Bangladesh’s external debt servicing burden has reached a critical level, threatening the country’s fiscal stability and limiting the government’s ability to fund essential development projects, according to recent data from the Economic Relations Division (ERD). In the first quarter (July-September) of the current 2025-26 fiscal year, Bangladesh repaid $1.28 billion in foreign loans - exceeding the $1.15 billion it received in fresh disbursements during the same period. The repayments included $820 million in principal and over $460 million in interest, marking a 14% increase from the same quarter last year.
While foreign assistance commitments and disbursements from multilateral and bilateral lenders like the World Bank, Russia, ADB, Japan, and India have continued, the pace of repayments has overtaken inflows. Experts say this imbalance is a clear signal that Bangladesh’s debt sustainability is under growing stress. Debt Payments Exceed Fresh Inflows: According to ERD’s quarterly report released last week, the government’s repayment obligations have grown faster than its ability to attract new external loans. “This is the first time in several years that repayments have consistently exceeded disbursements for consecutive quarters,” an ERD official told Daily Industry, requesting anonymity.
The official noted that while the World Bank released $322.2 million and Russia $315.3 million in the July-September period, China provided no new funds, reflecting a significant slowdown in bilateral financing. “This gap between inflows and outflows is widening,” the official added. “Even as Bangladesh continues to service earlier loans, new commitments are shrinking. This places extra pressure on the budget and foreign exchange reserves.”
Growing Fiscal Burden: Economists and policymakers alike have expressed concern that the growing debt service payments are eating into the country’s limited fiscal space. Dr. Zahid Hussain, former lead economist of the World Bank’s Dhaka office, said: “The problem is not only the volume of debt but the rising cost of servicing it. As more loans are maturing and global interest rates remain high, the government’s repayment burden is rising sharply. This is now constraining fiscal flexibility.”
He explained that when repayments exceed disbursements, the net flow of foreign funds becomes negative, meaning Bangladesh is effectively paying out more than it receives. “This situation is unsustainable in the medium term if export earnings and remittances don’t rise significantly,” he warned.
Pressure on the Budget: The government has already been struggling to balance its budget amid sluggish revenue collection, rising inflation, and a sharp depreciation of the taka. The finance ministry recently acknowledged that the cost of debt servicing-both domestic and external-has reached one of the highest levels in the country’s history.
According to officials, more than 20% of total budget expenditure is now allocated for interest payments alone, compared with about 12% five years ago. “Debt servicing is crowding out essential spending on education, health, and social protection,” a senior official at the Ministry of Finance said. He added: “The government is under pressure to cut development expenditure because a large part of revenue now goes to repay earlier loans. This pattern is not sustainable if we want to maintain economic growth and social safety programs.”
Experts Urge Fiscal Rebalancing: Economist Dr. Ahsan H. Mansur, Executive Director of the Policy Research Institute (PRI), told Daily Industry that Bangladesh needs to take urgent measures to restore fiscal balance. “Debt servicing is now one of the biggest risks to macroeconomic stability,” he said. “Unless fiscal reforms and revenue mobilization improve, the country will have to borrow even more just to repay existing loans.”
Dr. Mansur pointed out that external debt repayments have increased due to a mix of factors-rising interest rates on floating-rate loans, currency depreciation, and the maturity of older concessional loans taken over the last decade.
“Bangladesh’s earlier borrowing strategy relied heavily on low-cost multilateral loans,” he explained. “But now, as the economy has grown and concessional financing has declined, the country is taking more semi-commercial loans that carry higher interest costs.”
Declining Concessional Lending: According to ERD data, new loan commitments fell to $910 million in the first quarter of FY2025-26, showing that development partners are taking a more cautious stance. Multilateral agencies such as the World Bank and ADB have maintained steady support, but bilateral lenders like China have slowed their disbursements.
Development economist Dr. Mustafizur Rahman of the Centre for Policy Dialogue (CPD) said that this change reflects a shift in donor behavior: “Donors are becoming more careful about new lending as they assess the country’s repayment capacity and governance issues in project implementation. This decline in concessional financing means future loans will be costlier.”
He also warned that debt distress could escalate if the government does not address inefficiencies in public investment management. “We must ensure that borrowed funds are used for productive, high-return projects that can generate revenue or savings to repay the loans. Otherwise, debt will accumulate faster than growth.”
Foreign Reserve and Currency Impact: Rising external debt servicing has also begun to affect Bangladesh’s foreign exchange reserves and the exchange rate volatility is also increasing the effective cost of foreign loans, as repayments are denominated in dollars while revenues are in depreciated local currency. Need for Strategic Borrowing and Debt Management: Experts agree that Bangladesh must adopt a more strategic borrowing policy focused on debt sustainability rather than volume. This includes better coordination between the Ministry of Finance, the ERD, and Bangladesh Bank in managing external obligations and new loan negotiations.
Dr. Zahid Hussain emphasized: “We must prioritize concessional and low-interest loans, avoid politically motivated projects, and strengthen debt transparency. It’s time to align new borrowing strictly with the country’s repayment capacity.” Similarly, Dr. Mansur suggested that the government expand domestic revenue sources-particularly through tax reforms-to reduce dependency on external borrowing. “Without strong revenue growth, even concessional loans can become a burden,” he said.
World Bank and Russia Lead, China Absent: Among lenders, the World Bank was the top disburser in July-September with $322.2 million, followed closely by Russia with $315.3 million, mainly for the Rooppur Nuclear Power Plant project. The Asian Development Bank ranked third, releasing $187.7 million, while India and Japan provided $60 million and $40 million, respectively.
China, however, did not disburse any loan funds during the quarter. Analysts believe Beijing’s inactivity reflects a reassessment of its exposure to Bangladesh amid project delays, repayment concerns, and Dhaka’s growing alignment with Western development institutions.
Looking Ahead: Balancing Growth and Stability: With repayments projected to rise further in the coming quarters, Bangladesh’s fiscal planners are bracing for a difficult balancing act. The government is expected to seek additional support from the IMF and World Bank for budgetary assistance, while also attempting to expand local revenue collection through the National Board of Revenue (NBR).
However, economists stress that borrowing alone cannot solve the underlying problem. “We need to generate higher exports, attract remittances through formal channels, and ensure fiscal discipline,” said Dr. Mustafizur Rahman. “Otherwise, rising debt servicing will continue to erode our growth potential.”
Bangladesh’s rising external debt servicing burden has become one of the most pressing macroeconomic challenges of 2025. With repayments outpacing new disbursements and concessional lending on the decline, the government’s fiscal room is tightening. Unless immediate reforms are made in revenue generation, debt management, and project efficiency, the country risks slipping into a cycle of borrowing to repay debt - a scenario that could severely undermine economic stability and development momentum. As Dr. Zahid Hussain aptly concluded: “The warning signs are clear. Bangladesh must act now to restore debt sustainability before the problem becomes unmanageable.”
