Pvt sector’s foreign borrowing: Waning appetite to put pressure on reserves

The private sector's shrinking appetite for foreign loans is likely to put further pressure on the country's strained dollar stockpile, according to bankers and experts.

At the end of March, the private sector's external debt obligations stood at $22.18 billion, down from $24.31 billion recorded three months earlier, according to data from the Bangladesh Bank.

Short-term loans, which have a maturity of three to six months, account for 63.5 percent of the sum.

But thanks to the strained dollar stockpile, sharp devaluation of the local currency and higher interest rates, short-term loans are being discouraged by the central bank.

"Those are constantly rolled over -- new credit would come in and that would help pay off the old amount," said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

Now, the repayment for the private sector's foreign loans would have to come from the reserves.

"This will put further pressure on the reserves," said Zahid Hussain, a former lead economist of the World Bank's Dhaka office.

As of July 12, gross foreign reserves stood at $23.57 billion, enough to cover about three months' import bills, according to data from the BB.

Compounding matters is the private sector's jump in foreign loans amid the pandemic thanks to the low interest rates in much of the Western world.

At the end of 2020, the private sector's external debt obligations stood at $14.76 billion. Over the next year and a half, it hit a peak of $25.95 billion.

It began to decline in the third quarter of 2022 as central banks around the world started to increase interest rates to tame inflation.

Many of those loans are set to start repayment soon.

"Difficult times lie ahead -- how the government would manage the dues next year has become a critical issue," said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.

Mansur, also a former chairman of Brac Bank, is puzzled why the private sector is being discouraged from taking short-term foreign loans.

"There is not much to worry about the private sector. Only those who have the ability to pay foreign loans get it."

In fact, the private sector's increasing foreign loans was a positive sign, said Mansur, a former economist of the International Monetary Fund.

At the turn of the century, the private sector's foreign debt was about $1 billion and it hovered around that mark until 2012, when it stood at $1.82 billion. It grew steadily in the following years and then got a massive jump during the pandemic.

"The amount is nothing unusual. We jumped out of a well and into a pond. We want to swim in the river and the sea. It is a good sign as before, no one would lend to us," Mansur said.

Rahman says getting foreign loans made more sense for companies.

"The interest rate was about 1 percent whereas at home it was 9 percent. Between 2012 and 2021, the devaluation of the taka was not more than 1-1.5 percent. It was much safer and cheaper to borrow from abroad."

In the past year, the taka depreciated by about 16 percent to Tk 108.4.

Companies can get short-term, medium-term and long-term foreign loans. Banks mostly arrange the short-term foreign loans and they are liable should the client default on the payments. For medium-term and long-term loans, approval must be taken from the Bangladesh Investment Development Authority; the chairman of the loan approval committee is the BB governor.

He says exporters would not face much trouble in servicing their foreign loans.

"Those who have a revenue source in dollar, they would not face any problem. But those who earn in taka and have to buy dollars to service the debt would take a big hit and face much problems," said Rahman, a former chairman of the Association of Bankers, Bangladesh.