Private sector’s foreign loan repayment to drop 42% in 2023

The Bangladesh Bank has projected that loan repayments against mid- and long-term foreign credits secured by the private sector might fall by 42.6 per cent in 2023, but the development might not bring about major relief for an economy reeling under the forex crisis.

The private sector will have to repay loans amounting to $1.62 billion this year compared to $2.82 billion in 2022. Debts worth $1.77 billion will have to be repaid in 2024, data from the central bank showed.

Economists say there is no scope to feel complacent about the decrease in debt servicing as the new flow of foreign loans has reduced to a large extent.

On top of that, the private sector would have to pay $16.41 billion in short-term loans this year.

The overall private sector foreign loans stood at $24.30 billion as of December last year, up 5.3 per cent from a year ago.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, says that the financial account of the balance of payments has recently registered a large drop, creating a major problem for the economy.

A widening deficit in the financial account means there is a large gap between the inflow and outflow of foreign exchanges.

A financial account covers claims or liabilities to non-residents concerning financial assets. Its components include foreign direct investment, medium and long-term loans, trade credit, net aid flows, portfolio investment, and reserve assets.

Between July and March of 2022-23, the financial account registered a deficit of $2.21 billion in contrast to a surplus of $11.92 billion a year ago, data from the BB showed. The deficit was $1.97 billion in July-February.

Historically the financial account of Bangladesh has experienced a surplus almost every year.

Mansur said that foreign lenders are showing reluctance to give out loans to the private sector in Bangladesh in some cases due to the ongoing unstable situation in the foreign exchange market.

The reserves stood at $29.91 billion on May 31, down about 29 per cent in contrast to $42.20 billion a year ago.

The declining foreign exchange reserves have dented the confidence of foreign lenders when it comes to disbursing loans to businesses in Bangladesh.

Besides, many local businesses are also avoiding borrowing from external sources as the interest rates on loans have increased in the global market substantially, said Mansur, also a former official of the International Monetary Fund.

A regular inflow of foreign loans is highly important to bring back stability in the foreign exchange market.

A Bangladesh Bank official says that the government has adopted a cautious stance before approving fresh foreign loans given the ongoing stress in the market.

Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue, says that the declining trend of foreign loans is not a good sign for the economy as it will adversely affect GDP growth.

"The central bank is slowly releasing funds from its Export Development Fund, so the dollar shortage in the private sector has widened," he said.

In Bangladesh, the exchange rate risk in the private sector has deepened as the taka has weakened against the US dollar significantly in recent months amid a sharp fall in the forex reserve.

The dollar traded at Tk 108.3 on Tuesday, a year-on-year increase of 18 per cent against the local currency.

"Under such a situation, the businesses that took loans two years ago have to pay more due to the sharp fall in the value of the local currency," Rahman added.