Situation
Bangladesh is now paying more to service debt while private credit expansion has fallen to its lowest level in 33 years. Government domestic debt servicing reached Tk 1.05 lakh crore, with foreign interest payments alone at Tk 22,500 crore [The Daily Star, 22 Aug 2026]. External debt servicing hit a record $4.49 billion in FY2025-26, up 11% year-on-year [Economic Relations Division/The Daily Star/The Business Standard, 2-3 Aug 2026]. Over the past 14 years, the foreign debt servicing burden has increased more than fourfold [The Business Standard, 20 Aug 2026]. At the same time, private sector credit growth slipped to 4.47% in June 2026, the lowest level recorded in 33 years, down from 10.13% a year prior [Dhaka Tribune, 9 Aug 2026]. Inflation is 8.32%, the highest in South Asia [The Daily Star, 22 Aug 2026]. The banking system is also carrying defaulted loans of Tk 5,88,704 crore, or 32.26% of total disbursed advances of Tk 18,24,668 crore at end March 2026 [The Business Standard, 2 Jun 2026]. The new Alternative Dispute Resolution policy issued on 21 August 2026 under Section 45 of the Bank Company Act 1991 [The Business Standard, 21 Aug 2026] provides a near-term recovery tool, but it must be sequenced with debt management to stop public borrowing and bad loans from absorbing the bank balance-sheet room needed for private credit.
Evidence
- Government domestic debt servicing surged to Tk 1.05 lakh crore; foreign interest payments reached Tk 22,500 crore [The Daily Star, 22 Aug 2026].
- Private sector credit growth was 4.47% in June 2026, down from 4.98% in May, 4.75% in April, and 4.72% in March, staying below 5% for four consecutive months [The Business Standard, 4 Aug 2026]. It was the lowest since 1993, down from 10.13% a year prior in July 2025 [Dhaka Tribune, 9 Aug 2026].
- Total outstanding private credit stood at approximately Tk 18.25 lakh crore at end June 2026 [The Business Standard, 4 Aug 2026].
- Overall investment-to-GDP ratio fell to 27.93% in FY2025-26 from 30.95% in FY2022-23; private investment fell from 24.18% to 21.53%, while public investment was 6.40% [Bonik Varta, 5 Aug 2026].
- Manufacturing plants reported operating 30 to 40 percent below capacity because of persistent gas and electricity shortages [The Business Standard, 4 Aug 2026].
- External debt servicing reached $4.49 billion in FY2025-26, and foreign aid commitments fell 37% to $5.24 billion, the lowest since FY2011-12 [Economic Relations Division/The Daily Star/The Business Standard, 2-3 Aug 2026].
- Total outstanding external debt was $110.93 billion at end March 2026, with public-sector external debt at $90.91 billion [Bangladesh Bank/The Business Standard, 10 Jun 2026].
- Defaulted loans reached Tk 5,88,704 crore, 32.26% of total advances of Tk 18,24,668 crore [The Business Standard, 2 Jun 2026].
- Inflation stood at 8.32% in July 2026, the highest in South Asia [The Daily Star, 22 Aug 2026].
Prescription
First, Bangladesh Bank should convert the new ADR policy into bank-specific recovery targets. Under the Section 45 Alternative Dispute Resolution policy issued on 21 August 2026 [The Business Standard, 21 Aug 2026], require each scheduled bank to file, with its next board meeting package, a loan-by-loan ADR eligibility and recovery plan for the Tk 5,88,704 crore defaulted loan stock [The Business Standard, 2 Jun 2026]. Bangladesh Bank should publish a quarterly bank-level recovery ratio and make new liquidity support conditional on progress toward recovery milestones. This sequence uses the existing nonperforming loan overhang to restart credit capacity rather than relying on broad monetary easing.
Second, the Ministry of Finance should direct the debt management office to rebalance the domestic issuance calendar away from short-term instruments that roll into the Tk 1.05 lakh crore domestic debt servicing burden [The Daily Star, 22 Aug 2026]. The mechanism is a maturity-lengthening program that creates medium-term benchmark securities and schedules new issuance only after reviewing Bangladesh Bank's private credit growth data. The purpose is to reduce rollover pressure without abandoning market-based pricing.
Third, the Economic Relations Division and the Ministry of Finance should open a formal public-sector external debt reprofiling negotiation. With external debt service at $4.49 billion in FY2025-26 [Economic Relations Division/The Daily Star/The Business Standard, 2-3 Aug 2026] and public-sector external debt at $90.91 billion [Bangladesh Bank/The Business Standard, 10 Jun 2026], the government should request maturity extensions and grace periods from bilateral and multilateral creditors. This should be sequenced before the narrowing aid pipeline, with commitments down 37% to $5.24 billion [Economic Relations Division/The Daily Star/The Business Standard, 2-3 Aug 2026], forces a sharper external squeeze.
