Bangladesh’s external cushion is wearing thin

Bangladesh’s latest external sector numbers deserve closer scrutiny than the reassuring headline of rising remittances suggests. A closer reading reveals an economy gradually losing one of its traditional sources of resilience: steady inflows of concessional foreign financing.

While remittances continue to support foreign exchange earnings, declining foreign loan commitments and disbursements, alongside rising debt repayments, point to a tightening external financing environment.

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The issue is not merely one of accounting; it is whether external obligations are growing faster than the resources available to finance development.

The most striking figure is the 37 percent collapse in foreign loan commitments, from $8.32 billion in FY2024-25 to $5.24 billion in FY2025-26. Loan commitments represent future investment capacity. Such a sharp decline raises difficult questions: Are development partners becoming more cautious? Are implementation bottlenecks delaying approvals? Or is Bangladesh becoming less attractive as concessional financing declines with its transition toward middle-income status?

Whatever the reason, the outcome is the same: fewer committed resources for infrastructure, energy, climate adaptation and human development.

The decline in loan disbursements adds to the concern. Actual foreign financing fell to $8.07 billion from $8.57 billion a year earlier. Although the reduction appears modest, it reflects weakening external support at a time when Bangladesh needs substantial investment to sustain growth and strengthen resilience. Development finance is valuable not only because it provides foreign exchange but also because it supports long-term investments that private capital often avoids.

More worrying is the rising burden of debt servicing. External loan repayments climbed to $4.49 billion in FY2025-26 from $4.09 billion a year earlier, reflecting the repayment phase of loans contracted over the past decade, particularly for large infrastructure and mega projects.

Many of these projects experienced delays, cost overruns or failed to generate the expected economic returns on time. Bangladesh is therefore beginning to shoulder repayment obligations before fully realising the productivity gains these investments were meant to deliver.

The challenge is likely to intensify as grace periods expire on more foreign loans. Without stronger export growth and higher foreign exchange earnings, debt servicing will consume a growing share of external resources, leaving less fiscal space for new development priorities.

Supporters of the current outlook may point to remittances, which rose 15 percent year-on-year to $2.85 billion in July. Migrant workers remain one of the strongest buffers against external shocks. Yet July still fell short of the $3 billion monthly level consistently achieved between December 2025 and May 2026, reminding policymakers that remittance growth cannot be taken for granted or expected to offset every external imbalance.

Meanwhile, imports rose 6.26 percent during July-May FY2025-26 to $64.02 billion on a free-on-board basis. While this may reflect improving industrial activity, the continuing Middle East conflict has kept global fuel and commodity prices high and volatile. For an import-dependent economy like Bangladesh, higher prices inflate the import bill even without significant volume growth, putting pressure on foreign exchange reserves, widening the trade deficit and raising production costs.

Taken together, these indicators show that Bangladesh is not facing an immediate balance-of-payments crisis, but its external financing cushion is visibly thinning. Restoring development partner confidence, improving project implementation, strengthening export competitiveness, diversifying foreign investment, sustaining remittance growth and ensuring future borrowing delivers timely, productive returns are now essential safeguards against mounting external vulnerabilities.

The writer is a professor of economics at Dhaka University and executive director of the South Asian Network on Economic Modeling (Sanem).