Bangladesh’s Climate Risks and External Debt Tightrope: Safeguarding Sustainability Amid Transition – Boston University

Report on Bangladesh’s External Debt Sustainability and Climate Vulnerability

Introduction: The Nexus of Debt, Climate, and Sustainable Development

An analysis of Bangladesh’s economic position reveals a critical intersection of external debt obligations and high climate vulnerability, posing significant challenges to the nation’s progress towards the Sustainable Development Goals (SDGs). As Bangladesh prepares to graduate from Least Developed Country (LDC) status in 2026, its ability to maintain economic resilience is contingent on managing these dual threats. This report evaluates the impact of climate change on the country’s debt sustainability, framing the challenges and potential policy responses within the context of the 2030 Agenda for Sustainable Development.

Analysis of Financial and Climate Risks to SDG Achievement

External Debt Exposure and its Implications

Bangladesh’s external debt profile has undergone a significant transformation, with trends that could impede sustainable development. Key changes include:

• Rising Debt Levels: Total external debt reached $100.64 billion as of December 2023, indicating a substantial and growing liability.
• Shift in Loan Composition: There is a clear transition from concessional financing to commercial terms, and from multilateral to bilateral and suppliers’ credit.
• Increased Risk Factors: A growing proportion of loans carry variable interest rates and stricter terms, such as shorter grace and maturity periods. This escalates future debt servicing liabilities, threatening fiscal space needed for SDG investments.

This evolving debt structure directly impacts SDG 17 (Partnerships for the Goals), particularly Target 17.4, which calls for assisting developing countries in attaining long-term debt sustainability.

Climate Vulnerability and Economic Setbacks

Bangladesh’s acute vulnerability to climate change presents a direct threat to its economic stability and development aspirations. The recurring frequency of natural disasters, such as floods and cyclones, is projected to cause an annual GDP loss of 2.2%. This undermines progress on several SDGs:

• SDG 1 (No Poverty): Climate shocks disproportionately affect the most vulnerable populations, destroying livelihoods and assets, and reversing gains in poverty reduction.
• SDG 8 (Decent Work and Economic Growth): Economic losses from climate events hinder consistent growth and create instability.
• SDG 13 (Climate Action): The government faces an increasing burden to fund adaptation, mitigation, and recovery efforts, creating a substantial climate financing gap that often must be filled by additional external debt.

Domestic Fiscal Constraints

A persistently low tax-to-GDP ratio severely limits Bangladesh’s capacity for domestic resource mobilization, a key component of SDG 16 (Peace, Justice and Strong Institutions). This fiscal weakness forces the government to allocate a large share of its limited revenue to external debt servicing, diverting critical funds from social sectors and thereby hindering progress on SDG 3 (Good Health and Well-being) and SDG 4 (Quality Education).

Debt Sustainability Assessment and Climate Finance

Findings of the Debt Sustainability Framework (DSF)

An assessment adapting the IMF’s Debt Sustainability Framework to include climate shocks yields critical insights into Bangladesh’s financial resilience.

• Solvency Risk: The analysis suggests a low risk of long-term insolvency, as indicators are projected to remain below sustainable thresholds.
• Liquidity Risk: The country faces a high risk related to short-term liquidity. Debt service indicators are highly sensitive to external shocks, such as declines in export earnings or increases in interest rates, especially when compounded by climate-related losses.

This vulnerability highlights the precarious balance Bangladesh must maintain to ensure financial stability while pursuing long-term development objectives.

The Critical Role of Grant-Based Climate Finance

The report identifies a significantly more optimistic scenario if climate-related financing is structured as grants rather than loans. Under this condition, both solvency and liquidity indicators remain well below distress thresholds, even when accounting for potential export declines due to measures like the EU’s Carbon Border Adjustment Mechanism (CBAM). This finding underscores that concessional and grant-based finance, as advocated under SDG 17, is essential for enabling vulnerable nations to pursue SDG 13 (Climate Action) without jeopardizing their overall debt sustainability.

Policy Recommendations for Safeguarding Sustainable Development

To navigate these challenges, a series of integrated policy actions are recommended to align debt management with climate resilience and the broader 2030 Agenda.

1. Integrate Climate Risks into National Debt Sustainability Analyses: Policymakers must formally incorporate climate change indicators and valuations of climate-induced damages into debt projections. This will provide a more accurate assessment of debt distress risk, enabling the formulation of effective management strategies and supporting the development of resilient infrastructure, in line with SDG 9 (Industry, Innovation and Infrastructure) and SDG 16.
2. Strengthen Export Resilience and Promote a Green Transition: Proactive measures are required to mitigate risks from international climate policies like the CBAM. The government should establish national frameworks for emissions measurement, reporting, and verification for all sectors. This will help maintain export competitiveness while advancing SDG 9 and SDG 12 (Responsible Consumption and Production).
3. Advocate for Climate Finance as Grants: Given the scale of financing required for climate action, Bangladesh must champion the global provision of climate finance as grants. This approach is fundamental to achieving SDG 13 without compromising fiscal stability and progress on other goals, particularly SDG 1 (No Poverty). This aligns with the principles of global partnership and shared responsibility enshrined in SDG 17.

