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Bangladesh's looming debt bills to China, Russia fuel forex fears
Dhaka must be 'very careful' with reserves as infrastructure loans come due
DHAKA -- Bangladesh's public finances are coming under increasing strain as mounting loan repayments for Chinese, Russian and other infrastructure projects are poised to put a deeper dent in the country's foreign exchange reserves.
The South Asian country is to begin repaying two China-funded megaprojects, the Karnaphuli river tunnel and the Padma bridge rail link, in November and December, respectively, according to officials. Payments on a portion of two large Russian loans, totaling $11.88 billion, for construction of the Rooppur Nuclear Power Plant began earlier this year, although the money is currently being held in an escrow account.
Experts and officials note that arrangements with bilateral lenders -- and the types of loans Bangladesh has been taking in general since graduating to "lower middle-income country" status in 2015 -- are starting to put more pressure on Dhaka's foreign reserves, exacerbated by its weak currency, the taka. While the country is generally thought to have more breathing room than neighbors like Pakistan and bankrupt Sri Lanka, many say it now faces a crucial period for preserving its coffers.
"If we fail to manage it properly, the macroeconomic stability may be jeopardized," said Mustafa Kamal Mujeri, a former chief economist at Bangladesh's central bank.
The country's loan repayments for the 2022-2023 fiscal year, which ended in June, were already up 37% on the year, at $2.74 billion, according to data released this month by officials with the government's Economic Relations Division (ERD). The Ministry of Finance estimates that loan servicing costs this fiscal year could hit $3.28 billion, and reach $5.15 billion by 2029-2030.
Bangladesh has little margin for error now that its official foreign reserves are hovering below $30 billion, down from $48 billion in August 2021, partly due to higher import costs stemming from Russia's war in Ukraine. Calculated under the International Monetary Fund's stricter criteria, its reserves are even lower, at around $23 billion.
Bangladesh earlier this year entered into in an IMF loan program worth $4.7 billion to help shore up the reserves. But ERD officials pointed out that repayments of Chinese, Russian and Indian debts are adding to the strain, as their interest rates are higher and repayment periods shorter than loans from multilateral lenders.
Officials say Bangladesh's borrowing costs have gradually risen since 2015, after the country joined the lower-middle-income tier under the World Bank's classification -- gross national income per capita between $1,036 and $4,045. Since then, they say, both bilateral and multilateral creditors prefer to provide Bangladesh with "blended loans," a mixture of higher-interest hard loans with softer ones, instead of pure soft loans.
"Usually bilateral loans come with high interest rates and stringent conditions," said a senior ERD official who asked not to be named.
Professor Mustafizur Rahman, a distinguished fellow at the Dhaka-based Centre for Policy Dialogue, said the country has taken on a number of megaprojects since achieving lower middle income status.
"Since then, the nonconcessional loans are increased, instead of soft loans, and that is having an effect," he said.
Rahman said some loans Bangladesh received from China and Russia have relatively short grace and maturity periods. The grace period for World Bank international development assistance is 10 years, while in the case of Russian, Indian and Chinese loans it is typically half that.
Likewise, in the case of World Bank development loans, the total repayment period is 30 to 40 years, while for bilateral loans the average is 15 years, Rahman said. Repayment installments on bilateral loans are also bigger, he added.
Bangladesh signed for a $705 million loan from China for the Karnaphuli tunnel in June 2015 and a $2.67 billion loan for the rail link portion of the Padma bridge in April 2018. Bangladesh's total debt obligations to China now stand at around $17.5 billion, according to the ERD.
The Rooppur nuclear project predates these deals, and the bills are also due. With Ukraine war sanctions hindering repayments to Russia, Bangladesh is looking to pay in yuan, and on Aug. 7 the ERD sent a letter to Bangladesh Bank asking it to open an account with the People's Bank of China to facilitate the payments, according to local media.
Bangladesh's debt burden continues to grow. The Finance Ministry estimates the country's external debt may rise to $85.24 billion in fiscal 2024-25 from $76.45 billion in fiscal 2023-24.
Rahman noted that Bangladesh's total foreign debt is not so large as a percentage of gross domestic product -- 20.5% as of June 2022 -- and that its servicing costs are also not particularly high when compared with the country's export and remittance earnings.
"But now the forex reserves have fallen, thus we need to be very careful," he said.
Another pitfall looms as Bangladesh moves out of "least developed country" status in 2026. That means it stands to lose concessional market access to many countries, potentially impacting exports. "At this moment, the debt servicing issue needs to be given utmost care," Rahman said.
Mujeri, the former central bank chief economist, explained that in the last decade the country's development and economy accelerated, creating various infrastructure needs. This prompted the government to pursue a range of projects, but delays and cost overruns have been an issue.
"Thus, always, there is a mismatch between actual and projected returns from megaprojects, and they turn into a burden as foreign loans were taken to implement them," he said.
"Since we have on taken a number of megaprojects simultaneously, the debt repayment requirements are increasing fast and will continue rising," he warned, stressing the need to "be careful and selective in taking foreign loans."
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