Bangladesh’s economy has reached a critical juncture where mounting public debt, chronic revenue shortfalls, and surging interest payments are creating unprecedented pressure.
Analysts warn that the country is showing early signs of a "debt trap," as the government’s heavy reliance on borrowing to meet even its daily operational expenses calls into question the long-term stability of the nation’s macroeconomic framework.
The government’s dependence on the banking sector has intensified as expected revenue fail to materialize.
In the first nine months of the current FY26 (July–March), the Ministry of Finance borrowed Tk108,985 crore from the banking system—effectively exhausting the entire year's borrowing target of Tk104,000 crore well ahead of schedule.
Of this amount, Tk78,049 crore was sourced from commercial banks, while Tk30,936 crore came directly from the central bank.
While some repayments have since lowered the net debt to approximately Tk94,000 crore, economists remain concerned.
The necessity of borrowing to cover essential expenditures like civil service salaries, subsidies, and interest payments has occasionally forced the government to print money, a move that risks fueling inflation and destabilizing the budget management process.
Data from the Ministry of Finance reveals a staggering trajectory in public debt. By the end of December 2024, total government debt exceeded Tk2,206,000 crore.
To put this in perspective, the debt grew by approximately Tk317,000 crore in just 18 months.
The historical context is equally telling. When the Awami League-led government took office in 2009, the national debt stood at roughly Tk200,000 crore.
By the time of the government change in mid-2024, that figure had ballooned to nearly Tk1,900,000 crore.
Prime Minister Tarique Rahman recently emphasized the gravity of the situation, stating at the 2026 Deputy Commissioners’ Conference that his administration inherited a total debt burden of Tk30,000,000 crore, describing it as the weakest economic starting point in the country’s history.
Shifting debt structures
There has been a notable shift in the composition of the national debt.
Currently, internal sources account for 57% of the total debt, with external (foreign) debt making up the remaining 43%.
While leaning on domestic borrowing reduces exchange rate risks, it creates a "crowding out" effect in the banking sector.
When the government consumes a lion's share of available credit, private sector enterprises find it harder to secure loans, which directly stifles investment and job creation.
Simultaneously, external debt has risen due to budget support from international partners.
In the last fiscal year, the government took $3.44 billion in budget support, a significant increase from the previous year’s $2 billion.
The revaluation of foreign debt against the current exchange rate has added further weight to these obligations, with external debt rising from Tk812,000 crore to Tk959,000 crore in a short span.
The most immediate strain on the budget is not the principal repayment, but the interest.
In the first half of FY26, interest payments accounted for roughly 26% of total government expenditure.
Debt servicing is now outpacing spending on education and infrastructure, threatening to shrink the space available for vital social safety nets.
Interestingly, even as development spending through the Annual Development Program (ADP) fell to a seven-year low, the debt remained high.
This paradox is explained by the massive burden of servicing old debts and the high cost of maintaining government operations amidst a failing revenue collection system.
Distinguished Fellow at the Centre for Policy Dialogue (CPD) Prof Mustafizur Rahman warned that the country is gravitating toward a debt trap.
He noted that as debt servicing becomes a primary budgetary expense, the economy risks falling into a "middle-income trap," where growth is stifled by the weight of past liabilities.
To navigate away from this crisis, economists suggest several urgent structural reforms, such as strengthening the NBR’s capacity to reduce revenue leakages, cutting unnecessary administrative costs and subsidies to loss-making state-owned enterprises, creating a stable environment that prioritizes private sector growth over government borrowing, and seeking low-cost, long-term concessional foreign loans rather than high-interest domestic credit.