This growing financial burden can be attributed to a change in the country’s borrowing practices. Concessional loans, which typically carry interest rates of 2 percent or less, have become less accessible, forcing Bangladesh to rely more on market-based loans.

Bangladesh has seen a decline in foreign loan flows while grappling with soaring interest payments, which have almost tripled in the past three years. Principal payments also increased, albeit modestly, by 32% over the same period.

This growing financial burden can be attributed to a change in the country’s borrowing practices. Concessional loans, which typically carry interest rates of 2 percent or less, have become less accessible, forcing Bangladesh to rely more on market-based loans.

These loans, particularly those linked to the overnight financing rate (SOFR), have seen a dramatic increase in interest rates – from less than 1% two and a half years ago to around 5.5%, putting more pressure on the country’s debts.

Data from the Economic Relations Division (ERD) shows that in the first three months of the current fiscal year, Bangladesh’s foreign loan repayments exceeded new loans received from development partners – receiving 846 million of dollars during the July-September period and repaying $1.13 billion in principal and interest.

In FY 2021-22, the country paid $491 million in interest, which jumped to nearly $1.35 billion in FY24. During the same period, Principal repayments increased from $1.5 billion to just over $2 billion. As a result, Bangladesh’s net foreign loan inflows, after taking into account principal and interest payments, increased from $8.15 billion two years ago to $6.5 billion over the past year. exercise 24.

The sharp rise in debt servicing costs stems from the growing reliance on market-based loans, which accounted for 28.1% of Bangladesh’s total loans in FY24, up from 15.8% in exercise 20.

Bangladesh borrows from development partners through two main channels: fixed-rate loans, on which interest remains unchanged; and market-based variable rate loans, which fluctuate based on rates such as SOFR and the Euro Interbank Offered Rate (EURIBOR).

Three years ago, market-based lending posed few problems, with SOFR being less than 1%. However, the rate climbed in the wake of the Ukraine-Russia war, reaching 5.5% last year, although it has recently returned to 4.8%. As a result, Bangladesh pays interest rates of 6-7% on SOFR-linked loans.

EURIBOR has also increased significantly over the past three years, from -0.55% at the start of 2021 to over 3% in mid-2024.

According to ERD data, repayment of principal on external debt is increasing at an annual rate of 15%. However, interest payments increased significantly by 45.59% in FY24, following an even steeper rise of 88.71% in the previous financial year.

ERD officials say the gradual loss of concessional elements of financial support received from development partners is leading to increased debt servicing costs.

Monzur Hossain, research director at the Bangladesh Institute of Development Studies (BIDS), told TBS: “Rather than focusing only on whether the net inflow of foreign capital is increasing or decreasing , we must prioritize caution regarding foreign debt financing in the future. evaluate the types of loans we accept and their interest rates.

Additionally, debt financing should support efficient projects while preventing corruption and waste, he added.

Half of ADB loans are market-based

According to ERD sources, Bangladesh borrows the most foreign loans from the Asian Development Bank (ADB) at market rates. During the last financial year, the country paid $518.74 million in interest to the ADB due to higher rates on these loans.

The total loan arrangement with ADB in FY24 reached $2.94 billion, of which 49.45% is market-based loans.

Additionally, $90 million of the loan obtained from the World Bank in the previous fiscal year also had a market-based interest rate.

All Asian Infrastructure Investment Bank (AIIB) loans in Bangladesh are market-based; This is why no project loans were taken out from this organization during the last financial year given the higher rates. However, Bangladesh borrowed $400 million in fiscal aid at market rates to support its reserves.

First quarter net flow becomes negative

According to ERD data, in the first three months of the current fiscal year, repayment of Bangladesh’s foreign loans exceeded the amount disbursed by development partners.

During this period, after repayment of interest and principal, the flow of foreign aid to Bangladesh was approximately $279 million.

ERD data shows that foreign loan repayments increased by 29% between July and September compared to the same period last year.

Capital repayments reached $685.5 million during the period, compared to $492 million during the same period last year.

Interest repayments also increased, from $378.46 million in the same period to $441 million, the data showed.

The share of variable rate foreign loans in Bangladesh’s total external debt will reach over 82% in 2041, up from 26% in 2020, according to an earlier forecast by the ERD and the General Economic Division (GED).

According to an ERD report, the loss of the concessional elements of financial support received from official donors will also lead to increased debt servicing costs.

In recent years, Bangladesh has decided to combine its financing with a combination of concessional loans from the World Bank’s International Development Association (IDA) and ADB’s Ordinary Capital Resources (OCR).

According to the report, after the World Bank and ADB, other multilateral development partners will also gradually reduce the provision of concessional loans to Bangladesh in the coming years.