Will Bangladesh Follow Sri Lanka into the Abyss?

The storm gathering in global financial markets is no longer a distant warning�"it is heading towards Bangladesh.

The world's safest financial asset, the US Treasury bond, is under unprecedented pressure. Investors are dumping government bonds, yields are soaring, and borrowing costs are rising across the globe. From the United States to Japan and Europe, governments are paying a heavier price to finance their debts. Economists warn that the next victims could be heavily indebted emerging economies. 

The unsettling question is now echoing through Bangladesh's financial circles:

Will Bangladesh Become the Next Sri Lanka?
The answer is both reassuring and alarming. Not today�"but it could tomorrow if the country ignores the warning signs.
Sri Lanka's collapse did not happen overnight. It was a slow-burning crisis fuelled by reckless borrowing, shrinking foreign reserves, weak institutions and costly policy mistakes. Bangladesh has not reached that point, but many of the ingredients are beginning to appear.

The IMF and the World Bank have already cut Bangladesh's growth forecast, warning that the economy is losing momentum while debt obligations continue to grow. 

Bangladesh's public debt has climbed to around 42 per cent of GDP, while total external debt has crossed US$104 billion. More worrying is the speed at which debt-servicing costs are rising as global interest rates remain high. Every new dollar borrowed today is significantly more expensive than it was just a few years ago. 

Former Bangladesh Bank Governor Dr Atiur Rahman believes Bangladesh is not yet in a debt trap, but he warns that the country is entering a "danger zone" where borrowed money must create productive assets rather than white-elephant projects. Debt becomes a trap, he argues, when it finances waste instead of growth.

Leading economist Dr Zahid Hussain identifies Bangladesh's weakest link: revenue. With one of the lowest tax-to-GDP ratios in South Asia, the government is borrowing because it cannot collect enough taxes to finance its spending. Borrowing to fill budget holes, rather than investing for future returns, is the classic path towards debt vulnerability.

The comparison with Sri Lanka is unavoidable.

Sri Lanka depended heavily on expensive commercial borrowing, exhausted its foreign reserves and eventually defaulted on its sovereign debt in 2022. Bangladesh still enjoys three crucial shields: concessional foreign loans, a resilient garment export industry and billions of dollars in remittances from overseas workers.

But shields can weaken.

Economist Dr Selim Raihan warns that Bangladesh is facing a dangerous combination of slowing investment, stubborn inflation and rising debt-servicing costs. Without deep reforms, economic resilience will continue to erode even if debt levels remain manageable on paper.

The IMF has delivered perhaps the clearest warning. It says Bangladesh's growth could slow further unless the government reforms its banking sector, broadens the tax base and strengthens fiscal governance. 

This is where the global bond crisis becomes Bangladesh's nightmare. Higher US Treasury yields strengthen the dollar and make foreign borrowing more expensive. Countries with weak currencies and growing external debt face increasing repayment pressure. Bangladesh is already spending a larger share of its budget simply to pay interest on old debts instead of investing in health, education and jobs.

The country's banking crisis adds another layer of risk. Record defaulted loans, capital shortages and repeated rescue packages are placing enormous pressure on public finances. If the government continues borrowing to support weak banks while growth slows, debt dynamics could deteriorate rapidly.

So, is Bangladesh heading for a debt trap?

Not yet. Unlike Sri Lanka, Bangladesh has not defaulted, its debt remains largely concessional, and its debt-to-GDP ratio is still below many developing countries. But the margin for error is shrinking.

The World Bank warns that Bangladesh has limited capacity to absorb prolonged external shocks, whether from global interest rates, energy prices or geopolitical instability. 

The verdict is stark: Bangladesh is standing at the edge of a fiscal cliff�"not because debt is already unbearable, but because the economy is slowing while the cost of debt is accelerating.

The lesson from Sri Lanka is brutally simple: countries do not fall into debt traps in a single day. They slide into them by ignoring warning signals until it is too late.

For Bangladesh, the global bond market turmoil may be that warning signal. The choice now is whether to reform�"or risk becoming the next cautionary tale in South Asia.