Depreciation adds Tk60,000cr payment burden for foreign loan borrowers

The once cheaper foreign loan has now turned into a burden for private sector borrowers as they will have to pay an additional Tk60,000 crore against the total foreign currency loan of $24.3 billion thanks to taka devaluation. 

Back in 2021, when the greenback rate stood at Tk84.8, private borrowers indebted in dollars were staring at a payment of Tk2 lakh crore against their loans. Fast forward to the present day, with the dollar surging to Tk107, and the payment for the same quantum of offshore debt has jumped to Tk2.60 lakh crore.

As if the taka depreciation in the past year was not enough, private borrowers are now grappling with escalating interest rates in the global market. According to a top central bank official, this is deterring them from seeking external loans. 

Data shows that private sector foreign borrowing saw a drop of $1.6 billion during July-December last year, breaking the continuous rising trend of the past six years.

The total external loan in the private sector declined to $24.3 billion at the end of December last year after reaching the record high of $25.9 billion in June that year, according to the Bangladesh Bank data.

Referring to the rising interest rates in the global market and the high devaluation of the taka, the Bangladesh Bank senior executive, who requested anonymity, said it appears that even renewing loans is proving to be a challenge for private borrowers due to the exorbitant rates. 

The effective interest rate for foreign borrowing now stands at 8.30% from 3% to 4% a year ago after the Federal Reserve Bank of America raised the rates multiple times last year. 

When the Fed raises interest rates, it impacts the global interest rates too as central banks have to tighten their monetary tools. The Fed's policy rate is now set to a range of 4.5%-4.75%, up from near zero a year ago.

At present, the interest rate for the foreign loan is 3 months USD Secured Overnight Financing Rate (SOFR) plus 3.5%. The SOFR is nearly 5% now, escalating costs for foreign borrowing above 8% when borrowing from local sources is cheaper at 7% to a maximum of 9%.

In this situation, borrowers are not willing to take foreign loans, which contributes to declining overall foreign currency inflow in the country, taking financial account in the negative territory.

Simply put, the dip in private sector external debt comes at a time when the country is in dire need of foreign currency inflows to replenish its dwindling forex reserve.

In the July-December period of the current fiscal year, the Financial Account turned to a deficit of $1 billion from a nearly $7 billion surplus in the same period of the previous fiscal year, central bank data shows.

Of the total private sector external debt, nearly 68% or $16.4 billion was short-term loans which are risky for the country because borrowers take such short-term loans for three to six months as buyer's credit.

A buyer's credit is a short-term loan by an overseas lender such as a bank or financial institution to an importer by an overseas lender for the purchase of goods or services.

Amid the dollar dearth, private sector borrowers are under huge pressure of making payments on short-term foreign loans, said industry insiders.

The share of medium and long-term debt in the private sector debt was 30% or $7.8 billion in December last year, central bank data shows.

Long-term debt declined by 3.6% in six months from $8 billion in June last year mainly due to a fall in loan inflow from the US – which is the fourth highest creditor country.

The loan from the US declined nearly by 10% to $699 million in December from $776 million in September last year, according to the Bangladesh Bank.

However, loan inflow from the top creditor country China remained stable, rising by 4.5% to $2.3 billion in December last year from $2.2 billion in June of the same year.