Short-term private sector foreign debt fell by $102 million in May due to exchange rate risk

Short-term borrowing by the private sector from foreign sources fell by $102 million in the month as businesses became cautious about borrowing in dollars due to exchange rate risks.

Short-term foreign debt stood at $11.04 billion at the end of May, according to central bank data. The debt rose slightly in April after 11 consecutive months of decline; however, it resumed its downward trend in May.

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

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

“However, the dollar and interest rates are high now, so traders are paying off their foreign debts. For these reasons, many traders are refraining from borrowing foreign currencies in both the short and long term,” he added.

The central bank indicated that short-term external debt began to decline in 2022. In June 2022, the debt stood at $17.76 billion. Since then, it has declined by about $6.72 billion in about two years, leading to a reduction in the country’s foreign exchange reserves.

According to senior officials of several private banks, the central bank increased the value of the dollar by Tk 7 on May 8, making it the biggest one-day devaluation of the taka in the country’s history.

Since then, they say, there have been some signs of stabilization in the dollar market, but traders and bankers remain wary of the long-term value of the dollar. As a result, they are prioritizing paying down rather than taking on new short-term foreign debt.

The bank’s managing director said the value of the local currency has fallen by about 35% in the past two years. This means borrowers now have to pay more to repay dollar loans.

For example, he said, someone who borrowed when the exchange rate was Tk 85 per dollar might have to repay Tk 110 per dollar. This fear of future currency fluctuations discourages entrepreneurs from borrowing.

Mohammad Ali, Managing Director of 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.

“As a result, entrepreneurs took out many loans. However, they later suffered significant losses due to the increase in the dollar exchange rate. These experiences made them afraid of taking out loans in dollars,” he added.

Commenting on the dollar and taka interest rates, this seasoned banker noted that although the dollar interest rate is slightly lower, the risk of currency fluctuations can be avoided by borrowing in taka. For these reasons, entrepreneurs are not very interested in taking out new loans.

Bankers say the current SOFR rate is around 5.3%. Taking out a dollar-denominated loan incurs an additional 3-4% in margins and miscellaneous fees, for a total interest cost of around 9-9.5%. Taka loans, on the other hand, have interest rates of 10 to 14%.

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

“However, this pressure is gradually easing. There were months when traders made payments totaling $700-800 million. So while the $102 million drop is not positive, it is not overly negative either,” he added.

Md Mezbaul Haque, spokesman for Bangladesh Bank, said the country’s gross reserves stood at $21.84 billion as of June 30, as per BPM-6. Net reserves stood at about $16.77 billion, excluding certain short-term liabilities such as Asian Clearing Union payments.