Bangladesh’s Debt Trap: When Yesterday’s Borrowing Becomes Tomorrow’s Budget

For years, Bangladesh’s debt debate was framed around a reassuring statistic: the country’s public debt-to-GDP ratio remained relatively modest by international standards. That argument is becoming increasingly inadequate. The FY2026-27 budget exposes why.

Bangladesh has entered a period in which the central fiscal question is no longer simply how much the government borrows, but rather how much of today’s national budget must be sacrificed to pay for yesterday’s borrowing.

The numbers are increasingly difficult to ignore. The government has allocated approximately Tk 127,500 crore for interest payments alone in FY2026-27. Of this, roughly Tk 105,000 crore is attributable to domestic debt and Tk 22,500 crore to external debt.

That means approximately .82 percent of the government’s interest bill originates from domestic borrowing Exhibit 1: FY2026-27 Interest Burden

This immediately challenges a common misconception. Bangladesh’s debt problem cannot simply be described as a problem of foreign lenders. The overwhelming majority of the government’s current interest burden comes from borrowing inside Bangladesh.

But interest represents only one part of the debt burden. The gross FY2026-27 budget also contains approximately Tk 577,439 crore in principal repayments on domestic and foreign borrowing. Roughly 91.7 percent of that principal repayment relates to domestic obligations.

That does not mean Tk 577,439 crore permanently disappears from the government’s balance sheet. A significant portion represents Treasury bills, bonds and other securities that mature and are refinanced through new borrowing. But that is precisely where the deeper problem begins.

Exhibit 2: The Scale of the FY2026-27 Debt-Servicing Cycle

The distinction between gross principal redemption and net debt servicing is important. But neither interpretation is comforting. Bangladesh is increasingly refinancing old liabilities while accumulating new ones. That is the fundamental architecture of a debt trap.

The Debt Trap Does Not Begin With Default

A country does not suddenly wake up one morning bankrupt. A debt trap normally develops gradually. The progression looks something like this:

Budget deficit → borrowing → larger debt stock → higher interest payments → less fiscal space → further borrowing → refinancing of old debt → still larger interest burden.

Once that cycle becomes entrenched, government borrowing gradually changes character.

Initially, borrowing finances development. Eventually, borrowing increasingly finances previous borrowing. That is the point Bangladesh must avoid.

Government debt has already risen above Tk 22 lakh crore, divided between a very large domestic portfolio and a rapidly growing external portfolio. The absolute debt number matters.

But the trajectory of debt service matters even more. Interest expenditure has been rising much faster than government revenue, particularly because domestic borrowing has become increasingly expensive.

The Most Dangerous Debt May Be Domestic

Public debate in Bangladesh frequently associates the phrase “debt trap” with foreign creditors such as China, Russia, Japan, the World Bank or Asian Development Bank.

The FY2026-27 numbers suggest that this framing is incomplete. More than four-fifths of the government’s interest bill is domestic. Exhibit 3: Where Bangladesh’s Interest Bill Comes From

The domestic debt problem is especially important because domestic borrowing can become expensive very quickly. Consider a simple example. Suppose the government issued Tk 10,000 crore of Treasury securities several years ago at an interest rate of 6 percent.

Annual interest cost:

Tk 600 crore When those securities mature, the government may not possess Tk 10,000 crore in spare cash to eliminate the liability.

Instead, it refinances the debt. If the replacement securities now carry a 10 percent yield:

Annual interest becomes:

Tk 1,000 crore The government still owes approximately the same principal. But its annual financing cost has increased by almost 67 percent. Multiply that process across hundreds of thousands of crores of government securities and the fiscal consequences become enormous.

This is rollover risk. It is one of the most important yet least discussed elements of Bangladesh’s debt problem.

The Age of the Debt Matters

Not all government debt is economically identical. Bangladesh’s debt portfolio contains liabilities ranging from Treasury bills that mature in a few months to development loans that may be repaid over several decades.

Exhibit 4: Bangladesh’s Debt Maturity Structure Instrument Typical maturity profile Principal risk Interest-rate risk 91-day Treasury bill 3 months Very high rollover frequency High 182-day Treasury bill 6 months Very high High 364-day Treasury bill 1 year High High Treasury bonds Roughly 2-20 years Medium Medium National Savings instruments Several years Medium Relatively high cost World Bank/IDA loans Often 25-40 years Low annual refinancing risk Historically low ADB concessional loans Often 20-40 years Low/medium Historically low Japanese ODA Often 25-40 years Low annual refinancing risk Historically low Recent non-concessional foreign loans Generally shorter Higher Higher Large project loans Project specific Can become substantial after grace period Currency-sensitive

This maturity structure explains why Bangladesh can simultaneously have a moderate debt-to-GDP ratio and an increasingly uncomfortable debt-service problem. A short-maturity domestic portfolio must constantly be refinanced. Each refinancing exposes taxpayers to the interest rates prevailing at that moment.

