Private short-term foreign loans down $11.5b in 2023. With what effects?

The country's banking sector witnessed a sharp decline of $11.45 billion in short-term foreign loan inflows within the private sector. This led to the widening of the financial account deficit and an increased depletion of the foreign exchange reserve.

According to the latest data released by the Bangladesh Bank on Monday, the cumulative inflow of short-term foreign loans in the private sector amounted to $25.8 billion by the end of December 2023. This figure reflects a 31% decrease compared to the previous year's receipt of $37.25 billion.

The country repaid $31 billion last year, exceeding the received amount by $5.3 billion.

Central bank data shows there was a surplus of $525 million in the inflow of short-term loans compared to repayments in 2022.

Short-term loans refer to funds borrowed by private sector businesses and banks from external sources for a duration not exceeding one year. Importers borrow from foreign lenders, mostly for purchasing capital machinery, under a financial arrangement commonly referred to as "buyer's credit". Banks take short-term trade loans from foreign sources to settle their external payment obligations.

Short-term loan is a component of the financial account which includes buyer's credit, deferred payment, back-to-back foreign letters of credit (LCs) and short-term trade loans.

The increased repayments, coupled with reduced inflows, exerted pressure on the financial account, resulting in a deficit of $2 billion in FY23, marking the first occurrence in the last decade. This contrasts with the surplus of $16.6 billion recorded in FY22.

The substantial deficit in the financial account compelled the central bank to sell dollars from its reserves to fulfil market demands. Consequently, the gross reserves decreased from $26 billion in December 2022 to $19.94 billion at the end of January 2024.

The financial account deficit continued to widen as the inflow of foreign loans remained sluggish amid rising global interest rates which is the main reason for the declining inflow.

Additionally, the imposition of a 20% "withholding tax" on interest payments in the current budget has further increased the cost of foreign loans. The cost of borrowing has now shot up to around 11%.

However, the 20% tax was suspended in December of the previous year until February this year to encourage a greater influx of foreign loans. The Bangladesh Bank recently also raised interest rates for foreign loan borrowing by 50 basis points to 4% plus Secured Overnight Financing Rate (SOFR) to attract foreign investors.

Meanwhile, short-term foreign borrowing by banks decreased to $2.8 billion at the end of December last year from $4.3 billion in January of the same year, according to central bank data.

Such a decline in borrowing forced banks to go for a conservative approach in LC opening for imports. Moreover, banks squeezed foreign currency lending through their offshore unit, which created more scarcity of dollars for importers, said industry insiders.

The high depreciation of the taka also increased the repayment burden on businesses, making them reluctant to borrow from foreign sources.

Bangladesh experienced a 26% depreciation of the taka within a single year in 2022, but this rate slowed down to 2.8% in 2023.

Private sector borrowers who borrowed loans at the exchange rate of Tk105 per dollar at the beginning of last year had to buy dollars for repayment above Tk120 from the market at the end of that year when the official rate rose to Tk110.

The global interest rate is likely to remain high as the Federal Reserve Bank of America is not going to cut interest rates soon.

Federal Reserve Chair Jerome Powell in an interview with media on 4 February said Americans may have to wait beyond March for the central bank to cut interest rates as officials look for more economic data to confirm that inflation is headed down to 2%, Bloomberg reports.

Import curb, high-interest rate behind lower inflow: Experts

Selim RF Hussain, the managing director of BRAC Bank, told TBS, "One factor contributing to the reduction in short-term foreign loans is import restrictions, leading to a decrease in our buyers' credit through foreign banks."

Additionally, he mentioned that the credit line limits with foreign banks have diminished due to the downgrading of our country's banking sector by international rating agencies, serving as another contributing factor.

The head of the treasury department of a private bank told TBS that another significant factor contributing to the decline in our foreign loans is the surge in international interest rates. 

"At the beginning of 2022, foreign loans to traders carried only a 4% interest rate, while local bank's rate was at 9%. The SOFR rate remained below 1% throughout most of 2022, allowing banks to charge an additional 3%," he said.

"Currently, the SOFR rate has exceeded 5.5%, and banks can impose an additional 4% charge. On top of it, the government has imposed a 20% tax on interest, collectively diminishing the influx of foreign loans," he added.

A state-owned bank's MD, on condition of anonymity, told TBS that businesses have grown exceedingly cautious, given the approximately 30% increase in the dollar rate over the last year and a half.

"My bank typically gets about $30 million in foreign loans from international banks for LC payments annually. However, due to the ongoing uncertainty in the dollar rate, we are refraining from utilising this credit facility," he said.

"One of the reasons for reduced foreign loans is our low demand. Besides, credit rating downgrades also impacted the loan inflow," the MD added.

Repayment pressure eased

Despite the decrease in the influx of foreign loans, increased repayments alleviated pressure, as the monthly repayment amount decreased significantly, thereby contributing to a slowdown in exchange rate fluctuations.

The monthly repayment of private sector short-term loans declined to $2.2 billion at the end of December last year from $3.2 billion in January of the same year, central bank data shows.

Reduction in repayment pressure helped to slow down exchange rate fluctuation in the last one and half months, settling down the LC rate for importers at Tk122 to Tk123. As the expectation of a further rise in dollar price has reversed, remittance inflow also improved to above $2 billion in January which dipped to $1.3 billion in September last year.

During the unveiling of the monetary policy for the second half of FY24, Bangladesh Bank Governor Abdur Rouf Talukder said the major portion of the loans were paid off, and the monthly external loan payments will come down to $100-$200 million soon. As a result, the reserve will rebound in the coming days.

He said the current account balance turned into a surplus thanks to controlled imports. Though controlled imports caused suffering for many businesses, the central bank had no other option.

The governor also said there is no alternative than to increase dollar inflow. Banks are encouraged to increase their credit line with foreign lenders to improve their dollar liquidity.