Bangladesh would make its strides to reduce reliance on debt in the medium term amid two key macroeconomic challenges - low revenue collection and high-interest rate regime.
To face the looming challenges, the finance division came up with the strategy for the next three financial years (FYs) as suggested in its latest Medium Term Macroeconomic Policy Statement (MTMPS) for FY 2023-26, released with the proposed budget documents.
It recommended adopting a comprehensive and integrated approach to debt management, improving revenue collection, and exploring alternative financing mechanisms to cope with the challenges.
The low revenue collection is limiting the capacity to invest in infrastructure and other developmental projects, it observed, adding that the low tax-GDP ratio also affects the debt sustainability.
This issue is further exacerbated by the LDC graduation deadline in 2026, which would affect the country's access to concessional financing from international sources, it noted.
Dr Zahid Hussain, former lead economist of the World Bank's Dhaka office, however, observed that there is no logic for exploring alternative financing mechanisms because no other alternatives are there for the government.
"The government should rather give attention to full utilisation of the existing and potential low-cost loan options," he told the FE on Thursday.
He added that Bangladesh still receives low cost loans from the development partners like the World Bank, Asian Development Bank, Japan International Cooperation Agency (JICA), and Islamic Development Bank (IDB).
However, the country is failing to fully utilise the funds.
"The options for soft loans are still there," he said, adding that the International Development Association (IDA) will come up with larger loans in the next year while Bangladesh is the major beneficiary of such IDA loans.
The finance division found, according to the MTMPS, a high-interest rate regime both in the domestic and international markets as another key challenge for the country's economy.
The high-interest rate regime is increasing the government's borrowing costs and putting a strain on public finances, it said.
"This situation is further compounded by the increasing financing needs of the government to fund critical infrastructure projects, social safety nets, and other development initiatives," it added.
The MTMPS identified that the segmented debt offices within different offices and agencies have led to coordination challenges in debt management, which could potentially affect the country's overall fiscal sustainability.
"It is crucial to address these issues promptly to ensure that the country's public debt remains sustainable and supports the long-term development goals of Bangladesh," noted the policy statement.
The management of external debt redemption is a crucial aspect of debt management in Bangladesh. The country's external debt comprises both concessional and non-concessional loans, which have varying maturity periods.
At the end of FY 2021-22, the government paid back US$1.5 billion in principal repayment for external debt, and this amount is expected to rise to $2.1 billion in FY 2022-23.
The principal repayment in FY 2023-24 is projected to be $2.4 billion, and it will further increase to $2.6 billion by the end of FY 2025-26.
"Managing the debt service obligations is essential for ensuring financial stability and preventing liquidity crises," said the MTMPS.
The finance division said the expansionary fiscal policy will continue in the medium term to ensure recovery from the negative impact of the Covid-19 pandemic.
This will help the debt-GDP ratio grow from 32.4 per cent in FY 2020-21 to 38.5 per cent in FY 2025-26.
Both the domestic and external debt stock, in percentage of GDP, will continue to grow in the medium term.
The external debt stock will grow faster than the domestic debt stock. At the end of FY 2025-26, external debt stock will reach 14.8 per cent of GDP and will constitute 38.6 per cent of total debt stock, it projected.