Increasing LIBOR rate and the appreciation of the greenback against the taka are putting pressure on Bangladeshi businesses that borrowed from foreign sources to meet their needs, according to a report of the Bangladesh Institute of Bank Management.
If these pressures cause the exchange rate to depreciate further the private sector debt will become costlier to service, said the report that will be unveiled today.
Most of the borrowers are importers, meaning they have no source of foreign currency earnings to absorb the pressure.
Between 2013 and 2017, the private sector's commercial borrowing from external sources almost trebled, according to data from the Bangladesh Bank.
Last year, the private sector borrowed $11.34 billion from abroad, in contrast to $4 billion in 2013.
The interest rate on foreign loans is tagged with the London interbank offered rate (LIBOR), the global standard interest rate. Typically, the interest rates are LIBOR plus 3-4 percent.
The three-month LIBOR rate, which mostly remained below 1 percent for the best part of last decade, hit a nine-year high of 2.32 percent, meaning the local borrowers will have to pay about 2 percentage points more.
Moreover, the appreciation of the dollar -- from Tk 78 to Tk 85 in the last one year -- has also created an additional pressure on borrowers.
“Exporters with own source of the dollar will not be affected by the exchange rate, but they have to pay an additional 2 percentage points for the rise in LIBOR,” said Shafiqul Alam, managing director of Jamuna Bank.
Abdus Salam Murshedy, managing director of Envoy Textiles, said they preserve adequate dollar for repayment of foreign currency loans, but the case is different for others.
“Only 5 percent borrowers have the capacity like us. The remaining 95 percent borrowers are likely to feel the pinch of the LIBOR rate hike and the exchange rate,” he added.
The trend of private sector borrowing from external sources is relatively new in Bangladesh.
It was highly controlled by the central bank until 2013 when the regulator allowed off-shore banking units to undertake buyer's credit.c
Earlier, the government took foreign currency loans. For instance, in 2006 the government accounted for nearly 94 percent of these loans, the BIBM report said.
But the trend changed from 2013 and as of September 2017, the ratio of foreign loans of the private sector to the public sector is 24:76. Bangladeshi entrepreneurs have borrowed the most from Germany, the UK, Singapore, China and Japan.
Borrowing from the UK and Germany took place for capital machinery purchases for the power and garment sectors, according to the Bangladesh Investment Development Authority.