The Government Is Competing With Businesses for Money The debt trap also affects the private economy. When the government needs hundreds of thousands of crores in financing, it turns heavily to Bangladesh’s banking system.

But banks have alternatives. They can lend to factories. They can finance exporters.

They can provide working capital to businesses. They can finance SMEs.

Or they can purchase government securities carrying attractive yields and sovereign backing. From a bank’s perspective, the choice can be obvious. Why take significant credit risk lending to a private manufacturer when the government offers double-digit or near-double-digit returns? That produces crowding out. The mechanism is straightforward:

Government borrowing rises   ↓ Banks allocate more funds to government securities   ↓ Private credit becomes more expensive or less available   ↓ Investment slows   ↓ Employment and economic growth weaken   ↓ Government tax revenue grows more slowly   ↓ Government needs additional borrowing That is how fiscal weakness begins spilling into the real economy. And once that happens, debt becomes not simply a government accounting problem but an obstacle to private-sector growth.

Foreign Debt Is Cheaper, But Carries Another Risk

External borrowing has historically been much cheaper than domestic borrowing. Bangladesh benefited enormously from concessional financing from development partners such as the World Bank, ADB and Japan.

Many older loans carried very low interest rates, generous grace periods and maturities extending 20, 30 or even 40 years. But those favorable characteristics can create political complacency. A loan contracted ten years ago eventually reaches repayment.

Grace periods expire. Principal amortization begins. And several generations of project borrowing can begin coming due simultaneously. Bangladesh now appears to be entering precisely that phase.

External debt service is projected to climb from approximately $4.1 billion in FY2024-25 to around $7.6 billion by FY2028-29.

Exhibit 5: External Debt-Service Pressure

An approximately 85 percent increase within four years is not something policymakers should dismiss merely because the country’s debt-to-GDP ratio remains manageable. Debt is not repaid with GDP. Debt is repaid with government revenue and foreign exchange.

Currency Depreciation Is the Hidden Interest Rate

Foreign debt introduces another risk that is frequently ignored. Imagine Bangladesh borrowed $1 billion when:

$1 = Tk 80 The taka value of the borrowing was:

Tk 8,000 crore Suppose repayment occurs when:

$1 = Tk 122 The same principal now costs:

Tk 12,200 crore Exhibit 6: Currency Effect on a $1 Billion Loan

The dollar principal has not changed. But the taka cost has risen by:

Tk 4,200 crore or approximately:

52.5 percent That increase is economically similar to an additional financing cost borne by Bangladesh. So when evaluating a foreign loan, policymakers should not simply ask whether its nominal interest rate is 1 percent, 2 percent or 4 percent.

The true national cost is closer to:

Interest + principal + currency depreciation + project performance.

And project performance may be the most important variable of all.

Debt Is Not the Problem. Unproductive Debt Is.

There is nothing inherently wrong with government borrowing. Every developing country uses debt. Indeed, refusing to borrow for economically productive infrastructure can itself be irresponsible.

Suppose Bangladesh borrows Tk 10,000 crore to finance infrastructure that generates Tk 25,000 crore in additional economic activity, raises exports, reduces transportation costs, increases productivity and expands the government’s future tax base.

That debt has helped create national wealth. But consider another project. The government borrows Tk 10,000 crore. The project suffers substantial cost overruns.

Contracts are inflated. Construction is delayed. The project earns little economic return. It produces insufficient foreign exchange. Yet taxpayers must continue servicing the debt for 20 or 30 years.

The accounting treatment may call both projects “development expenditure.” Economically, they are completely different. One creates an asset. The other creates a liability. That is why Bangladesh urgently needs to move from measuring how much money was spent to measuring what economic return taxpayers received from the money borrowed.

Yesterday’s Mega Projects Are Becoming Today’s Debt Service

This issue becomes particularly important when examining the infrastructure-led development strategy pursued during the previous decade and a half. Large projects create unusual political asymmetry. The infrastructure is visible immediately.

The debt is not. Political leaders inaugurate bridges, rail lines, tunnels, power plants and highways today. The principal repayments may not begin for five or ten years. The political credit therefore belongs to one generation of policymakers.

The financial bill belongs to another. Bangladesh is increasingly entering that second phase. Projects financed during the high-borrowing years are now entering their repayment periods. The question therefore should no longer be simply:

How much infrastructure did Bangladesh build?

It should also be:

At what lifetime financial cost?

