The government has decided to utilise foreign exchange reserves to provide loans to importers. Of course, it is because that the forex reserve remains far above the minimum international requirement. Foreign exchange reserves reached a comfortable level in July 2019. This satisfactory situation has prompted the authorities to find out viable options to invest foreign currency reserves for the country's interest.
As per the report, the central bank has drafted a policy to use the foreign exchange reserves to provide short-term loans mainly to importers of capital machinery and industrial raw materials. There is no doubt that this will help industrialists in setting up new industries in the country. It has been learnt that the central bank will take the initiative to disburse foreign currency loans through commercial banks after the approval of the draft policy.Local banks have been performing this duty through their offshore banking windows. In doing so, they borrow foreign currency from abroad and, as a result, continue to create a debt burden on the economy. In case the debt of the overseas lender goes beyond control, offshore banking is likely to be in a mess. The step of the central bank will hopefully help eliminate this problem.
According to the draft policy, the interest will be fixed as per the Euro Inter-Bank Offer Rate (EIBOR) with an additional 2.5 per cent interest to it. Thus, the importers will receive loans at 2.5 per cent interest for a maximum period of one year. This is a good initiative to utilise the excess foreign currency reserves.
However, as we know that lending of the national asset to local entrepreneurs is a new concept; the benefit of this new policy will largely depend on how efficiently this is administered. Banking sector experts warned the authorities concerned of the potential loan default culture in the process. We share similar concern and hope that efficient management of the procedures of using foreign currency reserves will bring about favourable results in the economy.