The notion that Bangladesh's economy is grappling with high inflation, non-performing loans, and other structural issues is no longer new. Recently, the nation's debt was added to the list of challenges. News such as "Bangladesh's foreign debt has tripled in the last 10 years" and "Bangladesh's per capita debt has reached Tk95,019" are all over economic platforms.
All of the debate over Bangladesh's debt began when the country's debt-to-GDP ratio for the current fiscal year was announced. The general people looked disturbed by the ratio and gloomy about the economy. However, a detailed grasp of what the ratio signifies, along with a comparison of Bangladesh's debt to GDP with other countries, is required to discern the economy's true state.
Before proceeding with any analysis, let us first define the concept of debt to GDP ratio. According to World Economics, the debt-to-GDP ratio is the proportion of a country's government debt to its gross domestic product (GDP). Comparison using trend analysis, different ratios, other countries, or even a benchmark is required to evaluate the ratio or any other economic variable.
To understand how Bangladesh is dealing with its debt, why the debt is rising, or if the debt has exceeded the economy's tolerance level, one must examine the nation's debt from every angle mentioned.
To begin, Bangladesh's historical debt-to-GDP ratio is examined to assess whether it is in the usual range. If the last 10 years are taken into account, Bangladesh had the highest ratio in 2013 which was 25.16%, according to Ceic data. This means that Bangladesh must pay one-fourth of its GDP for its debt servicing.
The ratio began to fall considerably after 2013 and the ratio became 14.22% in 2017. This indicates that the country had either raised its GDP or reduced its debt. The percentage rose again to 20.77% in 2022, per Ceic data. This statistic may not have included the country's domestic debt, but according to its study, Bangladesh's current debt level is not alarming, because the country has already managed a debt-to-GDP ratio higher than this.
Bangladesh is successfully managing its debt, as evidenced by the receipt of the IMF loan. While Pakistan and Sri Lanka were yet to receive the credit despite having requested it considerably earlier than Bangladesh, Bangladesh received the first tranche of the approved loan in February of this year. At that point, Bangladesh received the loan at a much more manageable interest rate of around 2%.
It's impressive that Bangladesh survived the Covid-19 pandemic, the Russia-Ukraine war, and the foreign reserve crisis. The loan portfolio formulation and maintenance by Bangladesh is another commendable debt management effort.
Some still think Bangladesh is falling into the Chinese debt trap, but the reality is far from it. According to the current Economic Relations Division report, China provides only 8% of Bangladesh's entire loan portfolio, while the World Bank, ADB, and Japan lead the list with 33%, 24%, and 17%, respectively.
Not just in the case of taking loans, the nation is performing efficiently in the case of granting ones as well. The proof became evident with Bangladesh receiving the first installment of $50 million of $200m of loans disbursed to Sri Lanka. Thus, the argument against Bangladesh's credit management capacity isn't really a valid one.
Position of Bangladesh according to IMF's analysis
According to the International Monetary Fund, the official debt-to-GDP ratio for Bangladesh is 38%. This has created a buzz among the public. However, as was previously mentioned, using just this one ratio to evaluate a country's condition is insufficient. A total of 156 nations were examined for the World Economic Report, and Bangladesh, which was ranked 124th overall, had one of the lowest ratios.
If the ranking is narrowed down to Asia, Bangladesh's position is 30th of the 42 Asian countries assessed. Bangladesh's debt-to-GDP ratio was much lower than those of Nepal, Bhutan, Pakistan, and Thailand, as well as Bangladesh's immediate neighbours India (52.3%) and Myanmar (39.6%).
Even, 7 countries had a debt-to-GDP ratio of over 100%, with Japan being the most indebted nation with a ratio of 240.7%. However, no one is bothered about Japan's debt. Why? Because internet users understand that this ratio by itself does not provide a reliable indicator of a country's economic well-being. The most important consideration in gauging the country's financial predicament is whether or not it can afford to repay the loan.
Can Bangladesh pay off its debt?
In the eyes of an ordinary civilian, the newspaper headline "Each Bangladeshi has a foreign loan of nearly Tk1 lakh" may strike fear. However, they failed to make the connection that our per capita income is $2,765, which is close to Tk3 lakh. Simply put, Bangladesh can pay back its debts with its income, which is more than three times the size of the loan.
Also, the loans won't be paid back instantly or overnight. The portfolio is made up of loans to different parties with different terms and conditions. In its analysis of Bangladesh's debt, the World Bank said that there is a low risk of external debt distress. So, loan payments are always important, but the average person doesn't need to worry about them.
Bangladesh is one of the few countries that has been able to boost its economy despite the pandemic. With the completion of megaprojects, the start of new projects, and continued development planning, the country still has the capacity to achieve positive GDP growth while carrying a moderate amount of debt. However, focusing solely on austerity measures may stymie economic recovery, while excessive debt accumulation can lead to serious fiscal crises. Comprehensive measures that address structural concerns and promote long-term growth are required.
When compared to the benchmark of the debt-to-GDP ratio, Bangladesh is in the safe zone. The standard for the ratio is 77%, indicating that even if Bangladesh's debt doubles in size, the country's economy can absorb the loan adequately.
However, this does not imply that the country should accrue loans without solid footing. Nonetheless, the country must maintain a solid track record of debt servicing and seek to keep the economic cycle running against all difficulties.
Ashraful Alam Chowdhury is an Independent Researcher and Columnist. He has experience working in the USA, Bangladesh, Myanmar and India.
