Escalating Debt in Bangladesh’s Economy
As of September this year, Bangladesh’s external debt has risen dramatically to surpass $100 billion, now representing 22% of the nation’s GDP—up from 16% in 2016. This marks a significant increase from $41 billion just six years ago. The rapid growth of international debt, surpassing the annual GDP growth rate, signals a potential economic risk. The alarming trend is that 70% of this debt was acquired in the last decade during a period of otherwise robust economic expansion, highlighting the reliance on external borrowing for development.
Sustainability and Economic Impact
The sharp rise in Bangladesh’s debt necessitates urgent government intervention to manage potential financial instability as debt servicing demands escalate. Despite the growth opportunities that borrowing presents, the excessive reliance on external funds without adequate tax revenue support from the nation’s affluent is concerning. The tax-to-GDP ratio has notably declined, indicating a reduced commitment to leveraging domestic fiscal policies to manage debt.
Private Sector Debt and Future Risks
The private sector in Bangladesh now holds 21% of the foreign debt, enjoying initially lower funding costs. However, the growing obligation to service these debts in foreign currency could strain future reserves, which have already seen a decline. There’s an imperative need to scrutinize whether these funds were invested effectively or misappropriated, amidst rising concerns of external savings and potential money laundering activities.
Additional Information: Economic Repercussions of Rising Debt
The increasing burden of foreign debt in Bangladesh poses severe risks, exacerbated by inefficient government practices and corruption in public projects. Notably, the financing of the Rooppur Nuclear Power Plant, which involved substantial Russian loans exceeding $11 billion, lacked sufficient scrutiny and discussion regarding its environmental and economic implications. This scenario underscores the importance of transparency and efficacy in managing large-scale foreign-funded projects. Policymakers must address the rapid increase in debt critically, rather than justifying it by comparing with lower debt-to-GDP ratios in other countries. Effective utilization of loans, particularly foreign debts, is crucial for maintaining economic stability and ensuring the nation can meet its international obligations without resorting to detrimental financial measures like excessive currency devaluation.