Private sector short-term foreign debt rises in April after 10-month dip
Private sector short-term foreign debt increased slightly in April after ending a continuous 10-month decline, driven by a surge in the local currency lending rate.
According to Bangladesh Bank data, short-term foreign debt stood at $11.1 billion at the end of April, increasing by $60 million from March but decreasing by around $690 million compared to December 2023.
Starting in June 2022 at $17.76 billion, short-term foreign debt has decreased by around $6.5 billion over about two years, significantly depleting the country's forex reserves.
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Senior officials at several private banks said there has been some stabilisation in the dollar market since the central bank increased the dollar rate by Tk7 a month ago.
Consequently, banks and customers are increasing deferred LCs, albeit on a small scale. They are also taking some short-term loans, which has halted the downward trend of short-term foreign debt in April, they added.
Ahsan H Mansur, a former IMF economist, told TBS the increase is definitely positive in the current economic context.
He said, "Dollar loans are increasing mainly due to the increase in the interest rate on loans in the local currency. A few months ago, when interest rates on loans in taka were capped it was lower than that on dollar loans.
"The removal of the cap has changed this situation. The dollar rate is heading towards stability in the dollar's interbank market as the taka interest rate increases. However, since the market rate of the dollar is not executed here, there is not much buying and selling."
A deputy MD of a private bank said banks are currently charging 14-15% interest on loans in taka, whereas it was stuck at 9% earlier. Conversely, less interest has to be paid when taking loans in dollars.
As an example, he explained that currently, the SOFR, known as the dollar benchmark interest rate in the international market, is around 5.3%. Taking a dollar loan incurs an additional 3-4% along with margins and miscellaneous charges. So, borrowing in dollars currently costs about 9.5% interest, which is cheaper than borrowing in taka.
However, in taking a loan in dollars, borrowers have to bear the risk of taka devaluation, as noted by this experienced banker. He said the taka has devalued by about 35% in the last two years. Consequently, borrowers must allocate more funds to repay loans in dollars, prompting caution when taking on new loans.
Ahsan H Mansur said if the private sector increases the short-term loan, it will positively affect the Balance of Payment (BOP). Increasing short-term loans will reduce the financial account deficit to some extent.
