Short-term foreign debt falls $500m in Aug, mounting pressure on reserves 

Short-term foreign debt to the private sector dropped by $500 million in August alone due to hikes in international interest rates and increased repayment pressure, eventually mounting pressure on the country's forex reserves.

According to data from the Bangladesh Bank, the short-term debt taken by the country's private sector from various foreign banks and institutions decreased by about $3.58 billion over the span of eight months from $16.42 billion at the end of December.

A senior central bank official told The Business Standard, "There has been a big decline in our forex reserves in the last eight months. One of the reasons for this is the reduction in short-term foreign loans to the private sector. The short-term loans are used for imports.

"Currently, the demand for these loans is also decreasing due to the drop in imports. Also, last September saw a tendency to make payments more than get new loans."

According to the central bank, the country's reserves have decreased by $2 billion in a span of just one month from $23.09 billion at the end of August.

When asked about the reasons behind the drop in short-term foreign debt, bankers attributed it to three main factors.

Firstly, more than 8.5% interest has to be paid for these short-term loans. According to the central bank, there is a rule to pay the maximum Secured Overnight Financing Rate (SOFR) plus 3.5% interest on foreign loans. SOFR is now over 5%. In 2020, it was below 1%. That is, the interest rate in the international market has increased several times. This is one of the reasons why Bangladeshi borrowers are not much interested in taking new loans. They want to pay off the old loans.

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

Secondly, a 20% tax is payable on foreign loan interest. Interest rates on loans have already increased. Taxes add an extra 1.7%, making the net interest over 10.2%. Businessmen are not interested in taking loans with so much interest.

Thirdly, there is continuous currency devaluation. The taka has depreciated by around 13% in the last one year. As a result, for those who took the loan one year ago, apart from the interest, the cost has gone up a lot due to devaluation. Currently, the dollar crisis is going on, and as a result, the value of the currency may decrease further. All in all, the businessmen have reduced their borrowing due to the increased risk of deterioration of the business situation.

Syed Mahbubur Rahman, managing director at Mutual Trust Bank, said apart from the demand for loans, their supply is also not as available as before.

Explaining the matter, he told TBS, "Many foreign banks do not want to give us loans as before because international organisations have degraded our credit ratings. As a result, new loan disbursements are less, compared to the fact that we have to pay more dues."

According to central bank data, the lowest short-term loans were received in August in the last six months. New loans for the entire month were $1.85 billion. A smaller amount of $1.83 billion in loans came in February this year.

In contrast, Bangladeshi businessmen made loan repayments of $2.42 billion in August, including interest.

The central bank said the country's businesses received a total of $17.82 billion from January to August this year, when they repaid $21.79 billion, including interest.