Short-term foreign debt interest payment crosses $300m in just 5 months

The interest cost of short-term foreign debt in the private sector has reached an unprecedented level due to a surge in international interest rates and mounting pressure from businessmen.

According to data from the central bank, between January and May this year, principal and interest payments amounted to $14.15 billion. Out of this, the principal payment accounted for $13.84 billion, while the interest payment stood at $308 million.

In comparison, a principal payment of $36.49 billion was made in 2022, with interest payments amounting to just $246 million. The trend of interest payment was also low in the previous years.

Bankers said these short-term loans necessitate an interest payment of over 8%. 

According to the central bank's regulations, foreign loans require the payment of the maximum Secured Overnight Financing Rate (SOFR) plus 3% interest. Currently, SOFR stands at over 5%, while it was below 1% at one point. Consequently, the international market's interest rates have risen significantly, resulting in increased interest payments. 

Additionally, foreign banks have imposed various charges, further contributing to the overall rise in interest costs, added the bankers.

The SOFR, which has replaced the London Interbank Offered Rate, serves as a benchmark interest rate for dollar-denominated derivatives and loans.

According to the central bank, Bangladeshi businesses received a higher amount of short-term debt from foreign banks and institutions in May, compared to the previous months of this year. Within a month, businesses received a total of $2.83 billion and repaid $2.74 billion.

From January to May, new loans amounting to $11.38 billion were received, whereas loan payments made during the same period totaled $14.15 billion.

Private short-term foreign debt rise in May

Due to the increased credit limits of foreign banks and a shortage of dollars in the country's banking system, the private sector's short-term foreign debt has risen by $200 million in May, following a significant decline over the previous four months.

According to data from the Bangladesh Bank, the outstanding private sector short-term foreign debt reached $14.08 billion at the end of this May, compared to $13.87 billion in the previous month.

Senior officials of various private banks have informed TBS that foreign banks reduced credit limits around November-December. As a result, all types of short-term trade credit, including buyers' credit and deferred payments, decreased. 

Additionally, businessmen were inclined to repay these loans, partly due to uncertainty regarding future currency depreciation. However, this trend has now diminished, as businessmen are now seeking to obtain more loans than before.

Central bank data reveal that the average exchange rate per dollar increased to Tk99 at the end of December last, up from Tk85.80 during the same period the previous year. Currently, the exchange rate stands at Tk109, indicating a depreciation of the currency by more than 10% over the past five months.

When asked about the potential reduction of currency depreciation pressure in the future, bankers said that it is difficult to predict at present. 

They, however, mentioned that traders are currently experiencing some pressure and are thus seeking loans, even though they are aware of the possibility of further currency depreciation. But, banks are trying to discourage them from doing so, added the bankers.

Mohammad Hatem, executive president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), told TBS that they are encountering difficulties in opening foreign back-to-back LCs (letters of credit). 

"Banks have long imposed limits on opening LCs in local currency. But when the limit was set, the dollar rate was Tk84-85. Currently, the dollar rate stands at Tk109, and, therefore, converting the money limit to dollars has reduced our LC limit in dollars." 

The decrease in back-to-back LC openings will have an impact on their exports, Hatem warned.