Bangladesh's growing public debt burden is emerging as a major concern for policymakers and economists, with sharply rising interest payments placing increasing pressure on the national budget and constraining the government's ability to finance development priorities.
According to statements highlighted by The Daily Industry, interest payments on government debt have surged more than 13-fold over the past two decades - from Tk 85 billion in the 2005-06 fiscal year to Tk 1,147 billion in 2023-24. Economists warn that this dramatic increase is crowding out development spending and narrowing fiscal space at a time when the country faces multiple economic challenges.
Finance and Planning Minister Amir Khasru Mahmud Chowdhury acknowledged the severity of the situation, stating that the rising cost of debt servicing is becoming a major burden for the government. "This rising cost of debt servicing is crowding out development spending and limiting fiscal space," he said, adding that the government must now carefully balance its expenditure priorities. Fiscal Pressure Mounts: The surge in interest payments reflects a steady accumulation of both domestic and external debt, driven by years of budget deficits, large infrastructure spending, and increased borrowing to manage economic shocks. Economists note that as debt levels rise, so do interest obligations - creating a cycle where more resources are allocated to servicing debt rather than funding productive investments. Dr. Zahid Hussain, a former lead economist at the World Bank's Dhaka office, said the trend is a clear warning signal. "When interest payments grow at this pace, they start to consume a significant portion of the budget. This reduces the government's ability to invest in infrastructure, education, health, and social protection," he said. He added that the situation becomes even more challenging when revenue growth fails to keep pace with rising expenditures.
Development Spending Under Threat: One of the most immediate consequences of rising debt servicing costs is the crowding out of development spending. As a larger share of the budget is allocated to interest payments, less funding is available for projects that drive economic growth and improve living standards.
Experts explained that this trend could have long-term implications for the economy. "Development spending is critical for sustaining growth and creating jobs. If a significant portion of the budget is diverted toward interest payments, it will slow down economic progress and reduce the effectiveness of fiscal policy," said an analyst. He warned that Bangladesh risks entering a "debt trap" if borrowing continues to rise without corresponding increases in productivity and revenue generation.
Rising Borrowing Costs: The increase in interest payments is also linked to rising borrowing costs, both domestically and internationally. Higher global interest rates, coupled with exchange rate depreciation, have made external borrowing more expensive.
At the same time, domestic borrowing through treasury bills and bonds has also become costlier, adding to the government's debt servicing burden.
Dr. Mustafizur Rahman, Distinguished Fellow at the Centre for Policy Dialogue (CPD), said the changing global financial environment has played a significant role. "Global interest rates have increased in recent years, and this has directly affected the cost of external borrowing. Additionally, currency depreciation means that servicing foreign debt requires more local currency," he explained.
Revenue Constraints Add to the Challenge: Bangladesh's relatively low tax-to-GDP ratio has further complicated the situation. With limited revenue mobilization, the government faces difficulties in meeting both its debt obligations and development needs.
Economists argue that without significant improvements in revenue collection, the fiscal pressure will continue to intensify.
Dr. Zahid Hussain emphasized the importance of tax reforms. "Expanding the tax base, improving compliance, and reducing evasion are essential to increasing revenue. Without these measures, managing the debt burden will become increasingly difficult," he said.
External Sector Implications: The rising debt burden also has implications for Bangladesh's external sector. Increased reliance on foreign borrowing can put pressure on foreign exchange reserves, particularly when repayment obligations rise.
Exchange rate fluctuations further complicate the situation, as depreciation increases the local currency cost of servicing external debt.
Dr. Mustafizur Rahman noted that careful management of external debt is crucial. "While external borrowing can support development, it must be used efficiently and managed prudently. Otherwise, it can create vulnerabilities in the balance of payments," he said.
Policy Options and Reforms: To address the growing debt burden, economists recommend a combination of fiscal discipline, structural reforms, and improved governance.
Economists suggested that the government should prioritize high-impact projects and avoid unnecessary expenditures. "Public spending must be more efficient. Projects with low economic returns should be reconsidered, while those that enhance productivity should be prioritized," said an analyst.
He also emphasized the need for transparency and accountability in public financial management to ensure that borrowed funds are used effectively.
Balancing Growth and Stability: The challenge for policymakers is to strike a balance between maintaining economic growth and ensuring fiscal sustainability. While borrowing can support development, excessive reliance on debt can create long-term risks.
Dr. Zahid Hussain said that a gradual approach to fiscal consolidation may be necessary. "The government needs to reduce its reliance on borrowing over time by increasing revenue and controlling expenditures. This must be done carefully to avoid undermining growth," he said.
A Critical Juncture for Economic Policy: The sharp rise in interest payments marks a critical juncture for Bangladesh's economic management. As the country navigates a complex global environment, the ability to manage its debt sustainably will be a key determinant of future growth and stability.
Finance Minister Amir Khasru expressed confidence that the government is aware of the challenges and is taking steps to address them. "We recognize the pressure created by rising debt servicing costs. Our focus is on restoring fiscal discipline, improving revenue collection, and ensuring that public spending supports long-term economic growth," he said.
Looking Ahead: As Bangladesh prepares its upcoming national budget, the issue of debt sustainability is expected to be a central focus. Policymakers will need to make difficult decisions to balance competing priorities while safeguarding economic stability.
Economists agree that the current situation is a wake-up call for reforms. "The rising debt burden is not just a fiscal issue; it is a structural challenge that requires comprehensive policy action," said Dr. Mustafizur Rahman. "If managed properly, Bangladesh can navigate this phase. But delays in reform could make the situation more difficult in the future." With interest payments continuing to rise, the government faces increasing pressure to act decisively to ensure that debt remains sustainable and does not undermine the country's development ambitions.
