Foreign fund flow, new pledges dwindle as debt servicing surges

With the obligations mounting and foreign funds diminishing, economists called for rejuvenating development spending as they argue this would streamline the foreign loan pipeline.

During the July-November period of FY25, the country returned $1.71 billion in principal and interest payments on foreign loans, up from $1.33 billion during the same period of FY24, according to finance ministry data.

According to the breakdown, the value of principal payments climbed by 37 percent to $1.05 billion while interest payments rose by 17 percent to $655 million.

Adding to the fiscal pressures, foreign assistance commitments have fallen precipitously.

In the first five months of FY25, total commitments for grants and loans stood at just $522.68 million — a sharp drop from $5.86 billion in the previous year.

Loan commitments fell from $5.57 billion to $248.88 million while grant commitments remained relatively flat.

Disbursements also declined in the July-November period, with total project-related disbursements amounting to $1.54 billion, down from $2.11 billion during the same period last year.

This decrease reflects a slowdown in project loan inflows at a time when Bangladesh relies heavily on external financing for infrastructure and development initiatives.

The combination of rising debt obligations and declining foreign assistance is presenting a huge challenge for Bangladesh’s fiscal management.

To cushion the increasing burden, economists suggested that the government should set priorities for annual development programme (ADP) implementation, stabilise the exchange rate and enhance domestic revenue mobilisation.

“The debt-servicing cost was supposed to surge as we have already seen the uptrend in the last couple of years,” said MA Razzaque, chairman of Research and Policy Integration for Development (RAPID), a local think-tank.

Razzaque said higher interest rates and shorter grace and maturity periods for foreign loans are contributing to the debt burden.

However, the fall in foreign loan disbursement is a matter of fresh concern, he said.

“A lower government expenditure, including development spending, has contributed to the slow disbursement,” he said, referring to a large chunk of foreign loans stuck in the pipeline.

“But the interim government is yet to streamline the loan pipeline as ADP spending slowed after the political changeover.”

In the first five months of FY25, public agencies managed to spend Tk 34,214 crore or 12.29 percent from the overall development fund, as per the Implementation Monitoring and Evaluation Division (IMED) data.

The economist suggested trimming the ADP allocation and prioritising foreign funded projects.

In a recent report, titled “Medium-Term Macroeconomic Policy Statement (MTMPS)”, the finance ministry said interest payments would continue to rise gradually in the coming years.

The proportion of external interest payments as a percentage of the national budget will rise to 2.6 percent in FY27 from 0.9 percent in FY22, reflecting the growing impact of external debt, the report said.

However, Ashikur Rahman, principal economist at the Policy Research Institute (PRI) of Bangladesh, does not believe the debt servicing would pose any risk for the country.

“Despite the rise in debt servicing, it does not pose any major risk even in absence of new loan commitments as exports and remittances offer a reasonable cushion that can help the treasury meet its immediate international debt obligations,” he told The Daily Star.

“In the current fiscal year, foreign exchange earnings from exports and remittances are likely to cross $70 billion, which means even if debt obligations reach $4-5 billion, it poses no significant default risk for Bangladesh.”

Nonetheless, given the local currency Taka is likely to further lose its value against the US dollar, the domestic fiscal burden of additional international debt servicing is going to intensify, he said.

“It necessitates that the Ministry of Finance keeps committing to streamlining domestic resource mobilisation initiatives that can offer the treasury more fiscal space to manage this additional pressure,” Rahman added.

However, domestic revenue mobilisation does not offer much hope.

During the July-November period of FY25, revenue collection logged nearly a 2.5 percent negative growth year-on-year, according to national revenue board sources.