Bangladesh, Covid-19 and Debt


The Covid-19 crisis threatens to erode two-decades' of progress on poverty reduction in Bangladesh. This difficult situation highlights the need for a more ambitious response to the crisis.

This blog is part of a series of articles that Eurodad is producing in collaboration with our global partners on the implementation of the Debt Service Suspension Initiative (DSSI), complementing and updating the "Shadow report on the limitations of the G20 Debt Service Suspension Initiative: Draining out the Titanic with a bucket?" published in October 2020. Over the coming months, we will publish a variety of articles covering issues related to the implementation of the DSSI and the debt situation in several countries in the global south.

The pandemic has wreaked havoc on the vulnerable population and healthcare system of Bangladesh. Located in South Asia, the country is home to 160 million people. The substantial progress achieved over the last two decades in terms of per capita income increases and poverty reduction is at risk of being eroded as a result of the Covid-19 crisis. Debt and the lack of adequate multilateral support both threaten to make the situation worse.

The health and social consequences of the pandemic

The first cases of Covid-19 were detected in the country in the first week of March 2020. Following the detection of the virus, the government proceeded to introduce strict lockdown measures, which only began to be eased in June 2020. However, Covid-19 continued to spread at an alarming rate, reaching 516, 929 cases in the first week of January 2021. This number is likely to substantially underestimate the real impact due to the scarcity of testing kits

The World Health Organization (WHO) reports that 7,670 people have died so far in Bangladesh as a consequence of the pandemic. This relatively low death rate with respect to the number of reported cases has raised questions regarding the accuracy of the data on at least two counts. First, the death rate in Bangladesh is well below other countries in the region with similar socio-economic characteristics, such as India. Second, the overall weakness of the country’s healthcare system may limit the capacity of authorities to report accurate statistics. Bangladesh has an estimated 0.3 doctors and 0.8 hospital beds per 100,000 inhabitants. Capacity constraints have turned medical facilities into sources of contagion and have forced them to turn patients away. Thus, it is likely that the true death toll of the pandemic in the country is yet to be understood correctly. 

The government response has lagged behind the severity of the situation. Authorities implemented an emergency response programme worth 1 per cent of Gross Domestic Product (GDP), equivalent to US$ 3.4 billion, in April 2020. For comparison, developing countries spent on average 2.2 per cent of GDP in emergency responses to the pandemic. Measures adopted in Bangladesh included additional support for the healthcare sector, transfer programmes for vulnerable populations, subsidies for agricultural activities and wage support for workers in export industries. 

In addition to these measures, the government established a scheme to subsidise interest payments by business to banks to the tune of 2.6 per cent of GDP, equivalent to US$ 8.8 billion. The scale of the subsidies is related to the massive impact of the pandemic on the Bangladeshi economy: economic growth was projected to slow down from 8.2 to 3.8 per cent between 2019 and 2020. At the height of the crisis, industrial production fell by 70 per cent while 91 per cent of small- and medium-sized enterprises (SMEs) reported sharp reductions in cash flows. 

The effects of this dynamic on the livelihoods of people have been devastating. At the peak of the crisis, more than 6 million people lost their jobs. The lack of social safety nets and the high degree of vulnerability among the population will push millions into deprivation. Eight out of 10 people in the country were poor or were likely to fall into poverty before Covid-19 arrived. As a result of the pandemic, the number of poor people in Bangladesh is set to double from 32 to 64 million people, affecting 40.9 per cent of the population. A survey found that 75 per cent of respondents reported not having enough food, while 91 per cent reported not having enough money to buy food. 

Children and women have been particularly badly affected. Schools have remained closed for most of the last 10 months and 39 million children have been unable to attend classes as a result. As observed in other countries, such as Ecuador and the Philippines, women have been forced to pick up the slack. Women in Bangladesh already spent 3.4 times more hours than men on unpaid care and domestic work activities before the pandemic, a burden that increased substantially after the Covid-19 outbreak began. Furthermore, a survey found that one out of three women had lost employment as a result of the crisis. Recent improvements in the area of gender equality are thus set to be reversed as a result of the crisis. 

How debt hampers the capacity of the country to respond to the pandemic

The government’s capacity to protect the population has been limited by fiscal constraints. Contrary to what happened in most of the rest of the world, expenditure levels in Bangladesh have declined during the crisis. Government expenditures, excluding interest payments, fell from 12.9 to 12.5 per cent of GDP between 2019 and 2020. In effect, the Bangladesh Covid-19 emergency response package has been financed entirely by cuts in other areas of the public budget. Sapping public response capacity in the middle of a global crisis will only increase the long-term costs of the pandemic. 

The driver of the fiscal response is the prioritisation by the government of debt sustainability. Bangladesh entered the crisis with a relatively low level of public debt of 35.8 per cent of GDP in 2019. The shock is projected to increase it to 42.3 per cent of GDP by 2023. The adjustment is designed to stabilise and reverse the growth of debt. The increase in debt levels will place a staggering burden on the country. Debt service required a punishing 60 per cent of government revenues in 2019. As a result of the crisis, almost the entire public revenue will be required to meet debt service payment: the ratio of debt service to government revenues will reach 98 per cent by 2023. Currently, for each US dollar paid to creditors as debt service, Bangladesh can only afford to invest 0.41 cents on public education and health care. As debt service displaces these and other basic public expenditures, this dire state of affairs is set to become untenable. Despite the appalling nature of this situation, the International Monetary Fund (IMF) has characterised these debt dynamics as sustainable.

Against this backdrop, the international community has failed to provide substantial support to Bangladesh. Despite being eligible to participate in the G20 Debt Service Suspension Initiative (DSSI), the country decided not to apply. The G20 DSSI allows for the suspension of debt service owed to bilateral creditors between April 2020 and June 2021. Only a quarter of the country’s US$ 1.3 billion in debt service for 2020 was due to bilateral creditors. As was the case for countries such as Kenya, failure to include multilateral and private creditors clearly limited the potential benefits of participation. By extension, it is unlikely that the country will participate in the G20 Common Framework for Debt Treatments. Thus, Bangladesh is unlikely to receive any type of debt relief going forward. 

In contrast to its abstention from G20 initiatives, Bangladesh applied for an IMF loan under the Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI) for a total of US$ 732 million in June 2020. The loan will end up increasing the heavy debt burden carried by the country and will open the doors for the introduction of IMF policy conditionality.

The difficult situation Bangladesh finds itself in highlights the need for a more ambitious response to the crisis. The country is not at risk of defaulting on its debt, but the costs imposed on its population are clearly unacceptable. In a similar vein, accomplishing the Sustainable Development Goals (SDGs), the Paris Climate agreement and Beijing declaration will require a substantial increase in public investment. In this context, prioritisation of debt sustainability is inconsistent with the development goals and international commitments of the country. Like many other developing countries, Bangladesh is unable to balance competing claims on resources without international support. This should encompass debt relief measures designed to support countries with high levels of public external debt owed to multilateral and private creditors, the establishment of a sovereign debt workout mechanism and substantial increases of Official Development Assistance (ODA).  

This blog has been published by ActionAid Bangladesh in collaboration with Eurodad.