The private sector's external debt declined by about $2 billion in the first three months of the year, in a sign of the shrinking appetite for foreign loans in the face of unfavourable terms.

At the end of March, the private sector's external debt obligations stood at $22.18 billion, down from $24.31 billion recorded three months earlier, according to data from the Bangladesh Bank.

Given the lower interest rates in much of the Western world, the private sector was resorting to borrowing more and more from abroad.

Their foreign borrowing began to shoot up in 2021 when central banks around the world kept the interest rates low to kickstart their economies from the pandemic-induced slowdown.

At the end of 2020, the private sector's external debt obligations stood at $14.76 billion. Over the next year and a half, it hit a peak of $25.95 billion.

It began to decline in the third quarter of 2022 as central banks around the world started to increase interest rates to tame inflation.

But Bangladesh's private sector began to face another issue: with the view to preserving the strained dollar stockpile, the government tightly controlled the dollar outflows, which led to one too many deferred letters of credit settlement.

"Our reputation was badly damaged," said Zahid Hussain, a former lead economist of the World Bank's Dhaka office.

This also prompted the global rating agency Moody's in December last year to downgrade the rating of Bangladesh's financial sector.

"This has made financing access very difficult for the private sector," he said.

Meanwhile, the interest rate has increased much abroad; and given the risks carried by the Bangladeshi borrowers due to Moody's downgrade and the reputational damage, the interest rate for them is even higher.

Coupled with the steep depreciation of the taka, foreign loans would not make much cost-effective option for the private sector.

The central bank has also put a cap on the interest rate for the private sector's foreign commercial borrowing and that cap is lower than the going rate in the international market, according to Hussain.

At the end of March, the private sector's short-term foreign loans stood at $14.1 billion, down from $16.42 billion at the end of December 2022.

The long-term loans though increased by $204.97 million to $8.1 billion at the end of the first quarter of 2023.

But the private sector's reduced foreign borrowing does not mean that the pressure on the foreign reserves and the exchange rate will subside.

"It is because both the financial and current accounts of the balance of payment are in deficit. If the current account is in deficit, it can be financed with the surplus in the financial account, and there would be no pressure on reserves or the foreign exchange market," Hussain said.

"When both are in deficit, commercial banks will have to draw on their foreign exchange accounts and the BB will have to use its reserves," he added.