Foreign loans now a headache for pvt sector

Foreign loans, once considered cheap, have now become a headache for the private sector due to an unprecedented slump in the taka’s value against the US dollar along with a jump in interest rates.

Earlier, short-term foreign credit in the private sector saw a sharp rise in Bangladesh after the start of the coronavirus pandemic, when stagnant investment brought the interest rate to nearly zero percent.

But the borrowers are now under immense pressure to refund the loans as they have to spend Tk 23 more to buy a dollar now, according to bankers and entrepreneurs.

The dollar price has now climbed to as high as Tk 109 in the local market, which was only Tk 86 early last year.

Meanwhile, the interest rate on short-term foreign credits increased more than threefold to over 9 percent which was less than 3 percent even before the start of the Russia-Ukraine war.

No one is sure whether the taka-dollar exchange rate or the interest rate will remain stable at this level or not.

The increased cost of foreign loans is keeping a section of businessmen away from such loans, while many international banks have lowered credit lines for Bangladeshi banks after the fall in the country’s credit rating by international credit rating agencies.

As a result, the flow of new loans has decreased, but previous loan repayment has increased, creating a new concern for the local dollar market.

"Interest rates on foreign loans and the necessity of the dollar dropped during the coronavirus pandemic when a stagnant situation prevailed in economic activities. Then, many countries stepped up loan repayment, whereas the situation was completely different in Bangladesh," said the chief of the Treasury Division of a private bank seeking not to be named.

At that time, Bangladesh Bank had repeatedly enhanced loan repayment periods and simplified loan repayment conditions as part of its policy support.

For this reason, local businessmen rushed for foreign loans because of their low-interest rates and simple conditions. The central bank also increased its foreign reserve by buying dollars from the market, the banker explained.

Bangladesh’s foreign currency reserves surged to a record $48 billion in August 2021 from $32 billion in early 2020.

But the fresh global turmoil has squeezed the overseas loan inflow for Bangladeshi businesses, along with increasing existing loan repayment pressure and lingering dollar market volatility.

Former lead economist at the World Bank’s Dhaka office Dr. Zahid Hussain also believes that foreign private credit surged during the pandemic because of low demand for investment across the globe and the low cost of the loans.

"The dollar rate had been kept stable in a place for a long time, for which local entrepreneurs had taken more foreign loans compared to domestic sources. Now, both interest rates and exchange rates have risen manifold," the economist said.

He believes that the pressure on the dollar market is not easing even after the fall in imports because Moody's lowering of the credit rating for Bangladesh has narrowed the scope of such credits for Bangladesh entrepreneurs.

At this moment, the central bank has to put more emphasis on increasing remittance inflow as well as export earnings, he advised.

The central bank’s first step should be making the dollar rate fully market-based, which he thinks will create competition between formal and informal sectors.

This may push up the dollar price further to Tk 113–114, but eventually it will help improve the situation through raising inward remittances and export earnings through formal channels, Dr. Zahid Hussain added.

"It will be very tough for the country to come out of the dollar crisis if the exchange rate is not made fully market based," the economist pointed out.

Short-term loans in the private sector declined by 3.67 billion, or 26.07 percent, to $14.08 billion at the end of May this year from $17.76 billion in June last year, Bangladesh Bank data show.

But the loans jumped by 69.28 percent to $15.46 billion at the end of 2021, compared to $9.13 billion at the end of 2020.

The country has never seen such a rise in foreign private loans. Similarly, the recent fall is also unusual.

Apart from the short-term loans, there are also $8.10 billion in mid and long-term foreign loans in the country’s private sector. In June last year, it remained higher at $8.19 billion, but much lower at $6.89 billion a year earlier. Bankers had then raised questions about the abrupt rise in foreign loans, but the central bank did not try that much to curb those loans.

Rather, it simplified loan conditions along with extending repayment periods.

Bankers say that the drop in imports, coupled with the rise in inward remittances and soaring export proceeds, has helped narrow the current account deficit as well as the external trade deficit.

But a wide gap has been created in the financial account because of the fall in overseas loans and investment, they said, also suggesting government initiative alongside the banks to improve the situation.