For each large externally financed project, Bangladesh should disclose:

Without such disclosure, taxpayers cannot determine whether public debt created national assets or merely transferred liabilities into the future.

Bangladesh’s Real Problem Is Revenue

Perhaps the most dangerous misconception in the debt debate is the belief that a moderate debt-to-GDP ratio automatically implies fiscal safety. It does not.

Governments do not service debt with GDP. They service debt with revenue.

Bangladesh has one of the lowest tax-to-GDP ratios among comparable economies. Consequently, even a relatively moderate debt stock can consume an enormous proportion of actual government resources.

The Tk 127,500 crore interest bill illustrates the problem. That is money that cannot simultaneously finance:

education, healthcare, social protection, public infrastructure, law enforcement, research, universities, energy investment, or poverty reduction.

Debt servicing therefore has an enormous opportunity cost. Every taka spent servicing yesterday’s borrowing is a taka unavailable for today’s priorities.

From Development Financing to Debt Financing

The most worrying fiscal transition occurs when government borrowing changes purpose.

Stage one is economically normal:

Borrow → build productive asset → generate growth → repay debt Stage two is more dangerous:

Borrow → finance deficit → refinance old debt → pay increasing interest → borrow again The second cycle can become self-reinforcing. Bangladesh has not yet reached a sovereign debt crisis. But some of the ingredients of a fiscal debt trap are clearly emerging:

None of these individually means Bangladesh is insolvent. Together, however, they warrant serious attention.

There Are Only Six Ways Out

Governments cannot escape debt arithmetic indefinitely.

A growing debt-service burden must eventually be addressed through some combination of:

1. higher taxes;

2. lower government expenditure;

3. faster economic growth;

4. additional borrowing;

5. monetary financing and inflation;

6. asset sales or restructuring.

There is no magical seventh option. And every option imposes a cost on somebody.

Increase taxes, and households and businesses pay. Cut public spending, and citizens lose services.

Borrow more, and future taxpayers inherit the liability. Borrow heavily from banks, and private businesses may be crowded out. Finance government deficits through monetary expansion, and citizens ultimately pay through inflation.

This is why the phrase “debt is deferred taxation” is so important. A government can postpone the invoice. It cannot eliminate it.

Bangladesh Is Not Bankrupt. That Is Exactly Why It Must Act Now.

The argument here is not that Bangladesh faces imminent sovereign default. It does not. The country still possesses major economic strengths: a large domestic economy, substantial exports, remittance inflows, access to multilateral financing and a debt ratio below that of many countries that have faced serious fiscal crises.

But waiting for a crisis before addressing debt sustainability would be irresponsible. The appropriate moment to reform debt management is when the country still retains choices.

Bangladesh should therefore undertake a comprehensive National Debt Audit. For every major government loan, citizens should be able to see:

Creditor | Year borrowed | Original principal | Interest rate | Currency | Grace period | Maturity | Outstanding balance | Annual principal payment | Annual interest payment | Project financed

This should be publicly available in a searchable database. Second, large debt-financed projects undertaken during the previous 15 years should undergo independent retrospective economic audits.

Third, Bangladesh should gradually lengthen the maturity profile of domestic debt wherever economically feasible to reduce rollover risk.

Fourth, tax reform must become a genuine national priority.

Fifth, major future borrowing should pass a transparent economic-return test before approval.

The Debt Trap Is Ultimately a Governance Trap

Bangladesh’s emerging debt challenge is not simply a matter of finance. It is ultimately a question of governance. One government borrows. Another government services the loan. And citizens who may never have had any role in either decision eventually pay the bill.

That creates an enormous moral responsibility. When a government borrows in the name of future generations, those future generations have a right to know what asset they received in return.

The FY2026-27 budget should therefore serve as a warning. Bangladesh is carrying more than Tk 22 lakh crore of government debt. Approximately Tk 127,500 crore will be required merely for interest this year.

Gross principal redemptions run into several lakh crore. External debt service could approach $7.6 billion annually by FY2028-29.

And large portions of domestic debt must continually be refinanced at today’s considerably higher borrowing costs. The danger is not that Bangladesh borrowed to develop. Developing nations must invest, and investment frequently requires debt.

The real danger is reaching a fiscal condition in which:

today’s taxes pay yesterday’s interest, today’s borrowing refinances yesterday’s principal, today’s banks finance the government’s deficits instead of tomorrow’s businesses, and tomorrow’s taxpayers inherit today’s borrowing.

When that cycle becomes permanent, something fundamental has changed. Debt is no longer financing development.

Development is financing debt.

That is the debt trap Bangladesh must avoid.

Dr Mohammad Nakibur Rahman is a professor of Finance at the University of North Carolina and the US spokesperson for Jamaat-e-Islami Bangladesh.