Interest payments ate up one-fifth of total budget in FY25

Bangladesh spent a record Tk 134,430 crore ($15.7 billion) on interest payments in fiscal year (FY) 2024-25, equivalent to one-fifth of total budget expenditure, according to the latest report from the Finance Division.

Remarkably, this nearly matches the allocation for development projects under the Annual Development Programme, which stood at Tk 144,356 crore for the year.

The government had initially allocated Tk 113,500 crore for interest payments but later increased the figure to Tk 121,500 crore in the revised budget. By the end of the fiscal year, actual spending had surpassed even this higher target.

Spending on interest payments also remained high – Tk 31,952 crore, or 26 percent of total allocations – in the first three months of the current fiscal year, though budget spending in other sectors was low during the period.

HIGH BORROWING, HIGHER REPAYMENT

The surge in interest payments is linked to rising government borrowing from both domestic and foreign sources and an increase in interest rates on treasury bonds and bills.

According to Finance Division data, the government spent Tk 116,617 crore ($13.6 billion) on domestic loans in the last fiscal year, up 17 percent from Tk 99,606 crore in FY24. Meanwhile, interest payments on foreign loans rose 25 percent to Tk 17,812 crore ($2.1 billion) from Tk 14,984 crore in FY24.

Overall, interest payments now consume 28 percent of the revenue budget, up from under 20 percent between FY2010 and FY2020.

A majority of domestic borrowing comes from treasury bills and bonds from bank and non-bank sources, whose costs rose significantly. Once the yield rate of bonds was around 8 percent, which rose above 10 percent in FY24. In FY25, it increased further to hover between 11 percent and 13 percent, according to Finance Ministry data.

Interest payments surged sharply after the Covid-19 pandemic, when the government borrowed heavily from foreign sources to support the economy. Interest obligations on these loans began immediately upon disbursement.

At the same time, domestic borrowing through treasury bonds and bills also contributed to rising costs thanks to their high interest rates. By FY2021, interest payments had already reached 21 percent of the revenue budget.

Meanwhile, the government's overall expenditure has risen sharply, but revenue collection has failed to keep pace. This has resulted in an 8 percent tax-to-GDP ratio, which is far below the Asia-Pacific average of 19 percent and the 25 percent average among developing countries.

For instance, the ratio is 12 percent in India and 17 percent in Nepal.

Interest rates in the banking sector have also risen by approximately 500 basis points over the last five years, pushing the government's interest payment obligations to unsustainable levels.

As of March 2025, the government's debt stock had reached a record Tk 20 lakh crore, up from Tk 13.44 lakh crore in June 2022. Of this, the foreign debt stock has nearly doubled to Tk 8.42 lakh crore since mid-2022. The interim government has signalled its intention to reduce reliance on foreign loans to mitigate risks to external debt sustainability.

Currently, Bangladesh's external debt-to-export ratio stands at 140 percent, according to the latest Debt Sustainability Analysis (DSA).

While Bangladesh's external debt-to-GDP ratio is still considered moderate compared to some other developing countries and within the IMF's "safe zone," the rapid pace of debt accumulation, the shift towards less concessional loans, and existing macroeconomic challenges are raising red flags, according to the Finance Division's Debt Bulletin.

Prudent debt management, careful selection of new projects, improved project execution, and robust domestic resource mobilisation are crucial to ensure long-term debt sustainability.

"The rising external debt stock, principal, and interest payments of Bangladesh against exports may create vulnerability in the external debt position and may affect external debt sustainability in the coming years," the Medium-Term Macroeconomic Policy Statement for FY26–FY28 warned.

Repayment volumes are rising due to loan maturities, currency depreciation, and the end of grace periods on certain loans, the DSA report noted.

The depreciation of the taka has had a significant impact on debt servicing costs. The local currency has weakened from around Tk 84 per US dollar in early 2021 to over Tk 123 today, meaning more taka are required to repay the same amount of foreign debt.

The government plans to conduct another DSA this month using the latest data to assess vulnerabilities and ensure transparency in debt management.

Bangladesh still has access to concessional external financing and prefers this mode. However, the country has been gradually facing exposure to non-concessional loans by official creditors due to persistent economic development and higher per capita income in recent times.

Moreover, the cost of borrowing from commercial lenders has been increasing due to global monetary tightening, higher domestic inflation, and depreciation of the local currency. It is expected that inflation will decrease substantially in the next financial year and the currency exchange rate will stabilise due to current initiatives by the central bank.

Fiscal space in the country has been reduced over the last 10 years, so the government now needs to borrow to meet its operating expenditure, which raises interest costs, said Ashikur Rahman, Principal Economist at the Policy Research Institute of Bangladesh (PRI).

"The tax-to-GDP ratio has dropped. Revenue collection can't keep pace with the rise in operating expenditure. A country cannot be operated in this way, taking loans as it creates a vicious cycle," he said.

For the next government, he said, it is a major task to reform public expenditure and create fiscal space. "It may need to freeze the inclusion of new government employees or go for privatisation of big infrastructures."

In any case, the tax-to-GDP ratio will have to be increased, and reforms to expand fiscal space will be necessary, he added.

LDC GRADUATION TO INCREASE PRESSURE

Analysts say Bangladesh's already growing debt pressure is likely to increase sharply upon its slated graduation from the Least Developed Country (LDC) category near the end of next year.

The country will lose access to grants and concessional loans from multilateral and bilateral development partners and will need to rely more on commercial loans, which carry higher interest rates and shorter repayment periods.

The medium-term outlook for Bangladesh's debt after LDC graduation hinges on the government's ability to implement effective strategies to counter these challenges, said the finance ministry report.

It states, "Without robust reforms in revenue mobilisation, export diversification, and debt management, the debt burden and associated risks could increase.

"However, successful implementation of these strategies could help Bangladesh navigate the transition and maintain a sustainable debt trajectory while leveraging its improved economic standing."