Bangladesh, which is on the brink of graduating to the Middle income tier within the next decade is facing a stern task in maintaining its finances, because most of its foreign funding is adding up to a potential debt trap for the country. Bangladesh’s external debt conditions, as reports from the Central Bank suggest, that the volume of external debt rose by 141 percent in two years to June 2018. Previously the figure at the end of March 2016 stood at USD 38.88 billion, a sharp increase brought the figure to USD 54.73 billion.
However, such loans are crucial in implementing major infrastructure projects and improvement of other mega projects as the country pushes to leave the LDC category. The rapid rise in such debts in the past couple of years were mainly warranted by the higher rate of short-term foreign borrowings. In the Bangladesh Bank report, it was mentioned that the short-term foreign borrowing made up almost 22 per cent of the total external debts as of June 2018. In the past, a similar scenario caused a 205 per cent growth in the period of March 2016 to June 2018.
According to the same report, such a rapid growth of short-term foreign debt is to be considered as an early indicator of potential vulnerability. However, the present scenario of the debt portfolio looks less alarming, as the current share of short-term debt to total debt portfolio looks to be relatively low. However, the study conducted by the Central Bank indicated that such influx of foreign debts to Bangladesh may drop, while the existing debts may also be affected.
There is however, not much cause for concern because previously in the fiscal year 2017-18, the external debt-GDP ratio reached the 20 per cent mark and the short-term external debt-GDP ratio stood at 4.44 per cent. Compared to other countries, Bangladesh’s debt scenario is still at a healthy state, as the ratio of short-term external debt to foreign exchange reserve in the country was 37 per cent, whereas it was 176.59 per cent in Thailand, 203.23 per cent in Indonesia, and 40.98 per cent in Malaysia respectively prior to the Asian financial crises. Bangladesh’s short-term external debt to remittance ratio stood at a resilient 81.63 per cent at the end of June 2018 to which the Central Bank claimed that debts such as these, could easily be nullified by the annual remittance inflow. Giving indication that the country’s vision to excel and graduate from the LDC category by 2024, looks on track, mainly due to these investment made in development and infrastructural side of the country.
Regardless of the reassurance from the Central Bank, the country’s financial system may need a significant transformation in order for it to be able to withstand a possible call back of their money by the foreign lenders. Otherwise such a possible outflow of money may cripple the financial stability of the country. Reassessing the flow of loans and monitoring the proper implementations of the funds are essential in staying in track for the much anticipated LDG graduation.