Bangladesh Faces Debt Trap as Revenue Chief Warns of Economic Challenges

Bangladesh is grappling with a significant financial challenge as debt servicing has become the second-largest budget expenditure. The tax-to-GDP ratio has decreased to about 7% from over 10%, according to M Abdur Rahman Khan, Chairman of the National Board of Revenue. He highlighted this issue during a seminar in Dhaka, expressing concerns about the country's increasing dependency due to its low revenue-GDP ratio.

Finance Secretary M Khairuzzaman Mozumder noted that this year's national budget is smaller than ever before. He likened the situation to asking a "thin man to lose even more weight." Mozumder warned that continued budget cuts could lead to structural growth problems, emphasizing that revenue growth is not meeting economic demands.

Debt and Economic Challenges

Bangladesh's external debt has surged by 42% over the past five years, reaching $104.48 billion by the end of 2024, according to the World Bank’s International Debt Report 2025. This external debt now represents 192% of export earnings, with debt-service payments rising to 16% of exports, indicating mounting repayment pressure.

The World Bank has identified Bangladesh as one of the countries facing increasing external debt repayment pressure, alongside Sri Lanka in South Asia. Data from the finance ministry shows that as of March this year, Bangladesh's total outstanding debt was Tk 19,99,928 crore, with foreign debt accounting for Tk 8,41,992 crore.

Banking Sector Concerns

The Bangladesh Bank reported a sharp increase in default loans by Tk 2.24 lakh crore in six months, reaching Tk 6.44 lakh crore by September's end. This figure represents 35.7% of all banking credit. Default loans rose by nearly Tk 3 lakh crore in the first nine months of this year from Tk 3.45 lakh crore in December last year.

The total loans in the banking sector amounted to Tk 18 lakh crore. Analysts suggest this scenario reveals a fragile banking system and raises concerns about financial governance amid an investment slump. "Bangladesh had never seen such a slump in investment before," reported Prothom Alo newspaper.

Revenue and Economic Management

Mustafizur Rahman from the Centre for Policy Dialogue noted that interest payments have overtaken agriculture and education as the second-largest expenditure after salaries and pensions in the revenue budget. This shift underscores the growing financial strain on Bangladesh's economy.

"Despite wide-ranging debates on growth, inflation and economic management, the core challenge remains unchanged, which means Bangladesh must significantly increase domestic revenue to reduce its dependence on borrowing," Mozumder asserted.

Bangladesh Bank Governor Ahsan H Mansur mentioned ongoing legal reforms aimed at addressing non-performing loans and recovering assets domestically and internationally. These efforts follow a "ring-fencing policy" to maintain operational stability.

The Prothom Alo report attributed the investment slump to factors such as unrest, uncertainty, energy crises, high interest rates, inflation, low wages, and reduced purchasing power.

Khan stressed that acknowledging Bangladesh's debt trap is crucial for progress. "We have already fallen into a debt trap. Without acknowledging this truth, it is not possible to move forward," he stated during his address at the seminar.

With inputs from PTI