External debt is often a hotly debated issue. Throughout history, it has driven some countries into economic crises. Yet, for many developing nations, borrowing money is crucial for funding infrastructure or stabilizing their economies. However, when too much money is borrowed, the debt repayments and interest can grow faster than the economy. This can lead to a dangerous cycle where countries keep borrowing just to pay off old debts, often resulting in a debt trap. Unfortunately, Bangladesh is one country currently facing massive debt problems.
Bangladesh, a rising star in South Asia, is one of the world’s fastest-growing economies and is on track to become a trillion-dollar economy. However, this growth has come with significant external debt challenges. As of the end of 2023, Bangladesh’s external debt surpassed $100 billion, with $79.6 billion from the public sector and $20.9 billion from the private sector. This means the government and state-run institutions hold most of this debt, raising concerns about the country’s fiscal health and its ability to manage such obligations in the long term. The high level of public sector borrowing, mainly for infrastructure projects and public programs, could push Bangladesh into a debt trap if not managed carefully. So, how did Bangladesh accumulate so much debt, and who are its main lenders?
A major factor in Bangladesh’s economic growth has been its foreign relations and foreign borrowing. The previous government under Sheikh Hasina made multiple trips abroad, especially to China and Russia, forging various deals. These deals strengthened diplomatic ties and attracted foreign investments and loans. According to the Bangladesh Bank, China is the third-largest lender to Bangladesh, with over $3 billion in loans to the private sector. The United Kingdom, Hong Kong, and the Netherlands follow, lending $1 billion, $896 million, and $839 million, respectively.
On the public sector side, China has financed some of the country’s largest projects, such as the Payra Power Plant, a 1,320-megawatt coal-fired plant in Bangladesh’s Patuakhali district. This $2 billion project is a joint venture between China National Machinery Import and Export Corporation and Bangladesh’s North-West Power Generation Company. The project was financed with a 30% equity investment from the partners, with the remaining 70% funded by Chinese banks, led by the Chinese Export-Import Bank.
However, one of the concerns with Chinese-backed projects is that they often favor Chinese companies. For instance, the $1.56 billion contract for engineering, procurement, and construction was awarded to a Chinese consortium, leaving local Bangladeshi companies out of the loop. This trend extends to other Chinese companies involved, such as Dongfang Boiler Group and Shanghai Electric Group.
According to a report by Prothom Alo, China has provided Bangladesh with nearly $3 billion in loans since the 2019-2020 fiscal year, accounting for 40% of the total loans China has extended to the country. Currently, 14 projects in Bangladesh are being financed with Chinese loans, totaling close to $10 billion. Beyond project financing, China has also offered direct loans. In July 2024, after a meeting with Chinese President Xi Jinping, Prime Minister Sheikh Hasina announced that Bangladesh had secured $2 billion in four loan packages, including grants, interest-free loans, concessional loans, and commercial loans.
Russia, too, has contributed to Bangladesh’s growing debt. The Rooppur Nuclear Power Plant, Bangladesh’s first nuclear energy project, is one of the country’s most ambitious undertakings. Initially proposed in 1961, the project only gained momentum in 2009 when Bangladesh signed a memorandum of understanding with Russia’s ROSATOM. Despite its potential, the project, valued at $12.65 billion, has added significantly to Bangladesh’s debt, largely financed by loans from Russia. Bangladesh has faced difficulties repaying these loans, partly due to shrinking foreign reserves and disruptions caused by U.S. sanctions on Russia. Recently, Russia has demanded that Bangladesh pay $630 million in overdue interest on these loans.
What does all this mean for Bangladesh? First, the country must repay these debts, which were borrowed in foreign currencies, usually U.S. dollars. Bangladesh cannot print U.S. dollars, so it must earn foreign currencies through exports, remittances, or foreign investments. However, Bangladesh’s foreign reserves are rapidly shrinking. The country is importing more than it exports, and while remittances are substantial, they are still overshadowed by imports. This is especially concerning when considering the trade imbalance with China. In 2021, Bangladesh exported just $1 billion to China, but bilateral trade was over $25 billion. Some argue that these imports support Bangladesh’s development, but the trade deficit remains a staggering $22 billion.
As Bangladesh’s foreign reserves dwindle, it becomes increasingly difficult for the country to repay its debts, especially those in U.S. dollars. If Bangladesh cannot keep up with its payments, it may face unpaid interest and penalties, which would damage its credit rating and make it harder to secure future loans or investments. Failure to manage its debt could force Bangladesh to cut spending on critical services like healthcare and education, slow economic growth, and even trigger social unrest. Furthermore, excessive borrowing could make Bangladesh more dependent on foreign lenders, reducing its control over its own economy.
In summary, while borrowing has helped Bangladesh grow, the rising debt could lead to serious problems. To avoid these issues, the country must manage its resources carefully, balance trade, and use loans wisely to support sustainable growth. Without such measures, the debt burden could have long-term negative impacts on both the economy and the people of Bangladesh.
However, it’s not all doom and gloom. Bangladesh’s government is actively renegotiating loans, especially with China, and seeking emergency funding to boost its foreign reserves. Moreover, most of Bangladesh’s external debts are long-term loans, meaning the country has up to 20 years to repay them. With careful management, Bangladesh may yet avoid a full-blown crisis. But only time will tell.