Bangladesh Rising Debt | Impact of rising debt on our socio-economic future | Impact of Debt on Bangladesh Economy

At the end of June 2024, the total debt burden—both domestic and external—of Bangladesh was Tk 18,000 billion. Since the population of Bangladesh is about 180 million, this implies that the debt burden on each Bangladeshi citizen is Tk 100,000. No, this is not our personal debt, but it represents our liability as citizens of Bangladesh. If we cannot repay this debt, it will become a liability for future generations. Looking at it from a different perspective, every child born in Bangladesh today is born with a debt.

Truly speaking, the amount of Tk 18,000 billion is enormous. However, the current situation was not created in a day or two. About four years ago, the country’s debt burden was around Tk 11,000 billion, roughly equal to the national budgets over the past three years. Of the total debt, domestic debt amounts to about Tk 10,000 billion, representing 56 percent of the total debt, while foreign debt was approximately Tk 8,000 billion, or 44 percent of the total debt. Three observations are pertinent. First, this is the first time that domestic debt has exceeded Tk 10,000 billion. Second, over the last four years, the amount of foreign debt has doubled. Third, the current debt-to-GDP ratio in Bangladesh is about 36 percent, compared to 32 percent four years ago.

These trends call for some comments. First, the debt-to-GDP situation undoubtedly needs consistent monitoring. It is true that Bangladesh’s debt-to-GDP ratio has not reached a dangerous level. According to the yardstick set by the International Monetary Fund (IMF), the acceptable level of the debt-to-GDP ratio is 55 percent. With a ratio of 36 percent, Bangladesh is in the safe zone. Second, every year, the government has to borrow from domestic and foreign sources to meet budget deficits. Since domestic loans are easier to obtain, previous governments have often opted for this route. In fact, due to inefficiencies in loan management, the majority of loans in the past were taken from domestic sources.

Third, most foreign loans were taken without proper scrutiny, necessary negotiations, or objective evaluations. Significant amounts of foreign loans were used to finance prestige projects. This occurred during a time when international organisations reduced the grace period for loan repayments and increased interest rates. The grace period for repaying loans for prestige projects is now ending, increasing the pressure to meet loan repayment liabilities.

Fourth, one aspect of debt is debt servicing. During the 2023-24 financial year, the Bangladesh government spent Tk 1,000 billion on debt repayment, amounting to one-sixth of the national budget. In the previous financial year, the debt-servicing ratio was 17 percent. Foreign loans have another dimension: interest on foreign loans must be paid in foreign currencies, leading to a depletion of foreign exchange reserves. For instance, as debt servicing on foreign loans has increased, Bangladesh’s foreign exchange reserves have fallen below $20 billion.

Fifth, the increasing debt burden of Bangladesh will have adverse impacts on the socio-economic sectors of the country. In the 2023-24 financial year, debt servicing amounted to about Tk 1,000 billion, surpassing the country’s education budget. If more funds are allocated for debt servicing, fewer resources will be available for crucial areas like health, education, and nutrition. This would negatively affect human development in Bangladesh.

In light of these issues, the relevant question is: what needs to be done to address them? The first action is to establish justifications for taking loans. The relevance of loans, their intended purposes, and their usage must be justified. Every loan proposal should undergo rigorous scrutiny. Second, large prestige projects with unclear economic contributions must be avoided. Similarly, loans should not be approved due to political considerations or pressures. Third, clear guidelines are needed for determining the sources of loans. In this context, the pros and cons of both domestic and foreign loans must be objectively assessed. Loan objectives, project evaluations, loan negotiations, and efficient management should guide decisions on loan sources.

Fourth, the government must mobilise resources for debt repayment and servicing. Currently, the government relies heavily on indirect taxes to generate revenue. This dependence must decrease, and Bangladesh’s direct tax base must be expanded. The tax-to-GDP ratio in Bangladesh is only about 8 percent, compared to 12 percent in India and 17 percent in Nepal. Bangladesh’s ratio is far below the 19 percent average in the Asia-Pacific region and 25 percent in developing countries. Increasing the tax-to-GDP ratio must involve expanding the coverage and amount of direct taxes. Approximately 68 percent of the population does not pay income tax; these individuals must be brought into the tax net.

Fifth, there is another important dimension to direct taxation. Historically, revenue has been mobilised through indirect taxes and duties on poor people rather than income taxes on the rich. This has exacerbated economic disparities in society. As Bangladesh aspires to build an equitable society, it is essential to reform this tax structure, which is unfavourable to common people. For example, while nearly 60 percent of tax revenue in India comes from direct taxes, nearly 65 percent of taxes in Bangladesh come from duties on essential commodities, disproportionately affecting poorer people. Revenue can also be increased by addressing tax evasion and improving tax administration. Due to tax evasion in various sectors, the Bangladesh government loses tax revenue ranging from Tk 560 billion to Tk 3,000 billion. Such evasion can be curbed through the use of information and communication technologies.

In conclusion, I once believed I had no economic debt—that I was a free bird. However, I now understand that, while I do not have personal debt, I bear a liability of Tk 100,000 as a citizen of Bangladesh. I realise that the country’s indebtedness has increased, and I am a part of this debt too.

Selim Jahan is director of the Human Development Report Office and lead author of the Human Development Report.

Views expressed in this article are the author’s own. 

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