Short-term pvt sector foreign debt dips $102m in May due to exchange rate risks

Short-term private sector borrowing from foreign sources has decreased by $102 million within a month as businesses are cautious about taking loans in dollars amid exchange rate risks.

According to central bank data, short-term foreign debt stood at $11.04 billion at the end of May. This debt saw a slight increase in April after 11 consecutive months of decline; however, it returned to its downward trend in May.

In the first five months of 2024, this debt decreased by approximately $751 million compared to December 2023.

When asked why the debt is decreasing, Selim RF Hussain, chairman of the Association of Bankers, Bangladesh and managing director of BRAC Bank, told The Business Standard that a reduction of $100 million in a month is not unusual.

Private sector short-term foreign debt rises in April after 10-month dip

"However, dollar and interest rates are high now, so businessmen are paying off their foreign debt. Due to these reasons, many traders are refraining from borrowing foreign currency in both the short and long term," he added.

The central bank indicated that short-term foreign debt had begun decreasing in 2022. In June 2022, this debt stood at $17.76 billion. Since then, it has decreased by approximately $6.72 billion over a span of about two years, leading to a reduction in the country's forex reserves.

The central bank raised the dollar by Tk7 on 8 May, marking the highest one-day devaluation of the taka in the country's history, according to senior officials of several private banks.

Since then, they said, some signs of stability have been observed in the dollar market, but traders and bankers remain apprehensive about the long-term dollar price. As a result, they are prioritising repayment over taking on new short-term foreign debt.

The managing director of a bank said the value of the local currency has depreciated by approximately 35% in the last two years. This means that borrowers now have to pay more to repay loans in dollars.

For instance, he said, someone who borrowed when the exchange rate was Tk85 per dollar might find themselves paying back at Tk110 per dollar. This fear of future currency fluctuations is discouraging businessmen from taking out loans.

Mohammad Ali, managing director at Pubali Bank, told TBS that before the Covid-19 pandemic, the Secured Overnight Financing Rate (SOFR), which is considered the dollar interest rate in the international market, was very low.

"Consequently, businessmen took out numerous loans. However, they later incurred significant losses due to the increase in the dollar rate. These experiences have instilled fear among them about taking loans in dollars," he added.

Commenting on the interest rates of the dollar and taka, this seasoned banker noted that while the dollar interest rate is slightly lower, the risk of exchange rate fluctuations can be avoided by borrowing in taka. Due to these reasons, businessmen are not showing much interest in taking out new loans.

Bankers say currently the SOFR rate is around 5.3%. Taking a dollar-denominated loan incurs an additional 3-4% cost in terms of margins and miscellaneous charges, bringing the total interest cost to around 9-9.5%. In contrast, loans taken in taka carry interest rates ranging from 10-14%.

A senior official of the central bank said one reason for the decline in the country's forex reserves over the past two years is the reduction in short-term foreign debt.

"However, this pressure is gradually easing. There have been months when traders have made debt payments totalling $700-800 million. Therefore, while the $102 million decrease is not positive, it is not excessively negative either," he added.

Md Mezbaul Haque, spokesperson for the Bangladesh Bank, said the country's gross reserves were $21.84 billion according to BPM-6 on 30 June. Net reserves stood at around $16.77 billion, excluding certain short-term liabilities such as Asian Clearing Union payments.