Foreign loans: Less received, more repaid

An unprecedented situation has arisen regarding the country's foreign debt. In the months of July and August of the current financial year, the country received less in foreign loans than it spent on repaying installments of previously taken loans.

On Monday, the Economic Relations Department (ERD) released an updated report on the external debt situation for July and August. According to the report, the country received USD 458.2 million in foreign loans during these two months. However, during the same period, USD 589.2 million had to be paid towards foreign debt repayments.

After the fall of the Awami League government, several development partners, including the World Bank, Asian Development Bank (ADB), and International Monetary Fund (IMF), pledged billions of dollars in loans to Bangladesh. These additional loans were primarily proposed to support the implementation of reform programs undertaken by the interim government led by Dr Muhammad Yunus. However, the disbursement of these loans during July-August was lower than expected. In contrast, the country had to continue repaying its foreign debt during this period.

The decline in foreign loan disbursements began in July. According to ERD data, foreign loans amounted to $358.3 million in July, while USD 385 million was repaid in the same month. Foreign debt repayments have been increasing in recent years, and the July-August data for this year reflects that trend.

ERD sources indicate that in the first two months of the 2024-25 fiscal year, $415.6 million was paid as principal and USD 17.36 million as interest. This is $190 million more than the same period in the previous year. During this time, the total debt repayment amounted to approximately Tk 69.64 billion. Over the course of one year, the loan repayment amount has increased by around 20 billion taka. A separate allocation is set aside in the national budget for the repayment of foreign debt by the government.

In July-August, despite the rising costs of debt repayment, foreign loan commitments dropped significantly, with only USD2 million being promised during this period.

Typically, the amount of foreign loans disbursed to Bangladesh exceeds the amount repaid. However, ERD officials stated that foreign loan disbursements were relatively low in July-August due to student protests and political uncertainty. The officials further explained that Bangladesh Bank's payment gateway was closed for several days during the student movement, which contributed to the decline in the flow of foreign loans.

The repayment of foreign debt has increased enormously over the last few years. ERD sources said Bangladesh repaid USD 1.1 billion in 2012-13 financial year. The amount surged to USD 2.01 billion after nearly 10 years, in 2021-22 fiscal year.

It soared to USD 2.75 billion in the 2022-23 fiscal year. In the immediate past financial year of 2023-24, the country repaid foreign loans amounting to USD 3.36 billion. That means, the amount swelled by three times in 12 years.

Recently, several steps have been taken to lessen the pressure of foreign loans. ERD sources said the repayment of principal amount of the loan taken from Russia for the construction of Rooppur Nuclear Power Plant (RNPP) is scheduled to begin from March 2027. But the interim government is negotiating to defer the time for two years. Besides, the government has adopted a “go slow” approach regarding the loan in yuan equivalent to USD 5 billion from China.

The new government has directed the officials to be more cautious in taking foreign loans. The ERD has been asked to study carefully about the interest rate, instalment, and repayment conditions while taking foreign debts.

Speaking about this, South Asian Network on Economic Modeling (SANEM) executive director Selim Raihan told Prothom Alo that it was definitely worrisome that the repayment amount is larger than the amount of loan the country received.

He further said foreign debts were taken for a few mega projects without careful study in the past. In some of the cases the large amount of loans were taken for some big projects but it is not certain when the economic benefit of those projects will be received. Rooppur Nuclear Power Plant is one such project.

According to Selim Raihan it would be more worrying for the country’s economy if it needs to borrow money to repay the loans. This will also escalate the country's debt burden.

He advised the authorities to review the foreign loan management risk.