Explore ways to better tackle increasing debt obligations

There is a fundamental law of economic gravity: you have to pay for what you borrow. For Bangladesh, that reality amounts to more than $30 billion this fiscal year. Next year, the country’s public debt servicing is expected to near $34 billion, according to projections from the International Monetary Fund. Bangladesh’s total public debt has climbed to roughly $189 billion, reaching 41 percent of GDP in the 2024-25 fiscal year, up from 39 percent the year before.

To the layperson, these are just large numbers. But to the IMF and economists, they are flashing warning lights indicating “rollover risk”—a prospect that the government will find it increasingly difficult, and punishingly expensive, to borrow new money just to repay old loans. The vulnerability is rooted in ballooning government expenditure and weak revenue collection. The country’s tax-to-GDP ratio currently languishes below seven percent. With the state coffers remarkably thin, the strain of repayment is thus becoming severe. In the current fiscal year, servicing domestic debt alone is projected to absorb a staggering 89 percent of government revenue, a figure significantly higher than that of peer nations.

The new finance minister, Amir Khasru Mahmud Chowdhury, has announced that the government intends to raise the tax-to-GDP ratio up to eight percent in the upcoming budget. But the IMF makes it clear that a far more aggressive improvement in revenue mobilisation is necessary. Without it, extreme scenarios, such as a major natural disaster, could send the debt service-to-revenue ratio surging past 110 percent by the end of the decade.

When a government is strapped for cash, it typically turns inward, borrowing heavily from domestic banks. The collateral damage of this strategy is the private sector, which gets “crowded out” as less money is left for businesses to borrow and expand. Furthermore, the IMF warns that the financial system’s capacity to absorb all this government debt is under strain. If the government is forced to rely on the central bank to prop up insolvent banks, it risks losing its grip on short-term interest rates. That is a classic recipe for a vicious economic cycle. Currency depreciation and soaring inflation could further erode the country’s debt sustainability.

Economists and IMF officials aren’t the only ones anxious about the country’s debt trajectory. In a note to his successor, former finance adviser Salehuddin Ahmed acknowledged that Bangladesh’s debt risk has slipped from “low” to “moderate.” While the debt level remains technically tolerable by IMF benchmarks, Ahmed pointed out an inconvenient truth: loan repayments have now surpassed what the government earns from exports or domestic revenue.

To avoid being crushed by its own obligations, the government must generate more revenue and spend less. Expanding the tax net will require bureaucratic resolve, but there is no alternative to bringing more people into the formal tax system. At the same time, the government must trim its own budget, scaling back inefficient subsidies and debt-fuelled vanity projects. Fiscal sobriety is rarely glamorous, but the alternative—a slow-burning crisis driven by heavy borrowing—is far worse.