Foreign debt of the private sector reverses the downward trend

Bangladesh’s private sector short-term foreign debt improved in April for the first time in over a year, providing a much-needed boost to foreign exchange reserves.

According to Bangladesh Bank data, private sector short-term external debt reached $11.10 billion in April, up $60 million from $11.04 billion in March.

Foreign debt of the private sector has been declining since the beginning of 2023 and this trend has continued in 2024.

A recent reversal occurred when interest rates in international markets began to fall after central banks cut interest rates or held them steady after lowering inflation. On the other hand, domestic loan rates rose sharply after BB left loan prices in the hands of the market to step up the fight against stubbornly higher inflation.

Thus, local companies and enterprises are once again showing interest in obtaining funds from international sources.

“The turnaround is good news and if the momentum continues, the pressure on reserves will ease and may eventually increase,” said Ahsan H Mansur, executive director of the Bangladesh Institute of Policy Research think tank.

It is generally agreed that the recently introduced exchange rate management system, the so-called crawl peg, and the market interest rate.

Before the latest change, banks set the rate according to BB’s instructions. Similarly, bank lending rates were capped at 9 percent from April 2020 to June last year, after which some flexibility was introduced from July by lifting the cap. It became fully market oriented on May 8.

“If the central bank can properly implement reform initiatives, the huge financial account deficit will also reduce. Ultimately, this will have a positive impact on reserves,” said Mansur, also a former International Monetary Fund (IMF) official).

Reserves stood at $19.21 billion on Wednesday, less than half of the $41 billion recorded in August 2021, according to International Monetary Fund calculations.

The unprecedented decline was one of the key factors in the widening hole in the financial account – the component of the country’s balance of payments that covers liabilities to non-residents and includes direct investment, portfolio investment and reserve assets.

According to BB data, the financial account deficit in the July-March period of the current financial year was $9.26 billion.

Reserves fell by almost $6 billion in January and May this year, with the private sector alone accounting for a $4.5 billion decline, Mansur said, referring to the study.

Since the beginning of 2023, their debt has decreased almost every month as interest rates on the international market have increased. In 2022, the debt was $16.42 billion, which decreased to $11.79 billion.

Previously, the interest rate on foreign loans ranged from 1%. up to 2 percent Currently, it has increased to 8-9 percent.

On the other hand, the interest rate in Bangladesh was 7 to 8 percent before June last year. Since interest rates were released, they have exceeded 14 percent and could rise even higher.

According to BB data, short-term private sector debt from foreign sources increased by 5.45 percent to $1.88 billion in April compared to the previous month. This is much less than in the last two years: it amounted to $25.79 billion in 2023 and $37.25 billion in 2022.

Currently, central banks around the world are either lowering interest rates or keeping them unchanged, which is a positive development for countries where investors withdrew their money from Asian countries at the end of 2021.

The European Central Bank recently cut interest rates, the first cut in almost five years. The central banks of Canada, Switzerland and Sweden have also cut interest rates to lower borrowing costs.

The US Federal Reserve is expected to cut its key interest rate in September and again this year.