Bangladesh Faces Mounting Debt Servicing Costs, IMF Warns of Rising Risks

Bangladesh is projected to spend over $30 billion this fiscal year on debt servicing, encompassing both principal repayments and interest on domestic and foreign loans, according to the International Monetary Fund (IMF). The global lender has cautioned that without substantial improvements in revenue collection, the country will encounter increasing “rollover risks,” potentially making it more challenging and costly to secure fresh financing for debt repayment.

Rising Debt Burden

The IMF’s Article IV Consultation Report, published last month, estimates public debt servicing will reach $30.59 billion in the current fiscal year, a rise from the previous $26.63 billion The Daily Star. This figure is expected to further increase to $33.84 billion in the next fiscal year.

As of the 2024-25 fiscal year, Bangladesh’s total public debt stands at $188.79 billion, representing 41% of the country’s GDP, up from 39% the previous year The Daily Star. This comprises $101.24 billion in domestic borrowing and $87.55 billion in foreign loans.

In FY25, domestic debt repayments accounted for 4.2% of GDP, whereas external debt servicing remained stable at 1.2%. However, the strain on government finances was significant. Domestic debt constituted 22.6% of GDP in the 2024-25 fiscal year, with servicing consuming 89% of government revenues The Daily Star.

IMF Concerns and Recommendations

The IMF has highlighted the “elevated debt service-to-revenue ratio” as posing significant rollover risks in the medium term The Daily Star. All public debt indicators are trending upwards, reflecting higher borrowing costs and slower economic growth.

The IMF suggests that tax reforms could modestly lower the debt service-to-revenue ratio by fiscal year 2026-27, but warns that extreme events, such as a major natural disaster, could see it surge to over 110% of GDP by 2030 The Daily Star. Raising the revenue-to-GDP ratio is crucial to reduce domestic debt vulnerabilities.

Currently, Bangladesh’s tax-to-GDP ratio remains below 7%, limiting its capacity to manage debt. Finance Minister Amir Khosru Mahmud Chowdhury has announced plans to increase this ratio to 8% in the upcoming budget.

The IMF also cautioned against heavy reliance on domestic borrowing, particularly from banks, which could “crowd out” private businesses and strain the financial system. Reliance on the central bank to support insolvent banks could lead to a loss of control over interest rates, potentially triggering currency devaluation and inflation The Daily Star.

Overall Risk Assessment

The IMF assesses the overall risks to Bangladesh’s debt-servicing capacity as “notable and rising” The Daily Star. Delayed banking sector reforms or slow progress in boosting revenues could negatively impact economic activity.

To mitigate these risks, the IMF recommends diversifying the investor base for government securities and establishing a liability management framework. A primary dealer system, where authorized financial intermediaries trade directly with the government, is also seen as vital.

Former finance adviser Salehuddin Ahmed has noted that Bangladesh’s debt risk has been downgraded from low to moderate, emphasizing the require for caution as loan repayments are outpacing export earnings and government revenue The Daily Star.