Bangladesh has allocated more than half of its foreign loans towards debt servicing, revealing a growing challenge in managing its financial obligations.

The latest report from the Economic Relations Division (ERD) unveils a troubling reality: a slight rise in foreign debt relief coupled with a rapid surge in foreign debt and interest servicing burdens.

During the first nine months of the current fiscal year (FY24), Bangladesh received approximately $5.63 billion in foreign aid, marking an increase of $268.57 million compared to the same period last fiscal year.

However, a staggering revelation emerges as over 54% of this assistance, amounting to around $2.57 billion, was utilised for debt servicing purposes.

Furthermore, the burden of interest payments on foreign loans has soared by more than 117% during this period, escalating concerns regarding the sustainability of Bangladesh’s debt.

In the July-March period of FY24 alone, interest payments totaled approximately $1.05 billion, compared to $485.90 million in the corresponding period of the previous fiscal year.

Experts said the recent appreciation of the dollar’s value has exacerbated challenges in foreign transactions for the government, leading to higher-than-anticipated allocations for purchasing dollars.

This trend underscores the precarious balance Bangladesh must strike between managing its debt obligations and securing necessary foreign exchange reserves, they added.

Despite these challenges, Bangladesh has witnessed a surge in loan commitments, with foreign lenders pledging a substantial $7.24 billion in loans by the end of March this year.

This figure represents more than double the amount pledged in the same period during the previous fiscal year, signaling a growing reliance on external borrowing to meet development objectives.

Economists said that with the decline in fixed-rate loans, the government is increasingly compelled to turn to market-based interest rate loans.

He said the shift not only increases the pressure on interest payments but also elevates the burden of actual repayments due to the shorter repayment periods associated with market interest rates.

They called for exercising caution in acquiring loans at market-based interest rates and avoiding projects that may not yield sufficient returns.

Dr Zahid Hussain, former lead economist at the World Bank’s Dhaka office, told the Daily Sun that the growing repayment of debts taken for mega projects is increasing the pressure of repayment.

He said it is needed for meticulous project selection to ensure optimal economic returns and mitigate repayment burdens.

Emphasising the importance of prioritising projects with tangible economic benefits, he advocated for initiatives that attract foreign investment, bolster foreign currency reserves, and enhance export productivity.

He particularly underscored the significance of projects aimed at improving logistics and fuel supply systems, which directly contribute to foreign exchange earnings.

With Bangladesh set to lose its Generalised System of Preferences (GSP) status and graduate from the Least Developed Country (LDC) status by 2026, Hussain urged proactive measures to bolster dollar reserves, boost remittance inflows, and expand export revenues.

The government repaid $2.67 billion in principal and interest to development partners in FY23.

The principal and interest repayment of the loans has gradually increased over the past few years. It was $2.02 billion in FY22, $1.91 billion in FY21, $1.73 billion in FY20 and $1.59 billion in FY19.

The ERD estimated that the foreign debt repayment will rise to $3.56 billion in FY24, $4.21 billion in FY25 and $4.72 billion in FY26. The government has set a target of getting foreign loans of $11 billion in FY24, which was $12 in FY23.