Private sector short-term foreign debt rises $355 million in a month
The increase in short-term foreign debt is mainly due to the exchange rate stability and a growing difference between international and local interest rates
After a continuous seven-month decline, private sector short-term foreign debt returned to an upward trend in February, driven by signs of exchange rate stability and a widening gap between international and local interest rates.
According to data from the central bank, as of the end of February this year, the outstanding amount of private sector short-term foreign debt stood at $10.16 billion—an increase by $355 million from the previous month.
At the end of January, the outstanding amount was $9.8 billion. Prior to this, the figure had been declining for almost seven months.
Describing the rise as a positive economic movement, Selim RF Hussain, managing director and CEO of BRAC Bank and chairman of The Association of Bankers, Bangladesh (ABB), told The Business Standard, "Our trade volume and exports are increasing. At the same time, our foreign exchange reserves have grown compared to before, and exchange rate stability is improving.
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"Imports have also started to rise, which has led to a slight increase in short-term debt. Overall, this is good for the economy."
Syed Mahbubur Rahman, Managing Director and CEO of Mutual Trust Bank, told TBS that due to policy rate cuts in many countries, the interest rates on international loans have decreased slightly.
"In addition, signs of stability in the dollar exchange rate have been visible for the past two months. As a result, businesses are now somewhat more confident in taking dollar-denominated loans compared to before," he explained.
An analysis of central bank data shows that as the exchange rate began to rise in 2023, it started impacting private sector short-term foreign debt. Businesses began to repay their dollar loans more actively during that time, as the rising dollar rate increased exchange rate losses and risks.
Consequently, the outstanding amount dropped from $16.42 billion in December 2022 to $11.79 billion in December 2023—a decline over one year.
At the beginning of 2024, the outstanding amount fluctuated. But since June of last year, the debt had been steadily decreasing, largely due to the fall of the Awami League government in August following mass protests and the subsequent deterioration of the political and law-and-order situation, as well as exchange rate instability.
Discussions with several policymakers from private banks reveal that the difference between international and local interest rates has increased significantly.
On one hand, the cost of taking out dollar loans is decreasing. Currently, interest payments for dollar loans go up to a maximum of 9%, largely due to a drop in the Secured Overnight Financing Rate (SOFR), which is considered the base rate for dollar loans.
On the other hand, to control inflation, the Bangladesh Bank has raised the policy rate multiple times to 10%, meaning borrowers now pay around 14% interest for local currency loans—which previously was about 9%.
In other words, the interest rate gap between local and foreign currency loans has widened to 5%, making dollar loans cheaper for businesses.
An analysis of central bank data shows that in February, loans taken via Buyer's Credit increased by $209 million compared to January. Additionally, short-term loans rose by about $101 million.
Syed Mahbubur Rahman noted that although imports of capital machinery have declined, overall imports in the country have been increasing in recent months. Correspondingly, loans against these imports are also increasing. Meanwhile, as exchange rate risk diminishes, many businesses are extending the maturity dates of their previously taken loans.
Commenting on Bangladesh's country rating by international rating agencies, Syed Mahbubur Rahman said that improvement in this area is necessary. He emphasised the need to bring local law and order under better control, warning that without this, foreign loan access and new investments will continue to face obstacles.
The central bank also reported that, as of the end of February, outstanding loans from countries such as Singapore, Hong Kong, Germany, and the UK have increased compared to January. In contrast, outstanding loans from countries like the UAE, China, and the USA have decreased.
