Pvt sector's foreign loan rises by $454m on stable exchange rate, reserve in three months

Infographics: TBS

Short-term foreign debt in the country's private sector increased by $454 million in the three months from February to April this year, driven by a confluence of factors including the advantage of lower interest rates on dollar-denominated loans compared to taka, stable foreign exchange reserves, and reduced exchange rate volatility.

According to central bank data, the outstanding short-term foreign debt of the private sector stood at $9.8 billion at the end of January this year, marking its lowest point in the past four years. However, the trend reversed from February, with the outstanding debt reaching $10.25 billion by the end of April. This represents a 4.59% increase compared to January.

Mohammad Ali, managing director and CEO of Pubali Bank, explained the surge to TBS, stating that there is a growing tendency among clients to open UPAS LCs (Usance Payable At Sight Letter of Credit) for raw material imports and to opt for Buyer's Credit.

He attributed this to several reasons: "Firstly, our balance of payments' current account balance has improved; secondly, the exchange rate is somewhat stable; thirdly, inflation has decreased to single digits; and fourthly, taking loans in dollars rather than taka incurs lower interest payments."

He continued, "Overall, our economic indicators are moving into a better position compared to before. Furthermore, our credibility abroad has increased due to the published data, leading foreign banks to now offer loans to our clients."

Elaborating on the interest rate advantage, Ali explained that international debts or loans typically incur a maximum interest rate of 8%, which includes the Secured Overnight Financing Rate (SOFR) plus a premium of 2.5-3%. In contrast, the interest rate on taka loans in Bangladesh is around 13%. This translates to a gain of approximately 5% when borrowing in foreign currency.

An analysis of central bank data shows that before January this year, the private sector's short-term foreign debt was lower only in December 2020, at $9.2 billion. After that, it consistently increased, reaching approximately $15.46 billion by the end of 2021, a nearly $6 billion rise within a year. 

By December 2022, the outstanding short-term foreign debt stood at $16.42 billion. However, it saw a monthly decline thereafter, with a $2.3 billion reduction in outstanding debt during the January-March quarter of 2023. Compared to April 2024, the outstanding debt for April this year has decreased by approximately $890 million.

As the dollar exchange rate began to climb in 2023, businesses rushed to repay dollar loans to avoid risks from exchange rate volatilities. The foreign debt stocks then fell to $11.79 billion by December 2023 from $16.42 billion of a year ago. However, the trend went upward since February this year, with short-term foreign debt stocks reaching $10.16 billion at the end of February, according to the central bank data.

The Scrutiny Committee on Foreign Loan and Supplier's Credit, led by the central bank governor, on 21 May approved two new loan proposals for over $20 million. It also approved restructuring of $988 million and gave retrospective approval for $315m loans.

Conversations with senior officials from several banks indicate that continuous declines in the country's reserves over the past two years, before the interim government took office, led to a deficit of trust among foreign clients and banks towards Bangladesh. This confidence gap was further aggravated by several international organisations issuing negative country ratings for Bangladesh, resulting in a consistent decline in private sector short-term foreign debt.

However, the country's economic indicators are gradually returning to a positive trend. Notably, according to BPM6, Bangladesh's forex reserves have consistently remained above $20 billion for about the past year. These improvements are contributing to increased trust from foreign banks.

The central bank figures also show that Deferred Payment Outstanding stood at $622 million at the end of April 2025, compared to $644 million at the end of January 2024.

The most significant increase in short-term foreign debt has been in Buyer's Credit. This rose from $5.08 billion in January this year to $5.53 billion by the end of April, an increase of approximately $443 million in three months. Buyer's Credit typically involves a Bangladeshi exporter taking a loan from their buyer against future export orders.