Rising external debt creates more pessimism for foreign reserves

This is only to be expected. That the rising external debt is going to jeopardise Bangladesh’s shrinking foreign reserves has been in speculation for quite some time among the experts and people who have an interest in the country’s economy. On Monday, Bangladesh Bank confirmed this alarm by saying that the external debt situation is posing risk to the already beaten reserves as higher debt servicing will be required on accumulated loans.

The BB’s Financial Stability Report for 2021 specifically pointed out that “Growing short-term external debt may entail higher risk due to their potentiality of being reversed in the near-term and may, thereby, create sudden pressure on foreign exchange reserves.”

According to government statistics, the total foreign reserves now stand at $36.3 billion, but the outstanding external debt stood at $90.8 billion in 2021 which was a 28.4 per cent increase from the previous year. Even more worrying is the fact that short-term debts increased by 64.6 per cent last year while the long-term external debt by 21.8 per cent. If a country has a sizable short-term debt, usually with tenure of three years, foreign lenders typically show reluctance to give long-term loans.  

Therefore, the growth of short-term loans is a real bad news for Bangladesh’s battered economy at a time when Bangladesh’s foreign exchange reserves are falling due to the higher import payments against lower export earnings and a sluggish trend of remittance inflow.

The private sector took on more short-term debts than the public sector. According to a report yesterday, the private sector took foreign loans worth $6.33 billion in 2021 in contrast to $0.77 billion received by the public sector.

As the matter stands today, Bangladesh is now facing the most crucial disadvantage of external debt that often leads to a vicious cycle of debt. The debt cycle has already pushed the country to the cycle of continuous borrowing, accumulating payment burden, and eventual default. To stop the freefall of the foreign reserves, the Bangladesh government has already applied for loans to the IMF and the World Bank.

To meet the IMF loan conditionalities, the government apparently increased the fuel oil and fertiliser price that has aggravated the food inflation to a breaking point for the poor and middle class people in Bangladesh. As the government will hardly be able to tame inflation and keep the exchange rate of dollars stable, there is no reason to be optimistic that the country’s economy will recover from the present crisis within a short time.