More revenue generation needed to get relief from heavy debt burden

Bangladesh is projected to experience a significant milestone as its debt service-to-revenue ratio is expected to surpass the 100 per cent mark for the first time.

This rise is attributed to escalating loans, coupled with diminished tax and export receipts, underscoring a growing risk to the country’s repayment capacity.

In the fiscal year 2020-21, the debt service-to-revenue and grants ratio was 58.7 per cent, but it escalated to 72 per cent in FY22 and slightly decreased to 71.8 per cent in the last fiscal year of 2022-23.

Debt service encompasses the sum of interest and amortization of both medium and long-term, as well as short-term debt.

The escalating debt service to revenue ratio underscores the critical need to boost tax revenue urgently to support essential spending for achieving a pro-poor, green growth recovery.

The heightened ratio is exacerbated by the National Board of Revenue (NBR) falling short of its tax target for the 11th consecutive year in FY23.

This shortfall is attributed to slowed collection growth amid economic downturns and ambitious government goals.

Export earnings as a percentage of gross domestic products (GDP) were 10.7 percent in FY21, increased to 12.9 percent in FY22, and are anticipated to reach 14 percent in FY24.

While Bangladesh currently faces a low risk of external debt distress, persistently low revenue receipts constrain the government’s spending ability and threaten debt sustainability. Increased interest rates due to global monetary policy tightening and sharp local currency depreciation deepen these risks.

Historically, Bangladesh’s debt-to-GDP ratio hovered around 32.2 percent, but it surged to 35.6 percent in FY21, with external debt comprising 15.1 percent.

The debt-to-GDP ratio increased to 39.8 percent in the last fiscal year, including 17.7 percent external debt. Projections from the World Bank-IMF suggest that the overall debt will rise to 41.4 percent in FY24, with external debt reaching 18.1 percent.

The Bangladeshi taka has depreciated by approximately 28 percent against the US dollar since January last year, reflecting a decline in foreign currency reserves as import bills outpaced earnings from both the export and remittance sectors.

To maintain the government’s loan repayment capacity, there is a pressing need to enhance revenue generation as there appears to be no alternative solution.