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While Bangladesh’s external debt-to-GDP ratio is still considered moderate compared to some other developing countries and within the IMF’s “safe zone,” the rapid pace of debt accumulation, the shift towards less concessional loans, and existing macroeconomic challenges are raising red flags, according to the Finance Division’s Debt Bulletin.

Prudent debt management, careful selection of new projects, improved project execution, and robust domestic resource mobilisation are crucial to ensure long-term debt sustainability.

“The rising external debt stock, principal, and interest payments of Bangladesh against exports may create vulnerability in the external debt position and may affect external debt sustainability in the coming years,” the Medium-Term Macroeconomic Policy Statement for FY26–FY28 warned.

Repayment volumes are rising due to loan maturities, currency depreciation, and the end of grace periods on certain loans, the DSA report noted.

The depreciation of the taka has had a significant impact on debt servicing costs. The local currency has weakened from around Tk 84 per US dollar in early 2021 to over Tk 123 today, meaning more taka are required to repay the same amount of foreign debt.

The government plans to conduct another DSA this month using the latest data to assess vulnerabilities and ensure transparency in debt management.

Bangladesh still has access to concessional external financing and prefers this mode. However, the country has been gradually facing exposure to non-concessional loans by official creditors due to persistent economic development and higher per capita income in recent times.

Moreover, the cost of borrowing from commercial lenders has been increasing due to global monetary tightening, higher domestic inflation, and depreciation of the local currency. It is expected that inflation will decrease substantially in the next financial year and the currency exchange rate will stabilise due to current initiatives by the central bank.

Fiscal space in the country has been reduced over the last 10 years, so the government now needs to borrow to meet its operating expenditure, which raises interest costs, said Ashikur Rahman, Principal Economist at the Policy Research Institute of Bangladesh (PRI).

“The tax-to-GDP ratio has dropped. Revenue collection can’t keep pace with the rise in operating expenditure. A country cannot be operated in this way, taking loans as it creates a vicious cycle,” he said.

For the next government, he said, it is a major task to reform public expenditure and create fiscal space. “It may need to freeze the inclusion of new government employees or go for privatisation of big infrastructures.”

In any case, the tax-to-GDP ratio will have to be increased, and reforms to expand fiscal space will be necessary, he added.

LDC GRADUATION TO INCREASE PRESSURE

Analysts say Bangladesh’s already growing debt pressure is likely to increase sharply upon its slated graduation from the Least Developed Country (LDC) category near the end of next year.

The country will lose access to grants and concessional loans from multilateral and bilateral development partners and will need to rely more on commercial loans, which carry higher interest rates and shorter repayment periods.

The medium-term outlook for Bangladesh’s debt after LDC graduation hinges on the government’s ability to implement effective strategies to counter these challenges, said the finance ministry report.

It states, “Without robust reforms in revenue mobilisation, export diversification, and debt management, the debt burden and associated risks could increase.

“However, successful implementation of these strategies could help Bangladesh navigate the transition and maintain a sustainable debt trajectory while leveraging its improved economic standing.”