Short-term foreign debt falls to $11.07b in February

The private sector's short-term foreign debt continues its downtrend with a decline of $180 million in February alone.

The decline is owing to various reasons such as increased dollar interest rates, concerns over currency devaluation, and disinterest of foreign banks to give out loans.

According to Bangladesh Bank data, private sector short-term foreign debt plummeted to $11.07 billion in February, falling by over $700 million in the first two months of the year. 

In other words, it has decreased by $5.34 billion or 33% in the span of 14 months as foreign debt was $16.42 billion at the end of 2022.

Private sector short-term foreign debt is calculated by adding the outstanding figure of buyers credit, deferred payment, short-term loan, foreign back to back LC and other short-term debt liabilities.

The central bank said that buyers' credit has decreased the most among short-term foreign debt, dropping from $9.57 billion at the end of 2022 to $5.77 billion in February 2024. In February, it fell by $194 million.

Buyer's credit is a short-term loan to an importer by an overseas lender for the purchase of goods or services. An export finance agency guarantees the loan, mitigating the risk for the exporter. Buyer's credit allows the buyer, or the importer, to borrow at rates lower than what would be available domestically.

According to several bank policymakers, the decline in buyers' credit is due to multiple factors, including Bangladesh's diminished reserves, delayed payments amidst the dollar crisis, and reduced reliance on domestic banks for lending. European banks, in particular, are exhibiting caution in extending such short-term loans.

According to the rules of the central bank, the maximum Secured Overnight Financing Rate (SOFR) plus 3.5% interest against foreign loans has to be paid. SOFR, now exceeding 5.5%, compared to its previous levels below 1%, has significantly increased international interest rates, contributing to higher interest costs for borrowers. This, coupled with additional charges imposed by foreign banks, has deterred potential borrowers, resulting in decreased demand for loans.

The SOFR is a benchmark interest rate for dollar-denominated derivatives and loans that replaces the London Interbank Offered Rate.

The depreciation of the local currency, as indicated by a 31% decline according to the central bank data, has further fueled concerns among traders regarding future devaluation in the next 6 months. Consequently, traders are opting for sight payments over loans to mitigate exchange rate risks and potential losses.

Syed Mahbubur Rahman, managing director and chief executive officer of Mutual Trust Bank, told The Business Standard, "If the customers take a loan now, they are not sure how much they will have to pay after 6 months because several needs to be taken into consideration including exchange rate and interest rate risk."

"As a result, the allure of new loans has diminished, contributing to the ongoing decline in short-term foreign debt," he added.