Bangladesh has repaid $3.07 billion to its development partners during the first 11 months of the current fiscal year, marking the highest debt repayment in a year ever by the country.

For the first time, Bangladesh’s annual foreign debt servicing – encompassing both principal and interest – has exceeded $3 billion, driven by the initiation of principal repayments for several mega projects and the impact of high global interest rates.

The latest report from the Economic Relations Division (ERD) unveiled on Wednesday a troubling reality: a slight rise in foreign aid accompanied by a rapid surge in pressure of foreign debt and interest servicing burdens.

According to the ERD data, the repayment during July-May period of FY23 was $2.47 billion, which ultimately totaled $2.67 billion by the end of that fiscal. 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, respectively.

ERD officials said the commencement of principal repayments on loans for major projects, such as the installation of Single Point Mooring with the Double Line and the Modernisation of Telecommunication Network for Digital Connectivity projects, has significantly contributed to the increased debt servicing burden. However, Bangladesh has allocated around 44% of foreign aid, amounting to around $3.07 billion, for debt servicing, revealing a growing challenge in managing its financial obligations.

During the first 11 months of the current fiscal, Bangladesh received approximately $7.02 billion in foreign aid, marking an increase of only $39.48 million compared to the same period last fiscal year.

Furthermore, the burden of interest payments on foreign loans has soared by more than 42% during this period, escalating concerns regarding the sustainability of Bangladesh’s debt.

The country’s principal repayment amounted to $1.81 billion in that period, which was $1.58 billion in the same period of the previous fiscal.

In the July-May period of FY24 alone, interest payments totaled approximately $1.25 billion, compared to $882.86 million in the corresponding period of the previous fiscal year.

Experts said the recent appreciation of the Dollar 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 seen a significant increase in loan commitments, with foreign lenders pledging a substantial $7.93 billion by the end of May this fiscal. The amount of pledged foreign aid was $5.97 billion in the same period of the previous fiscal.

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

They 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-based 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 selecting projects after assessing them properly is essential for ensuring optimal economic returns and mitigating 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, Dr Zahid urged proactive measures to bolster dollar reserves, boost remittance inflows, and expand export revenues.

However, 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.