Of late, some of the print media in Bangladesh are doom scrolling about public debt and giving Cassandra-like signals with dark portents. There is no doubt that they are well-intentioned and giving vent to their worries in greater public interest. It is, however, pertinent to examine how far their worries are likely to become alarming in the near future if the trend remains unchecked.
In the fiscal year 2020-2021 (FY21), borrowing was distributed evenly among bank, non-bank and foreign sources, the figures being Tk 44.28 bilion, Tk 442.81 billion and Tk 474.03 billion respectively. In FY22, the corresponding figures were Tk 619.41 billion, Tk 269.25 billion, and Tk 731.97 billion respectively, showing foreign financing sharply rising during this fiscal. In FY23, the government became heavily dependent on banks, borrowing Tk 1020.17 billion while non-bank borrowing (Tk 76.52 billion) almost disappeared but foreign borrowing remained the same as during the previous fiscal (Tk 746.45 billion). During FY24 bank borrowing fell substantially to Tk 375.64 billion but foreign financing reached its five-year high of about Tk 920.00 billion. The dependence of government on borrowing shifted back toward domestic sources, especially non- bank borrowing which rose to Tk 441.00 billion.
So, over these five years, bank borrowing has been substantial but being volatile does not show a linear upward growth. Borrowing from non-bank source also shows volatility but it declined in volume over the years until FY24 when it levelled up with the figure in FY21. As against borrowing from domestic sources, bank and non-bank, foreign financing has increased steadily, from Tk 474.03 billion in FY21 to Tk 920.22 billion in FY24 and Tk 726.15 billion in the following year.
What is important in government borrowing is not the volume of borrowing but whether it is within the permissible limit of borrowing. For this the ratio between borrowings to Gross Domestic Product (GDP) is used by multilateral lending institutions. There is, however, no single universal debt-to-GDP ratio at which a government automatically becomes unsafe. It depends on the country's growth rate, interest rate, revenue earnings capacity, currency composition of debt, and access to financing. The IMF has explicitly maintained that debt sustainability is country specific, i.e it depends on the financial state of the country defined by the factors mentioned above. On the basis of the prevailing economic factors Bangladesh has currently been classified as having medium debt- carrying capacity by IMF-World Bank. According to this framework, the relevant threshold of Bangladesh for total public debt at present value is 55 per cent of GDP. The corresponding threshold for external public debt is 44 per cent of GDP. The broader IMF-World Bank framework has thresholds of 35 per cent, 55 per cent, and 70 per cent of GDP for countries with weak, medium and strong debt- carrying capacity respectively. So, for Bangladesh 55 per cent is considered as the important warning threshold, which is not the same as saying 55 per cent is an absolute 'maximum'. Moreover, 55 per cent of debt-GDP ratio does not mean that Bangladesh will suddenly have a debt crisis at 56 per cent. It means that once debt approaches or exceeds this level, the risk assessment becomes considerably more serious and the government requires stronger fiscal management. Before saying anything about Bangladesh's
debt sustainability it has to be mentined that borrowing is an annual flow but debt-to GDP is the accumulated stock of past borrowing. Thus, even if annual government borrowing is only 3-4 per cent of GDP, the debt ratio can continue to rise if borrowing persistently exceeds the economy's capacity to absorb it.
According to recent IMF series reports, Bangladesh reached at 36.9 per cent debt-GDP ratio in FY23, 38.5 per cent in FY24 and 41 per cent in FY25 respectively. The IMF-World Bank medium capacity threshold for Bangladesh being 55 per cent, Bangladesh is not yet at the threshold but very near to it, the headroom being only 14 per cent of GDP. But more than the proximity it is the direction of the ratio that is concerning. The debt-GDP ratio indicates sharp increase over a short period of time. The ratio has risen from 31-33 per cent before the pandemic to about 41 per cent now. There is another reason for feeling concerned about the debt situation. According to IMF, Bangladesh's public debt remains sustainable as of now, but has assessed the country at moderate risk of debt distress, implying risk is increasing.
What debt distress means is weak repaying capacity. Taking the present volume of domestic debt, Bangladesh government has to pay 4.1 per cent of GDP annually. Its tax-GDP ratio being around 8-9 per cent the repayment of domestic debt has become precarious. There is thus a vicious cycle: greater volume of domestic borrowing leads to increasing amount in debt servicing that is beyond the revenue capacity of government which forces greater volume of borrowing from bank and non-bank and foreign sources, further increasing debt servicing burden. The servicing of foreign debt is, however, less onerous than domestic debt as it amounts to only 1.2 per cent of GDP though the volume of foreign debt is 39 per cent of total debt at present. The low level of debt servicing of foreign debt is because of the lower rate of interest charged by multilateral institutions which provide 0.7 per cent of external debt out of 1( one). Because of the higher volume of domestic debt (61 per cent of total) and higher rates of interest domestic debt servicing is three and a half times higher than foreign debt servicing. If the volume of foreign loan was higher than total debt servicing could be lower. But in recent years this loan has shown a declining trend.
Bangladesh is caught in a debt conundrum largely because of increasing volume of domestic borrowing that consumes almost half of the revenue earnings leading to more borrowing to meet the fiscal deficit. If the present trend continues the threshold determined by debt-GDP ratio (55 per cent) will be reached soon causing fiscal crisis.The way out of this economic catastrophe is to increase revenue earnings, reduce non-productive public expenditures and avail of more foreign loan at concessionary rates. The debt situation showing the economy caught in a vicious cycle is definitely concerning. Unless remedial measures are taken, soon the cycle can become a trap which will be alarming. What will be inexcusable is that it will be a trap of our own making.
