In Bangladesh, expanding the use of local currency bonds offers a practical way to attract global capital while reducing vulnerability to external volatility.
Despite two decades of consistent economic growth, Bangladesh’s increasingly heavy reliance on foreign currency loans poses a significant risk to its future economic stability. During this period, the country borrowed nearly $100 billion, almost exclusively in foreign currencies.
Total external debt amounts to $104 billion, with four-fifths owed by the public sector and the remainder by the private sector. In fiscal year 2025, external debt repayments will exceed $4 billion, including $1.5 billion interest.
External debt currently stands at 23% of GDP, a level that remains manageable due to concessional financing and a performing real economy. However, to meet its development goals, the country needs to secure tens of billions of dollars in additional annual foreign funding.
Bangladesh faces persistent challenges, including low revenue collection, weak export performance, and limited foreign reserves. These constraints could slow progress toward its economic goals and raise exposure to foreign currency risks. As of December 2024, the country’s savings-to-GDP ratio stood at 24%, reflecting limited domestic resources to finance investment.
The country’s foreign currency debt primarily originates from multilateral sources and typically features concessional interest rates and long-term maturities. Repayment obligations are met through project cashflows and fiscal revenues, both of which may not sufficiently mitigate foreign exchange risk. This risk is heightened when the government onlends external funds domestically in local currency over extended repayment periods.
Issuing local currency–denominated bonds to international investors is a proven strategy for mobilizing capital. Such bonds transfer foreign exchange risks to investors, rather than being borne by the borrower. This approach enables the government, state-owned enterprises, and private firms to access global financial markets while minimizing direct exposure to currency fluctuations.
International financial institutions require countries to establish sound macroeconomic and financial market policies before supporting the issuance of local currency bonds. The successful international issuance of local currency-denominated bonds signals confidence in the country’s economic stability. Such bonds help reduce external vulnerabilities and enhance the integration of domestic markets with global markets by attracting international investors and diversifying the investor base.
Bangladesh’s experience with foreign currency loans demonstrates the significant risks inherent in such financing.
Additionally, international issuance promotes the development of legal and regulatory frameworks for foreign participation in local currency bond markets. They facilitate the transfer of financial expertise to domestic institutions and encourage the adoption of global best practices in bond issuance. By advancing the creation of efficient yield curves and liquid benchmarks, these efforts contribute to the overall maturation of local financial markets.
Bangladesh’s experience with foreign currency loans demonstrates the significant risks inherent in such financing. Since 2022, the Bangladesh Taka has depreciated nearly 40% against the US dollar, resulting in an estimated $40 billion increase in the country’s external debt burden and straining its debt servicing capacity. The recent downgrade of sovereign credit rating, driven in part by foreign exchange issues, has limited access to traditional funding sources and may elevate borrowing costs.
Excessive reliance on foreign currency loans has significantly undermined many economies, and economic history is rife with currency collapses and ensuing debt crises that create substantial economic pain. Notable examples include the Asian Financial Crisis (1997), Turkish Lira Crisis (2001), Icelandic Krona Crisis (2008), Venezuelan Bolivar Hyperinflation (2018), Turkish Second Lira Crisis (2018), and Sri Lankan Rupee Crisis (2022).
For emerging economies, issuing local currency-denominated bonds in international markets presents considerable challenges. Issuing agencies are advised to establish a track record in the domestic market before exploring offshore instruments.
For instance, the International Finance Corporation in India pioneered rupee-denominated bonds by first issuing the onshore Maharaja Bond, followed by the offshore Masala Bond in 2014. Since then, India’s offshore Masala bonds issuances have reached an estimated $20 billion.
Typically, development finance institutions and governments lead the effort to build a track record for local currency-denominated bonds in the onshore market. The private sector subsequently follows, but this transition is challenging without government support. Proactive first measures are essential to encourage private-sector participation.
Bangladesh made history in 2019 when the International Finance Corporation issued the first offshore taka-denominated bond, the Bangla bond. However, no further issuance has occurred since then, with procedural challenges impeding development finance institutions’ efforts.
This lack of sustained issuance signals a cautious investment climate and raises concerns regarding investment governance. Notably, Bangladesh remains one of the few major Asian emerging economies without any outstanding local currency–denominated bonds in international markets.
External loans are vital for emerging economies’ growth. Risks associated with external loans can be mitigated by gradually scaling up local currency-denominated bonds and building confidence among international investors. This process requires persistent collaboration between the government and development finance institutions.
Although such bonds cannot eliminate currency risks entirely, their regular issuance establishes a solid track record, encouraging foreign direct investment and enhancing credibility. International investors managing trillions of dollars are highly unlikely to accept more than 10%–15% of all offshore bonds issued by an emerging economy like Bangladesh. This situation should not be viewed as an all-or-nothing scenario.
Development finance institutions primarily issue local currency denominated bonds most times to fund country-specific projects efficiently and to reduce hedging costs.
Bangladesh faces an urgent need for billions of dollars in additional financing to close its investment gap. With limited official sources, attracting investment from the international capital markets becomes imperative.
Foreign direct investment remains a key government priority. Adopting Taka-based financing is a prudent strategy to manage foreign exchange risk, bolster investor confidence, and attract investment. Such measures will facilitate a safer, more achievable, and sustainable development pathway for Bangladesh.
Source: blogs.adb.org
