Why pressure of paying foreign debt increasing?

Farhad Chowdhury: Worries about repaying foreign debt are increasing. The repayment amount has doubled in a span of one year. And the amount of interest payment is more than double. This pressure to repay the foreign debt is increasing at a time when the country’s foreign exchange reserves are continuously depleting. Also, the dollar market is going out of control. Remittances are not growing at the desired rate. Tensions have also started with Europe and America, the main market for export earnings. This has been linked to the strike-blockade in the country.
According to the Economic Relations Department (ERD) latest, Bangladesh has repaid Tk 12,860.94 lakh (at the rate of Tk 111 per dollar) against debt in the four months of the current fiscal year (July-October). And in the same period of the fiscal year 2022-23, Tk 6 thousand 906 crore 23 lakh has been paid. Out of this, the interest payment in four months of the current financial year is Tk 5 thousand 129 crores. In the last four months of the financial year, interest payment was Tk 1 thousand 786 crores. That is, the interest payment has increased more than twice.
On the other hand, the development partners have reduced the concession of promised loans. According to ERD data, in the four months from July to October of the current financial year, the cost of paying interest on foreign debt has increased by 52 percent compared to the same period of the previous financial year. In the last four months, a total of $110.14 crore has been paid for this, which was $72.43 crore in the same period of the previous financial year. That is, in the four months of the current financial year, the cost of interest and principal repayment of foreign loans increased by $37.72 million.
Why pressure increasing?
In addition to economic complications, the government’s market-based debt has increased. At the same time, the floating interest rate has also increased. Two years ago, one of the benchmarks for determining global interest rates (Secured Overnight Financing Rate or SOFR on market-based debt) was below 1 percent, which has now risen to 5 percent. As a result, the pressure of foreign debt repayment has increased. The first quarter of the current financial year has seen a 176 percent increase in interest payments compared to the same period of the previous year.
Economists say interest rates on foreign debt have risen since the country’s promotion to lower-middle-income status in 2015. Besides, additional interest is charged on SOFR, one of the benchmarks for determining global interest rates. This rate is like 5 percent. At this rate, many short-term loans such as budgetary assistance have to pay interest. The grace period in such loans is relatively short. Interest rates are high. Due to these reasons interest with principal has to pay more interest in recent months.
According to officials of the Department of Economic Relations, principal repayment of loans for notable projects such as the Bangabandhu Sheikh Mujibur Rahman Tunnel Project begins after the end of the grace period, which is one of the reasons for this increase.
For example, Bangladesh signed a $2.667 billion loan agreement with China on April 27, 2018 for the Padma rail link project. The five-year grace period for this loan ended last April. As a result, Bangladesh will have to pay the outstanding installments of this loan from the current financial year. This loan has to be repaid in 15 years.
From 2027, Bangladesh will start repaying the loan of $11.38 billion taken for the Rooppurnuclear power project. The 20-year loan requires principal payments of more than $500 million per year.
At the same time, the actual repayment of the loan for the first phase of the Metrorail project will also begin. Annual real repayments would then go from $4.5 billion to $5 billion. This will result in a bigger jump in actual repayments from FY 2025-26 to FY 2026-27.
According to the ERD report, the cost of foreign debt interest payments increased by 149 percent in the first four months of the current fiscal year. A total of $46.74 million had to be paid for interest. In the same period of the last financial year, the amount of which was $18.77 million.
On the other hand, the actual repayment of foreign loans has increased by 18.17 percent. A total of $634 million has been paid between July and October. In the same period of the last financial year, the amount of which was $53.66 crore. That is, compared to the same period of the last financial year, the actual payment has increased by $9.75 crore. Interest payments, in Bangladeshi currency terms, have increased by 75 percent in the last four months compared to the same period of the previous fiscal year. Tk 12,087 crores of loan interest has to be paid in the last four months. In the same period of the last financial year, this amount was only Tk 6,906 crores. In other words, in the first four months of the current financial year, Tk 5,181 crores have to be paid more than the same period of the last financial year.
Incidentally, the implementation of several large infrastructure projects has started in Bangladesh in the last decade. These include Metro Rail, Padma Bridge Rail Link, Matarbari Power Station, Karnaphuli River Tunnel, Hazrat Shahjalal International Airport III Terminal, Payra Sea Port, Rooppur Nuclear Power Plant etc. To implement such big projects, commercial loans have to be taken from Russia, China and India.
Bangladesh has been getting loans from various development partner countries and organizations including World Bank, Asian Development Bank (ADB), Japan.
However, this pressure may increase in the future due to relatively tough conditions being taken on a bilateral basis from countries like China, Russia and India.
In the last decade, a total of $3,628 million has been agreed to take loans from these three countries. Among them, China is giving $1,754 million in 12 projects, Russia is giving $1,138 million for Rooppur power plant and India is giving $736 million in three Lines of Credit (LoC).
