Private sector external credit falls below $10b after 4 years

Infographic: TBS

The country's outstanding private sector short-term foreign debt has fallen below $10 billion for the first time in nearly four years, according to data from the central bank.

As of January this year, the outstanding debt stood at $9.8 billion, down from a peak of $16.42 billion in December 2022. The last time the outstanding debt was lower was in December 2020, when it was $9.2 billion.

Since then, the private sector's short-term foreign debt has been increasing steadily. At the end of 2021, it reached $15.46 billion, an increase of approximately $6 billion within a year.

Senior bankers attribute the decrease of the outstanding private sector's short-term foreign debt to exchange rate volatility, a decline in the country's credit rating, and foreign banks' reduction of short-term loan limits.

While talking to TBS, they explained that the country's reserves have been consistently declining over the past two years before the interim government took office. As a result, a trust deficit has emerged among foreign clients and banks regarding our country.

Additionally, the downgrade of Bangladesh's country rating by several international agencies has further deepened this lack of confidence. Consequently, the private sector's short-term foreign debt has been steadily declining.

Central bank data shows that in December 2022, the private sector's outstanding short-term foreign debt stood at $16.42 billion. However, since then, the outstanding amount has declined almost every month. 

In the three months from January to March 2023, the outstanding debt decreased by $2.3 billion. Compared to January 2024, the outstanding debt has dropped by approximately $1.45 billion over the past year up to January this year.

A deputy managing director of a leading private bank said, "We are no longer receiving the same credit limits from foreign suppliers as before. As a result, it is not possible to open deferred letters of credit (LCs) in large volumes like before.

"Although there is a gain in interest rates, uncertainty regarding the exchange rate has also led to a slight decline in the demand for opening deferred LCs among importers."

Explaining the interest rate gain, the senior banker said, "Currently, for various international debts or loans, an interest rate of around 8% has to be paid by adding a premium to the SOFR (Secured Overnight Financing Rate) rate. 

"On the other hand, the interest rate on loans in local currency is around 12%. Based on this, taking a loan in foreign currency offers a gain of approximately 4%. However, due to exchange rate volatility, customers are less inclined to take advantage of this gain."

According to central bank data, as of the end of January 2025, deferred payment outstanding stood at $643 million, compared to $972 million at the end of January 2024.  

The most significant decline in short-term foreign debt has been in buyer's credit. It dropped from $5.97 billion in January 2024 to $5.08 billion by the end of January this year, marking a decrease of approximately $900 million over the year.  

Typically, a Bangladeshi exporter takes a loan against a future export order from their buyer.

Long-term loans drop

Bankers say buyers are no longer providing long-term loans as they used to. Previously, such loans were available for one year, but now the tenure has been reduced to six months.

The managing director of another private bank said many banks now have reduced capacity to open UPAS LCs (usance payable at sight letters of credit) and facilitate buyer's credit for their customers. 

"International banks have also lowered the credit limits for almost all banks in Bangladesh, and foreign transactions have declined for many local banks. Some foreign banks are even avoiding loan exposure with any Bangladeshi banks. As a result, overall buyer's credit is decreasing," he said.

A similar trend is occurring with short-term loans as well. Over the past year, short-term loan outstanding has decreased by approximately $750 million, reaching $2.05 billion by the end of January 2025.

According to bankers, outstanding amounts declined as foreign banks reduced short-term loan disbursements compared to before.

However, the central bank reports that due to strong export growth, back-to-back LCs have increased by approximately $340 million over the past year.

Sohail RK Hussain, managing director of Bank Asia, said, "When there is exchange rate volatility, importers tend to focus more on opening sight LCs. This is because, in the case of deferred LCs, there is both exchange rate risk and the need to pay confirmation charges. 

"In other words, exchange rate instability is one of the key reasons for the reduction in the private sector's short-term foreign debt."

Commenting that the decrease in international interest rates may slightly encourage an increase in the private sector's short-term foreign debt, he said the SOFR rate is now somewhat lower than before. "However, customers seek a stable dollar market to build confidence."

Sohail added that remittance growth is currently very good, and exports are also performing well. "If these two sectors continue to do well, pressure on the exchange rate will ease."

However, this experienced banker also mentioned that no significant changes are expected in the continuity of the private sector's short-term foreign debt in the next 4-5 months.

The central bank data shows although the foreign exchange reserves (as per BPM6) did not increase over the past year, they also did not decrease. At the end of January 2024, the country's forex reserves were $19.96 billion, and by the end of January this year, the reserves remained the same at $19.96 billion.