Fourth, Bangladesh Bank and the Ministry of Finance should publish a monthly debt and credit dashboard that tracks the Tk 1.05 lakh crore domestic debt servicing [The Daily Star, 22 Aug 2026], the Tk 22,500 crore foreign interest payment [The Daily Star, 22 Aug 2026], the 4.47% private credit growth [The Business Standard, 4 Aug 2026], and the 32.26% defaulted loan ratio [The Business Standard, 2 Jun 2026]. This single decision-grade table should be reviewed by senior Ministry of Finance and Bangladesh Bank officials before any new debt issuance or liquidity facility is approved.
Risks and tradeoffs
ADR recovery may move slowly if bank boards resist haircuts or if court challenges delay resolution. A shift to medium-term domestic instruments may raise borrowing costs or fail if market demand is weak. Creditor reprofiling may not be granted, and the 37% fall in foreign aid commitments to $5.24 billion [Economic Relations Division/The Daily Star/The Business Standard, 2-3 Aug 2026] shows there is little concessional backstop. Tying liquidity to recovery risks keeping private credit growth near 4.47% [The Business Standard, 4 Aug 2026] for longer if recoveries are slow. Energy shortages also remain a binding constraint: manufacturing plants are operating 30 to 40 percent below capacity [The Business Standard, 4 Aug 2026], so balance-sheet repair alone will not fully restore investment demand.
Bottom line
The priority is to stop debt service and defaulted loans from absorbing the bank balance-sheet room required for private credit. Bangladesh Bank should enforce ADR-based recovery, the Ministry of Finance should lengthen domestic maturities, and the Economic Relations Division should seek external debt reprofiling before private credit growth of 4.47% [The Business Standard, 4 Aug 2026] becomes entrenched.
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Sources
- Government domestic debt servicing surged to Tk 1.05 lakh crore, with foreign interest payments alone reaching Tk 22,500 crore. [The Daily Star, 22 August 2026]
- Private-sector credit growth plummeted to 4.47%, marking a multi-decade low. [The Daily Star, 22 August 2026]
- Inflation stood at 8.32% in July 2026, remaining the highest in South Asia. [The Daily Star, 22 August 2026]
- Over the past 14 years, Bangladesh's foreign debt servicing burden has increased more than fourfold. [The Business Standard, 20 August 2026]
- Private sector credit growth slipped to 4.47% in June 2026, down from 4.98% in May, 4.75% in April, and 4.72% in March, falling below 5% for four consecutive months. [The Business Standard, 4 August 2026]
- The 4.47% expansion rate represents the lowest level recorded in 33 years (since 1993), down from 10.13% a year prior in July 2025. [Dhaka Tribune, 9 August 2026]
- Total outstanding credit to the private sector stood at approximately Tk 18.25 lakh crore at the end of June 2026. [The Business Standard, 4 August 2026]
- Bangladesh's overall investment-to-GDP ratio dropped to 27.93% in FY2025–26, down from 30.95% in FY2022–23. [Bonik Varta, 5 August 2026]
- The private investment-to-GDP ratio contracted from 24.18% in FY2022–23 to 21.53% in FY2025–26, while the public investment-to-GDP ratio fell to 6.40%. [Bonik Varta, 5 August 2026]
- Manufacturing plants reported operating 30% to 40% below capacity due to persistent gas and electricity shortages. [The Business Standard, 4 August 2026]
- External debt servicing reached a record $4.49 billion in FY2025–26, up 11% year-on-year. [Economic Relations Division / The Daily Star / The Business Standard, 2–3 August 2026]
- Foreign aid commitments fell 37% year-on-year to $5.24 billion in FY2025–26, the lowest in 14 years since FY2011–12 ($4.76 billion). [Economic Relations Division / The Daily Star / The Business Standard, 2–3 August 2026]
- Total outstanding external debt stood at $110.93 billion at the end of March 2026, with public-sector external debt accounting for $90.91 billion. [Bangladesh Bank / The Business Standard, 10 June 2026]
- Defaulted loans in the banking sector surged to Tk 5,88,704 crore (Tk ~5.89 lakh crore) at the end of March 2026, representing 32.26% of total disbursed banking sector advances (Tk 18,24,668 crore). [The Business Standard, 2 June 2026]
- On 21 August 2026, Bangladesh Bank issued the Alternative Dispute Resolution (ADR) policy under Section 45 of the Bank Company Act 1991 to expedite bad-loan recovery. [The Business Standard, 21 August 2026]
13 newspaper articles retrieved via search.
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