Analysis of SDGs in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

The article on Bangladesh’s external debt and climate risks directly addresses and connects to several Sustainable Development Goals (SDGs). The analysis of the country’s economic resilience in the face of climate change and debt obligations touches upon core development challenges.

• SDG 13: Climate Action: This is a central theme. The article extensively discusses Bangladesh’s vulnerability to climate change, the increasing frequency of natural disasters like floods and cyclones, and the resulting economic losses. It also focuses on the need for financing for adaptation and mitigation measures.
• SDG 17: Partnerships for the Goals: This goal is crucial to the article’s discussion on finance. It covers issues of external debt sustainability, the shift from concessional to commercial loans, domestic resource mobilization (specifically the low tax-to-GDP ratio), and the role of international financial institutions like the IMF and World Bank. The call for climate finance to be provided as grants instead of loans is a key point related to global partnerships.
• SDG 8: Decent Work and Economic Growth: The article highlights significant risks to Bangladesh’s economic resilience and growth. The potential annual loss of 2.2% of GDP due to climate events directly threatens the target of sustained economic growth. Furthermore, rising debt servicing liabilities divert funds from investments that could foster economic growth.
• SDG 1: No Poverty: The article connects climate disasters to poverty by stating that calamities result in “significant economic losses, including the loss of income and capital, particularly for individuals residing in the most vulnerable segments of the population.” This directly relates to building the resilience of the poor and vulnerable against climate-related shocks.

2. What specific targets under those SDGs can be identified based on the article’s content?

Based on the issues discussed, several specific SDG targets can be identified:

1. Target 13.1: Strengthen resilience and adaptive capacity to climate-related hazards and natural disasters in all countries.
   • The article directly supports this by highlighting that Bangladesh is “susceptible to natural disasters, which have become more frequent and damaging” and requires spending on “adaptation and mitigation measures to enhance resilience.”
2. Target 17.4: Assist developing countries in attaining long-term debt sustainability through coordinated policies aimed at fostering debt financing, debt relief and debt restructuring.
   • This is the core subject of the article, which analyzes Bangladesh’s rising external debt, the increasing difficulty of servicing it, and the risk of future debt distress. The entire discussion revolves around making “debt sustainability analyses work for Bangladesh.”
3. Target 17.1: Strengthen domestic resource mobilization… to improve domestic capacity for tax and other revenue collection.
   • The article explicitly identifies “Bangladesh’s poor domestic resource mobilization record” and its “low tax-to-GDP ratio” as a key factor compromising its ability to service debt and fund essential services.
4. Target 1.5: By 2030, build the resilience of the poor and those in vulnerable situations and reduce their exposure and vulnerability to climate-related extreme events and other economic, social and environmental shocks and disasters.
   • The article points out that climate-induced disasters cause significant economic losses that disproportionately affect “individuals residing in the most vulnerable segments of the population,” linking climate resilience directly to poverty reduction.
5. Target 13.a: Implement the commitment undertaken by developed-country parties… to a goal of mobilizing jointly $100 billion annually… to address the needs of developing countries in the context of meaningful mitigation actions and transparency on implementation.
   • The article’s policy recommendation that “climate finance should be provided as grants rather than loans” directly addresses the nature and quality of international climate finance needed by vulnerable countries like Bangladesh.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

Yes, the article mentions and implies several quantitative and qualitative indicators that can be used to measure progress.

• Total external debt stock: The article provides a specific figure: “Bangladesh’s external debt, including both public and private debt, was $100.64 billion” as of December 2023. This is a direct indicator for monitoring debt levels (Target 17.4).
• Tax-to-GDP ratio: The article explicitly refers to Bangladesh’s “low tax-to-GDP ratio” as a major challenge. This ratio is a primary indicator (Indicator 17.1.1) for measuring domestic resource mobilization (Target 17.1).
• Economic losses from disasters as a percentage of GDP: The article quantifies the potential impact of climate change, stating that Bangladesh “may incur a loss of 2.2 percent of its GDP every year” due to floods and cyclones. This serves as a direct indicator for assessing climate vulnerability and the need for resilience (Targets 13.1 and 1.5).
• Debt service and liquidity indicators: While not providing specific figures, the article implies the use of such indicators by mentioning that “liquidity indicators… were more vulnerable” and that declines in export earnings can push them “above sustainable thresholds.” This points to indicators like debt service as a proportion of exports (Indicator 17.4.1).
• Composition of financial assistance (Loans vs. Grants): The article’s analysis strongly emphasizes the difference between loans and grants for climate finance. The proportion of climate finance received as grants versus loans is an implied qualitative indicator of the support being provided to address climate change (Target 13.a).

4. Summary Table of SDGs, Targets, and Indicators

Source: bu.edu