Following the global economic crisis, many countries experienced a persistent rise in their debt-to-GDP ratio. This also increases public debt significantly for countries at all income levels. Amid this challenging situation, the latest World Economics Report delivers some positive news for Bangladesh.
According to the report, Bangladesh's debt ratio is expected to be 26.9%, which is lower than neighbouring countries like India, Pakistan, and Sri Lanka. In the Asia-Pacific region, Bangladesh ranks 23rd among 32 countries.
Data shows that this ratio is even smaller than what the International Monetary Fund (IMF) calculated and is lower than the official report from Bangladesh's Ministry of Finance.
The debt-to-GDP ratio is a crucial metric that helps gauge a country's ability to repay its domestic and foreign debts. A higher debt-to-GDP ratio increases the risk of default, which can trigger financial panic in both domestic and international markets.
Based on the World Economics GDP database, Bangladesh's GDP, including the informal economy, was estimated to be $1,495 billion at the end of 2022.
However, the IMF officially reports the country's debt-to-GDP ratio as 37.5%.
According to the Ministry of Finance of Bangladesh, the Debt to GDP ratio was 30.56% (Tk1,359,898 crore) at the current market price as of December 31, 2022, which was 32.38% till June 30, 2022.
Among this, 19.42% was the domestic Debt to GDP ratio and external debt to GDP was 11.14% at the end of 2022. In taka, the amount is Tk864,105 crore and Tk495,794 crore respectively.
According to the Ministry of Finance, as of December 31, 2022, domestic and external debt was 64% and 36% of the total debt stock, respectively.
“Bangladesh is at low risk of debt distress even if the current growth and financing conditions change in unfavourable ways but within foreseeable bounds,” said Zahid Hussain, former lead economist at World Bank Bangladesh.
He also added saying there is a significant cushion between what is considered a sustainable threshold and the current debt-to-GDP ratio. However, Zahid Hussain questions this low calculation by World Economics, “To me, it looks mysterious,” he said.
A study by the World Bank found that countries whose debt-to-GDP ratios exceed 77% for prolonged periods experience significant slowdowns in economic growth. Pointedly, every percentage point of debt above this level costs countries 0.017 percentage points in economic growth.
This phenomenon is even more pronounced in emerging markets like Bangladesh, where each additional percentage point of debt over 64% annually slows growth by 0.02%.
Debt-to-GDP ratio
The debt-to-GDP ratio is the metric comparing a country's public debt to its gross domestic product (GDP). By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts.
The higher the debt-to-GDP ratio, the less likely the country will pay back its debt and the higher its risk of default, which could cause a financial panic in the domestic and international markets.
A country with a high debt-to-GDP ratio typically has trouble paying off external debts (also called public debts), which are any balances owed to outside lenders. In such scenarios, creditors are apt to seek higher interest rates when lending.
Generally, a lower debt-to-GDP ratio is ideal, as it signals a country is producing more than it owes, placing it on a strong financial footing.
