The amount of foreign loans benefiting the private sector in Bangladesh has been growing rapidly since 2020, creating a major headache for the country’s economy at a time when its foreign exchange reserves are collapsing.
Various private companies in the country took out foreign loans totaling $25.95 billion in June this year, up 39 percent year-on-year, according to Bangladesh Bank data.
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In addition, short-term external debt accounted for 68.4% of all foreign borrowing contracted by the private sector through June. The repayment tenure for the majority of these short term loans is a maximum of three years.
Experts say the repayment of short-term foreign loans will put additional pressure on foreign exchange reserves, which have been under pressure due to skyrocketing import payments since the last quarter of the 2021-22 financial year.
Reserves now stand at less than $38 billion compared to more than $46 billion a year ago.
Companies have mainly taken on large borrowings abroad during the pandemic, when LIBOR and other benchmark rates fell below 1% in the global market. Local companies were allowed to borrow abroad at the benchmark plus rate of 3.5% set by the Bangladesh Bank.
But things are completely different now, as benchmark rates have soared to over 3% in the overseas market, in line with the recovery of the global economy from the business slowdown caused by Covid-19.
Ahsan H Mansur, executive director of the Bangladesh Policy Research Institute, said if companies fail to repay loans on time, the central bank will have to provide them with foreign currency support.
In such a situation, foreign exchange reserves will face a deep crisis.
“Thus, companies should try to negotiate with foreign lenders so that they can repay loans at a convenient time when the current volatility ends,” he said.
The continuous fluctuation of the exchange rate has also emerged as a big challenge for businesses, creating unease in the private sector, Mansur added.
The taka has lost 25% of its value on the interbank platform over the past year. As such, the taka exchange rate stood at Tk 106.75 for every US dollar yesterday, compared to Tk 85.25 a year ago.
Mansur, also a former head of the International Monetary Fund, went on to say that the rise in global interest rates as well as the depreciation of the local currency against the US dollar has resulted in many inconveniences for borrowers.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, says companies able to raise funds from different multinational sources will not face major problems despite the current stress.
“But if companies are handling greenbacks from the local market in exchange for taka, they will face a setback to resolve the pressure,” he said.
The country’s power, gas and oil sectors took in foreign loans amounting to $4.33 billion in June, the highest of any section of the private sector.
This indicates that the power sector will have to repay its debts by raising funds from local sources as it generally does not export anything, Rahman added.
Mustafizur Rahman, a senior fellow at the Center for Policy Dialogue, said the central bank should strengthen its oversight of foreign lending to protect the country’s reserves from further depletion.
“If a borrower defaults, the image of the whole country will be tarnished,” he added.
Companies had previously taken out loans without thinking about the risks they might face in the foreseeable future, but the situation has changed, he said.
“Thus, the central bank should look at who takes out the loans and for what purpose in order to avoid any misuse of these funds,” Rahman said.
The disruption of the global supply chain resulting from the ongoing Russian-Ukrainian war has mainly created undue pressure on the country’s external sector.
The disruption had pushed up commodity prices on the world market, which subsequently pushed up Bangladesh’s import payments.
The country paid a record $82.49 billion for imports as it earned $49.2 billion from shipping goods overseas in the last fiscal year, driving up the trade deficit at $33.2 billion.