example, for fiscal year 2034-35, it would be $4.45 billion.

Similarly, the country’s external debt to GDP ratio would also contract.

For example, it would be 13.4% in fiscal year 2031-32, compared to 18.1% in fiscal year 2021-22, the International Monetary Fund said in its latest sustainability assessment. debt published in March.

Historically, the average external debt to GDP ratio of Bangladesh has been 18.7%. It is expected to fall to 15.1%, according to IMF DSA calculations.

“Bangladesh remains at low risk of external and overall debt distress,” the IMF said in the report.

The external and domestic debt indicators are below their respective thresholds in the baseline and stress test scenarios, he added.

Subsequently, one of the four strategies foreseen in the government’s MTDS, which was finalized this month, is to increase external financing.

The strategy envisages meeting 36% of gross financing needs with external financing at concessional and semi-concessional interest rates.

Semi-concessional financing has floating interest rates and concessional financing has a fixed interest rate.

Another strategy is to double 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 international bonds, which pushed Sri Lanka’s debt burden onto the hill.

The publication was presented to the IMF staff mission which concluded its nine-day tour in Bangladesh on July 21. The mission endorsed the strategy, it said in its final statement.

“Bangladesh’s external debt-to-GDP ratio is so low that even if the cost of debt rises, the chances of the debt burden becoming unsustainable are minimal,” said Zahid Hussain, former chief economist at the Dhaka office of the World Bank.

However, there are tail risks, which are events with a low probability of occurring.

Tail risks stem mainly from endogenous factors such as the ongoing Russian-Ukrainian war, which has caused commodity prices to skyrocket on the world market, causing a drain on Bangladesh’s foreign exchange reserves and widening the account deficit. running.

“Such a situation cannot be undone,” Hussain said.

Going forward, if exports or remittances, Bangladesh’s two main sources of foreign exchange, slump or imports soar, the government will experience cash flow constraints.

This would make it difficult to service the debt on time.

“Austerity measures might then be needed to keep debt repayments going so the country has no problem getting loans in the future,” he said.

Since independence, Bangladesh has been able to repay its foreign loans on time and has never requested rescheduling of installments, according to the ERD.

To avoid such a scenario, Hussain advised caution in selecting projects with foreign funding.

“If mega projects are not commercially viable, they can 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 savings from import costs. There has to be a tangible contribution, there has to be commercial viability.”

The source of foreign financing must also be carefully assessed so that the conditions are favorable to the country.

“Do we insure all concession facilities? Do the funds come with conditions that supply must be from a selected source, or do we have to pay a high down payment? them; should the entrepreneur come from them? These things need to be considered.

Shirlene J. Manley