Negative Credit Rating Outlook, Slowing Foreign Investment; Government Increasingly Relies on Bank and Foreign Loans

Staff Correspondent, Dhaka | 13 October 2026

New foreign investment has declined amid the banking sector crisis and credit quality pressures. According to Bangladesh Bank data, new equity investment in April-June fell by 4.77 percent to $77.4 million compared to the same period last year. However, during the same period, total net FDI increased by 12.78 percent to $346.9 million due to reinvestment. In other words, the total flow is maintained by the reinvestment of profits of existing foreign companies, and new investors are not coming.

The revenue deficit is increasing. In the 2025-26 fiscal year, the NBR collected Tk 87,527 crore less than the revised target. Although the collection increased by 12 percent compared to the previous year, the target was not met. In addition, the NBR has been given a target of collecting Tk 6,04,000 crore in the current fiscal year, which requires a growth of more than 45 percent. The government is borrowing more from banks to meet the deficit. Last March, the government’s internal debt reached 98.5 percent of the annual target. The target for the new fiscal year has been set at Tk 1.12 trillion.

The banking sector is also weak. At the end of June, defaulted loans stood at Tk 66,555 crore, which is 32.78 percent of total loans. Private sector credit growth fell to a record low of 4.47 percent in June.

These factors have made credit rating agencies cautious. Fitch downgraded Bangladesh’s outlook to negative in May and maintained its ‘B+’ rating. In July, S&P downgraded the outlook to negative due to a weak banking sector, fiscal constraints, and external risks. Moody’s, on the other hand, recently revised the outlook from negative to stable, but said structural weaknesses remained.

Foreign debt pressure is also increasing. The IMF has set a foreign borrowing limit of $8.44 billion for the 2025-26 fiscal year for the first time.

Consequences of high interest rates and strict conditions of foreign loans amid falling income

Bangladesh will graduate from LDC status on November 24, as a result of which concessional loans from the World Bank’s IDA and ADB will gradually move to market-based terms. According to the Ministry of Finance, the average interest rate for LDC status was 1.1 percent, and the 30-year repayment period will be halved after the transition.

Every billion dollars of debt with an interest rate of 1-2% costs 10 to 20 million dollars per year. If the interest rate is 6-8%, it becomes 60 to 80 million dollars. If the grace period is short, the principal has to be repaid first. That is, the burden of the same debt increases several times.

The trap of repaying debt with loans.

In the first two months of the 2026-27 fiscal year, 89 percent of the foreign debt received went to repaying previous loans and interest. An analysis suggests that annual foreign debt repayments will double by 2029. Therefore, less is spent on developing new loans and more on servicing old ones.

The revenue-to-GDP ratio is below 8 percent, one of the lowest in Asia. The debt-to-exports ratio rose to 162.7 percent in FY2024, much higher than the IMF’s previous projection of 116-118 percent. When debt increases relative to income and exports, risk increases, and lenders demand higher interest rates.

If foreign debt falls, the government will lean more on banks. The BEA, an organization of economists, has warned that this will shrink the space for private sector credit. As a result, investment and employment will decrease, and the potential for revenue growth will also decrease.

S&P has warned that the rating could be downgraded further if external debt repayment pressures increase. A rating downgrade makes new loans more expensive and increases LC costs.

There is no scope to say that a crisis is imminent. The total reserves at the end of June were $37.58 billion and remittances in April-June were $9.38 billion. The debt-to-GDP ratio is still within the IMF’s “safe” range. So it is a risk, not a crisis. However, if there is a policy mistake, the risk can turn into a crisis.