We have to be careful with foreign debt

It is worrying that Bangladesh’s interest payments on external borrowings are expected to increase by 65 percent within three years. This is due to rising global interest rates and a large foreign loan portfolio. It goes without saying that the increase in the cost of external debt will put further pressure on our dwindling foreign exchange reserves. Therefore, it is crucial that the government carefully analyzes our debt situation before taking any foreign loans in the future.

According to a report by the Ministry of Finance, Bangladesh’s interest payments on debt alone are set to rise to $2.21 billion in 2027, with the taka losing 35 percent of its value against the dollar over the past two years. The principal is also estimated to rise by 28 percent to $3.17 billion in FY 2026-27, compared to the current fiscal year. Foreign loan repayments – including interest and principal – are expected to reach $3.82 billion in the current fiscal year. By 2027, the amount owed is expected to rise to $5.38 billion. And the share of external interest payments in the budget is also expected to rise to 2.6 percent in FY27, from 0.9 percent in FY22.

Two major factors also contribute to the increase in interest payments on foreign loans. The first is that benchmark rates, an interest rate measure used to set other interest rates, are expected to remain high in developed countries, and the second is that Bangladesh’s graduation from the LDC category will gradually narrow the window for obtaining concessional loans from external sources. The latter is something we’ve known for a while; therefore, the government should prepare plans to maneuver without hitch in the face of that fact, and if it has not already started, it should certainly do so now.

As the Treasury report itself admitted, managing these debt service obligations is essential to ensure financial stability and avoid liquidity crises. Since Bangladesh is not yet out of the currency crisis, this becomes even more important. Therefore, the government should not only be wise in taking loans, but also be cautious in using foreign funds. This means that the government must do a better job in choosing projects that are of great social and economic importance, and refrain from taking on unnecessary projects that put further pressure on our external debt situation, without reaping major benefits in return.