Dr Debapriya: National debt increasing faster than the GDP

Bangladesh’s per capita debt was $432 or Tk37,584 and the country's total debt was $131.14 billion in FY21.

According to data, Bangladesh's total national debt is increasing at a faster rate than Gross Domestic Product (GDP), according to noted economist Dr Debapriya Bhattacharya.

In 2021 Bangladesh’s per capita debt was $432 or Tk37,584 and the country's total debt was $131.14 billion in FY21. 

The broader estimate of Bangladesh's current debt is 46% of its total Gross Domestic Product (2005-2006 as a base year), which was 44.10% in FY21. 

As a result of this, the share of debt in GDP will increase in the foreseeable future, he observed.

Although it is still less in the context of other South Asia countries, the amount of domestic and foreign loans is increasing at an unusual rate since 2018. 

This could move Bangladesh beyond the green and into the risk zone in FY 2024-25.

Centre for Policy Dialogue’s (CPD) Distinguished Fellow and Convenor, Citizen’s Platform for SDGs, Bangladesh Dr Debapriya hosted a conversation with the media titled "Deconstructing Public Debt of Bangladesh: Trends, Status and Outlook" on Monday to address the rising debt situation in the country that can distort the economy by undermining major macroeconomic variables such as economic growth, inflation and exchange rates.

According to a study by Debapriya and his team, the risk factors underpinning the debt situation in the country are high risk of project cost escalation, increasing risk of exchange rate and interest rate for domestic borrowing, and intermediate risk of the interest rate for external borrowing.

Economic returns from project and maturity risk are yet to be assessed.

In light of this, the CPD fellow on Monday suggested fiscal consolidation through revenue uptake, safeguarding external sector variables and holistic, transparent and frequent monitoring.

In his key presentation, he said: “Bangladesh's total national debt is increasing at a faster rate. The broader estimate of total debt now (FY22) is 46% of our total GDP. In FY21 it was 44.10% and in FY20, FY19, FY18 and FY17 the amounts were 37.12%, 32.33%, 28.88% and 25% of our total GDP, respectively.”

A World Bank study suggests that a debt to GDP ratio above the threshold of 77% may lead to an adverse impact on the economy. But this varies from country to country; a ratio exceeding 100% doesn't necessarily indicate a bankrupt/insolvent country.

He gave the example of Japan having had a ratio well over 200% for more than a decade without any signs of defaulting. Therefore, a high ratio does not always indicate a country's likelihood of default.

"Markets usually attach low probabilities of the debt crisis to countries with a strong record of being fiscally responsible. While countries do need to keep public debt ratios within a safe limit, a certain public debt target may not be necessary," he added.

According to his keynote presentation, the total public debt (as % of GDP) for Bangladesh was among the lowest in South Asia in FY20 with 34.7%, while Sri Lanka and Bhutan were the highest with 112.2% and 120.7%, respectively.

The economic report said that the total outstanding amount of debt in FY21 in Bangladesh was $131.14 billion. It increased by $16.45 billion on average over the past three years, which was about 2.5% of the GDP.

In FY21 alone, the total public debt increased by more than $18.64 billion (an additional 2.2% of GDP) of which more than 54% was domestic debt.

The total debt as a percentage of GDP has increased between FY18 (29.5%) and FY21 (36.9%) following a decrease between FY08 (38.8%) and FY17 (28.2%), the report noted adding that the linear decadal growth rates were 44.1% (FY02 to FY11) and 66.6% (FY12 to FY21).

The annual increase of outstanding debt from FY20 to FY21 was $9.62 billion and the per capita outstanding debt was $432 in FY21.

Dr Debapriya Bhattacharya said the calculation of interest payments on debts shows that in 2006 foreign debt interest payments were 38.91% and domestic was 61.09%. Due to the increased foreign debts after 2013, the picture started to change. 

In FY2021 government’s budget allocation in this sector, 67.65% of the interest on foreign debts and 32.35% on domestic loans have been spent. 

“The private sector has borrowed $16.6 billion from abroad and is gradually increasing. It is 5% of GDP and if they do not repay the loan properly, it could be a threat signal for the country, as the liabilities are increasing. The number of short-term loans is increasing compared to long-term loans. With this, the commercial debt is increasing and foreign debt is growing more bilaterally than multilaterally. With this, the involvement of China, Russia and India is increasing as they are taking more loans from those countries.”

He also said: “Our debt is higher than the GDP rate and the burden of foreign debt will increase when it comes to paying off. The biggest weakness of this situation is the internal debt, which is not seen in conjunction with liabilities. Another issue is private sector debt.”

Debapriya said elections have a relationship with government liabilities. Replying to a question on the seminar, Debapriya said that: “If there is any deficit in the democratic process in the case of elections, then the government tries to fill the deficit by adopting visible projects. This is seen in all countries. Many times, such projects are taken which do not have economic rationality or are not acceptable.” 

“Money laundering from Bangladesh and abroad increased in the years before and after the elections. That is what the data of Global Integrity says- such a tendency increases when there is a crisis of democratic existence and trust,” he added.

Asked if a situation like Sri Lanka could happen to Bangladesh, the renowned economist said that it would be irrational to compare Bangladesh with Sri Lanka. 

“I do not see the reason for such a situation as every country develops differently, so it is not logical to compare one with the other.”