Bangladesh gravitated towards external borrowing to finance its budget deficit in fiscal 2021-22, leveraging the country's capacity to absorb more of the relatively economical foreign loans.
In the first nine months of last fiscal year, the proportion of external borrowing was 49.38 percent, up from 33 percent in the previous year and 37 percent in fiscal 2019-20, according to the finance ministry's latest quarterly debt bulletin, which was unveiled yesterday.
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The finance ministry began the practice of publishing the bulletin on the International Monetary Fund's prescription from April last year to inform on the country's debt situation every quarter. However, after two editions, the finance ministry put the publication on hold. The latest bulletin comes after a gap of three quarters.
The country received about Tk 46,530 crore from external sources between July last year and March this year, which is more than fiscal 2020-21's full-year receipts of Tk 45,523 crore.
And yet, Bangladesh's external debt to GDP ratio, a metric that reliably indicates a country's ability to pay back what it owes, improved last fiscal year. The higher the debt to GDP ratio, the higher are the risks of default. Bangladesh's ratio though declined by 2.6 percentage points year-on-year to 11 percent last fiscal year.
"This leaves a lot of room for manoeuvrability as the threshold for the external debt-to-GDP ratio is 40 percent," the finance ministry said in the bulletin.
The disclosure will go some way towards quelling fears of debt distress stemming from the government's recent bid to secure financial assistance from development partners in budget and balance of payment support.
The external borrowing in the first nine months of last fiscal year came from concessional sources of financing, 53.8 percent of which came from bilateral lenders.
In fiscal 2020-21 too, external financing from bilateral sources was much higher than multilateral sources, accounting for 64 percent of the funds.
Bilateral loans tend to be costlier than those from multilateral lenders and with a relatively shorter maturity, according to Zahid Hussain, a former lead economist of the World Bank's Dhaka office.
"If the share of bilateral debt keeps rising as generally presumed to be the case in recent years, external debt management could become concerning in the not-too-distant future," he said, while urging the finance ministry to provide more information on the costs and maturities of the foreign debt in the bulletin.
Different analysts and observers are making different assumptions about the rise in foreign debt repayment burden in the near and medium term.
"The bulletin can be most useful if it helps understand to what extent such contemporaneous concerns are evidence-based," he added.
As of March, Japan tops the list of bilateral lenders, accounting for 45 percent of such loans, followed by Russia (22 percent), China (21 percent), South Korea and India (both about 4 percent).
However, multilateral lenders still account for the government's lion's share of total external debt as of March: 61 percent.
The World Bank tops the list, accounting for 55 percent of the debt stock to multilateral sources, followed by the Asian Development Bank (39 percent), the Asian Infrastructure Investment Bank and the International Fund for Agricultural Development (both about 2 percent), the Islamic Development Bank and OPEC (both about 1 percent).
Bangladesh's external debt stock is dominated by Special Drawing Rights (SDR), which are supplementary foreign exchange reserve assets defined and maintained by the IMF.
SDRs are units of account for the IMF and not a currency per se but they represent a claim to currency held by IMF member countries for which they may be exchanged.
The value of the SDR is calculated from a weighted basket of major currencies, including the US dollar, the euro, Japanese yen, Chinese yuan and the British pound.
As much as 43 percent of Bangladesh's external debt stock is in SDR, followed by the dollar (31 percent), yen (18 percent), yuan (4 percent), euro (2 percent) and others (2 percent).
Domestic debt constitutes the major share of the total debt stock as of March 31: 62 percent. And the dependence on domestic sources is increasing gradually, according to the bulletin.
"At present, domestic debt management is more of a challenge than external debt management," Hussain said.
National savings certificates (NSCs) and banks contributed equally to the domestic debt stock: 47 percent each.
But the cost of borrowing from NSCs is relatively higher but it has some socioeconomic implications, the bulletin said.
"At a time when liquidity in the banking system is drying because of sustained foreign exchange sales by the Bangladesh Bank, the conduct of monetary policy will become increasingly complex given the cap on the lending rate and the inflation-based floor on individual term deposit rates. Financial institutions will naturally seek safe havens when their spreads are squeezed while credit risks have risen due to continued forbearance on repayment and the ongoing macroeconomic stress," Hussain said.
However, the ongoing NSC reforms will help reduce the dependence on the costlier instrument and also bring about reforms in the domestic financial market, the bulletin said.
Still, the total debt-GDP ratio is about 32 percent, well below the sustainable threshold of 55 percent.