World Bank, ADB has a typical repayment period of 32 to 35 years. But after the grace period China and India will have to repay the debt in 15 to 20 years. For example, Russia’s loan of $1,138 million taken for the Rooppur power plant will have to be repaid in just 10 years. The grace period of Rooppur power plant loan will end in 2026.
China has given $195 million for the construction of a tunnel under the Karnaphuli River in Chittagong. This loan has to be repaid by 2031.
In this context, the private research organization Center for Policy Dialogue (CPD) Honorary Fellow Professor Dr. Mostafizur Rahman thinks that, considering the export income and remittance flow, the overall foreign debt repayment situation has not yet reached an alarming level. But in this situation, one should be very careful in taking new loans. Look for low interest loans. Besides, project implementation work should be done on time. Because implementation delays also increase costs.
Pressure will increase in future
According to ERD’s estimates, the external debt repayment pressure may increase further from the next financial year.
As the grace period of several mega projects like Padma Bridge Rail Link and Bangabandhu Tunnel is over, the pressure on Bangladesh to repay the principal and interest of the loans taken for these projects is gradually increasing.
According to Economic Relations Department (ERD) estimates, the actual repayment of Bangladesh’s largest loan for the RooppurPermanaki power project will begin after 2026. This will increase the debt repayment burden.
According to ERD data, the original payment will be $2.9 billion in the next fiscal year, which will increase to $3.31 billion in the following fiscal year. In the last financial year, Bangladesh paid off only $1.73 billion in foreign debt.
13 years ago, in the 2009-10 fiscal year, total debt repayments were only $876 million-out of which $686 million was principal and $190 million in interest.
According to ERD data, foreign debt repayment pressure including interest will increase by $1.19 billion in the current financial year. And in the next two financial years, it will increase to $1.31 billion and $1.41 billion respectively.
Foreign debt crossed $100 billion
According to the data of Bangladesh Bank, the amount of foreign debt reached $100 billion ($10 thousand crore) till September this year. Out of this, the amount of foreign debt of the government and government institutions is $79 billion. The private sector of the country took the remaining $21 billion in foreign loans. About 84 percent of the loans taken from foreign sources are long-term. The remaining 16 percent or $16 billion of debt is short-term.
A review of Central Bank data shows that nearly 70 percent of the country’s total foreign debt has been taken in the last 10 years. At the end of 2015-16 financial year, the total debt position of public and private sector from foreign sources was $41.17 billion. Of this, $34.19 billion was long-term debt. The remaining $6.98 billion were short-term loans. At that time, foreign debt was 15.5 percent of the country’s total GDP. Since then, foreign debt has steadily increased.
At the end of the fiscal year 2016-17, the foreign debt stood at $45.81 billion. At the end of the 2017-18 financial year, the debt status exceeded $56 billion. At the end of the financial year 2018-19, the foreign debt stood at $62.63 billion.
Central bank data says foreign debt has increased the most since 2018. At the end of the fiscal year 2019-20, the foreign debt stood at $68.55 billion. In the financial year 2020-21, this growth exceeded 19 percent. At the end of that fiscal year, the foreign debt stood at $81.62 billion. In the financial year 2021-22, the growth of foreign debt was 16.9 percent. At the end of the fiscal year, this debt exceeded $95.45 billion.
After that, many foreign institutions withdrew short-term loans from Bangladesh due to the increase in interest rates in the international market. It also reduces the growth of foreign credit flows. At the end of the fiscal year 2022-23, the external debt position increased to $98.94 billion. At the end of the first quarter of the current financial year, in September, the foreign debt position crossed $100 billion. According to Central Bank data, the country’s public-private foreign debt position is about 22 percent of total GDP.
In this context, the executive director of the private research institute Policy Research Institute, economist Dr. Ahsan H. Mansur said that the debt of the government has exceeded the dangerous level long ago. Bangladesh’s net foreign exchange reserves now stand at $15 billion. In contrast, short-term foreign debt is higher than reserves. From this point of view, the position of Bangladesh in terms of foreign debt is risky. He thinks that the pressure to pay installments of foreign loans will increase from next year. If the supply of dollars does not increase, the situation can take a very bad turn.
Reserves shrinking
Meanwhile, according to the International Monetary Fund (IMF), Bangladesh’s net reserves are now at $15 billion. Although the highest reserve in the history of the country was in August 2021. At that time, the amount of reserves increased to $48 billion. Since then, the depletion of reserves started. Reserves have declined by an average of $1 billion per month over the past two years.
In January last year, the country’s banking sector had the highest exchange rate of Tk 85 per dollar. But currently banks are charging Tk 124 to Tk 125 per dollar from the importers, it is alleged. According to that, the exchange rate of the dollar increased by about 47 percent at that time. And in the curb market (retail market), the price per dollar has gone up to Tk 128.