The Financial Express

Returns on foreign loans may squeeze as Bangladesh's debt servicing liabilities surge

| Updated: February 03, 2022 10:36:32

Returns on foreign loans may squeeze as Bangladesh's debt servicing liabilities surge

Bangladesh's net foreign loans fell as repayments under debt-servicing liabilities surged year on year in the last fiscal, officials say as economists caution about its blowback impact.

As government's repayment of the principal amounts against the outstanding loans is rising, the net foreign-assistance inflow and the economic returns on the loans are likely to get under pressure in the days ahead, analysts forecast.

Economists say if the repayments rise at higher rate compared to the rate of the net aid inflow, the economic returns on the external assistance would be squeezing in the long term.

Economic Relations Division (ERD) data show that the net external loan inflow decreased by 7.80 per cent in the last financial year (FY) 2020-21 compared to that of the previous FY2020.

Senior ERD officials apprehended that the net aid inflow could come under contraction pressure in the coming days as repayment for most of the large loans, especially of the megaprojects, started in recent years.

"When the year-on-year disbursement of big foreign aid against some megaprojects like the Rooppur Power Plant project would decrease or end, the net external loan will be getting under pressure further," a senior ERD official told the FE Friday, requesting anonymity.

According to the ERD, the government paid a total amount of US$1.91 billion against foreign debts to the development partners in the FY2021.

In the first five months (Jul-Nov) of the current FY2022, the government paid $868.25 million against its liabilities, the ERD data showed.

The ERD official notes that the amount of repayment money is rising every year, which is affecting the net medium-and long-term (MLT) concessional and non-concessional external loans.

The data show that the government five years ago in FY2017 repaid $1.12 billion against the outstanding loans, and the debt servicing started surging in the following years at higher rates.

In FY2018, the government served $1.41 billion against the foreign loans, $1.59 billion in FY2019, and $1.73 billion in FY2020, the ERD shows.

A Deputy Secretary of the Division says since repayment period of many big loans on the megaprojects and other large projects had started in recent years, the debt-servicing amount is rising every passing year.

"However, although the debt servicing is increasing, Bangladesh still is at a comfortable level," he adds.

The official said they had been using international-standard software 'Debt Management Financial Analysis System (DMFAS)' for the last 12 years to facilitate the task of debt management.

Bangladesh's ability to manage foreign debt has attained global standards, he says, implying that they are cautious about any unforseen imbalance that usually leads a nation into debt-trap.

The deputy secretary makes it clear that since independence, Bangladesh has never been defaulter in repaying loans. "Even the country never requires applying for rescheduling any installments in the debt servicing."

One of the most prevalent indicators is the foreign-loan status and the comparative analysis of the country's GDP, export earnings, revenue income with the repayments of principals and interest.

To this end, Bangladesh is in conformable zone with its some 15.5-per cent foreign loan against GDP as a ratio, and 88.5- per cent export and remittance-to-GDP ratio, the FY2020 data of ERD show.

Research Director of the Centre for Policy Dialogue (CPD) Dr Khandker G Moazzem told the FE that since Bangladesh has graduated as the Lower Middle Income Country (LMIC), its foreign loan is getting costlier gradually.

In addition, the government has already gone for South-South cooperation even in sourcing the loan which is still costlier than the other concessional loans, he added.

"We have to ensure justified use of the loans. If the projects are delayed, the rate of economic return is also affected. The project periods of almost all the foreign-funded projects are being increased. So, the rate of economic return is being affected," he says.

"If we make delay in project implementation, our rate of return from the foreign loan automatically goes down, and in the long run, Bangladesh's debt sustainability will be affected," Dr Moazzem adds.

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