The tendency of borrowing from external sources by local businesses is on the rise, creating a potential risk for the economy as the cost of foreign funds continues to rise.
Financial analysts said while loans are available in single-digit interest in domestic sources, the fund users might face difficulties in repaying the loans if the cost of borrowing continues to rise.The latest data from Bangladesh Bank (BB) show that a total of 147 Bangladeshi companies borrowed $13.24 billion from different from external sources until March this year.
The foreign fund was available at a cost below 4 per cent, including LIBOR (London Inter-bank Offered Rate) just a few years ago but the cost has gradually gone up and now it has crossed 6 per cent in many cases.
A rise in the exchange rate of US dollars against Bangladesh currency will raise liability of the country because the loan recipients have to repay the debt in dollars, they said.
The central bank data show there was no external loan before 2013. In 2013, $4 billion was borrowed by the private sector from foreign creditors, but the amount stood at more than $13.24 billion till March this year.
Borrowings by Bangladeshi businesses from foreign sources have gone up since 2013. In 2014 there was no rise in external loans.
Later in 2015, the foreign borrowings increased to $8 billion, in 2016 the loan stood $ 9.25 billion, then 2017 it became $ 12.28 billion, the loans rose to $12.52 billion in 2018 and $13.11 billion in 2019.Among the loan recipient private sector companies, 23 are in power, gas and petroleum sector, 100 companies are in the manufacturing sector, 14 companies are in trade and commerce sector, 5 companies are in transport, storage and communication sector, 4 companies in the service sector and 1 company in the construction sector.
ABM Mirza Azizul Islam, a former adviser of a caretaker government, told the Daily Sun that foreign loans in the private sector should be approved very cautiously as it can create additional pressure in the country’s economy. He suggested approving the loans in sectors which will contribute the foreign exchange income, failure to do so will increase the pressure on foreign exchange reserves.
He said several countries, including Hong Kong and Korea, had been in trouble before for foreign debts. Their private sector once invested in various local businesses, including the real estate sector, with foreign currency loans. But at some point, those sectors found it difficult to repay the loans in foreign currency.
Although there is no problem in paying foreign currency liability at present, there might be problems in the future, he added.
Former Bangladesh Bank governor Dr. Salehuddin Ahmed said the central bank had approved private commercial borrowing from foreign sources following demands from local businesses, especially the importers.
“The loans were misused sometimes at the beginning. But that does not happen anymore as Bangladesh Bank strictly oversees the matter now,” he said.
“Many countries faced crisis after taking foreign loans for the private sector. Although a similar situation has not occurred in Bangladesh, we need to stay alert,” he said.
Approval for borrowing from foreign creditors should be given after considering remittance, export and production first, Dr. Salehuddin said.
Former Bangladesh Bank executive director and BIBM’s Supernumerary Professor Yasin Ali also emphasized Bangladesh Bank’s vigilance to ensure that foreign credits were not misused. “Otherwise, the economy will be at risk.”
Seeking anonymity, a senior BB official said the number of foreign loan recipients keeps increasing in recent times, making it difficult for the central bank to maintain external debt management with limited resources.
Even some banks are borrowing money from overseas lenders and do business here taking the opportunity of a lower cost of capital, he said.
Talking about the risk, he said the cost of borrowing from external sources continues to grow and in many cases, it crosses the 6.0 per cent mark. In contrast, the lowest rate of interest in the local banking system hovers at 9 per cent.
Shafiul Islam Mohiuddin, former president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), agreed the trend in getting foreign funds by the private sector is growing in recent times.
He said the private sector is now building big infrastructural projects in the power and energy sector, which requires a large volume of finance.