Due to the weaker currency, the government’s external debt service obligations are expected to increase by nearly 11% over the amount reserved for the current financial year, according to the Economic Relations Department (ERD).
The department announced in a recent meeting that an additional Tk4.02 billion will be required for payment of principal and interest on external loans in FY24, attributing this demand to Tk devaluation.
Taking this additional amount into account, Bangladesh’s external debt repayments will increase by a staggering 52% compared to the previous year. The allocation for debt servicing in the original budget for FY24 was Tk 37,076 billion.
In the last financial year, Bangladesh spent Tk 26,928 million on external debt servicing.
ERD officials told Business Standard that the additional funds were sought in the revised budget on the assumption that it could cost 115 taka per dollar by the end of this fiscal year.
The official said the current allocation was made considering the exchange rate of Taka 104 to US dollar, adding that the government is currently repaying external debt at Taka 110 to US dollar.
According to central bank data, the exchange rate was 86 taka to the dollar in February last year. The rate started rising after the Ukraine war and has now increased by 28% to Tk110 to the dollar.
The external debt scenario is a striking example of how exchange rate fluctuations erode a government’s fiscal capacity while revenue falls short of expectations.
According to the National Board of Revenue, the government’s revenue collection in October was just over Tk27,000 billion, below the target of Tk31,000 billion.
To cope with the growing debt burden, the government will choose to secure additional funding from external sources and increase its reliance on higher-cost borrowing, experts said.
Zahid Hussain, former chief economist at the World Bank’s Dhaka office, said the rise in loan repayment costs is due to exchange rate adjustments, which are inevitable and there is no need to worry too much.
However, he warned that there was reason to be concerned about recent trends in increasing external debt servicing costs.
The economist said dollars are needed to pay down foreign debt, but they are difficult to obtain because government revenues are limited.
He said the government needed to address both issues to deal with external debt servicing pressures. To address this, he proposed curbing government spending and increasing revenue through exports and funds from expatriates.
Dr. Ahsan H. Mansoor, executive director of the Policy Research Institute, a research firm, said the debt burden would be further increased by the inclusion of Bangladesh’s annual membership fees and equity investments as a member of international organizations.
“If the exchange rate is not stable, it is difficult to keep the economy balanced, especially when it comes to overseas transactions,” the economist said.
He warned that if the situation continues, Bangladesh may have to seek an annual budget adjustment every year to repay its external debt.
Dr Ahsan Mansoor said the devaluation of the taka has already led to a significant increase in the private sector’s external debt, which has reached nearly Tk 100,000 crore.
He advised letting the market determine the exchange rate and increasing export and remittance income. Additionally, you will need to return any earnings you earn overseas and manage your import costs wisely.
principal and interest
The allocation for debt servicing in the original budget for FY24 was Tk 37,076 billion.
The ERD meeting had requested an additional Tk 1,596 billion in the revised budget to pay principal of external loans, an increase of 6.46% from the initial allocation of Tk 24,700 billion.
An additional Tk 2,424 million has been sought as interest payment. This is an increase of 19.59% from his initial Tk 14,800 crore.
For reference, Tk 17,491 crore was spent on loan repayments in the last financial year.
The government’s external loan balance was $55.602 billion as of June 30, 2022, compared to $62.57 billion at the start of this fiscal year.