Foreign government loans: Weak taka makes repayment more expensive

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Repaying the government’s external debt has become more costly due to the sharp depreciation of the taka against the US dollar in recent months.

Bangladesh repaid external debts amounting to $289.78 million in July and August, down 2.83% from $298.22 million in the same two-month period a year ago. is one year old, according to data from the Economic Relations Division (ERD).

Of this sum, the principal amount was $196.98 million and the interest was $92.80 million.

In terms of taka, expenditure amounted to Tk 2,731 crore compared to Tk 2,530 crore last year, an increase of 7.95%.

The increase in spending on external debt service came as the taka lost 9.2% in value against the dollar over the past year. It fell 2.15% in July and August.

The taka weakened amid a shortage of dollars caused by volatility in the foreign exchange market following the outbreak of the Russian-Ukrainian war, which sent import payments skyrocketing.

The depletion of foreign currency reserves has forced the central bank to regularly inject dollars into the market to help importers pay their bills.

Zahid Hussain, a former senior economist at the World Bank’s Dhaka office, attributed the drop in total debt service payment in US dollars to a drop in principal repayments.

“It looks like a timing issue,” he said.

The economist argued that the size of Bangladesh’s external debt is increasing, so there is no reason for the principal repayment to decrease over the whole year.

“It is likely to exceed the level of redemption of the US dollar compared to last year.”

The impact of exchange rate depreciation is evident in the taka amounts of interest and principal.

The exchange rate used for conversion from USD to taka for July-August 2021 and July-August 2022 respectively was Tk 84.8 and Tk 94.3, as calculated by Hussain.

“This 11.2% depreciation increased the burden of interest payments by Tk 86.98 crore. This shows the impact of the depreciation on government expenditure.”

How this additional spending, intended to repay foreign debt, affects the budget deficit will depend on the impact of the depreciation on revenue, Hussain said.

The collection of import duties in July-August was the main contributor to the 22% growth in revenue for the National Revenue Office, compared to a growth of 14.5% in July-August 2021.

Hussain said the principal repayment increased by Tk 187.03 crore due to depreciation.

He believes that the impact of increased repayment of principal in taka will be offset by the impact on disbursements.

“The magnitude of the compensation will depend on the relative percentage increases in principal repayments and disbursements. If the US dollar net disbursement increases, the net taka disbursement will increase even more due to the depreciation effect.”

The Economist points out that the ERD seems to use the BB rate for the conversion.

“It does not matter if the dollars are bought from the BB at this rate. However, since the market rate is higher, it implies that the central bank subsidizes the servicing of the government’s external debt.”

“Going forward, the depreciation effect will be significant as the BB rate has risen to Tk 96 per USD.”

Financial costs also increased for private sector companies that took on dollar-denominated borrowings from external sources due to currency depreciation.

In July and August, the use of foreign aid fell by 24.38%.

Disbursement of foreign aid fell to $864.29 million in July and August from $1.14 billion a year ago.

During the same period last year, there was a greater influx of foreign aid through budget support and immunization-related loans. Such assistance was absent this time around, leading to a decline in the use of foreign aid.

Development partners pledged to lend $304.92 million over the two months, an increase of 315.88% from $73.32 million last year.

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