BB hikes foreign loan rate to attract overseas funds

The central bank raised the interest rate for short-term trade finance in foreign exchange by 50 basis points on Thursday, responding to appeals from bankers considering the prevailing global market trend and a high-interest rate scenario.

The all-in-cost ceiling per annum has been revised, incorporating a mark-up or margin of 4%, an increase from the previous 3.5%, added to benchmark rates such as the Secured Overnight Financing Rate (SOFR), Euribor, etc, a Bangladesh Bank circular says.

While acknowledging that the increased mark-up might impact the overall cost for importers seeking financing for their foreign trade activities, bankers assert that it will enable local banks to attract foreign funds, meet customer needs, and boost foreign exchange reserves that are falling.

Bankers were demanding to increase their mark-up for short-term trade finance in foreign exchange by 100 to 150 basis points as foreign lenders are not so interested with Bangladesh after a rise in interest rates in the international markets and Bangladesh's country risk and downgrade in ratings.

Following the rate hike, a bank can now charge a customer a maximum of SOFR+4%, totalling 9.3%. This calculation is based on the 180-day average SOFR, which stood at 5.38% on Thursday. 

The SOFR is a benchmark interest rate for determining short-term interest rates in financial markets. 

"The decision will help Bangladesh get foreign funds," said Sarwar Hossain, director of the Foreign Exchange Policy Department of the BB. It will also help facilitate cross-border trade finance.

Dwindling forex reserves and volatility in the exchange rate also make foreign lenders lukewarm about the Bangladesh market despite having potentials, they said.

"We lend local customers by borrowing from foreign sources, but our margin has gone down significantly and banks were making losses," said the head of the treasury department of a leading private commercial bank.

After a 50 basis points hike in mark-up, banks that borrow from foreign lenders, such as Dubai-headquartered Mashreq, JP Morgan, Citi and the International Finance Corporation (IFC), would be encouraged to lend Bangladesh more, he added.

Bangladeshi banks avail $3 billion to $4 billion annually from foreign lenders as trade finance, also known as off-shore finance, according to treasury officials at different banks.

They said the move will boost the supply of dollars in the country. Besides, lending from the bank's offshore unit will bring some profit which was at a loss.

This rate hike would impact importers as their borrowing cost will increase by 50 basis points, another top treasury official said. "As the interest rate in the local market has increased to over 12%, it needs to be adjusted with foreign currency loans also," he said. 

Reserves fall below $20 billion

According to the BPM-6 method recommended by the International Monetary Fund, the country's foreign exchange reserves declined by $83 million in the span of a week, reaching $19.94 billion as of Thursday. 

Experts attribute the depleting health of the reserves to the continuous selling of dollars by the central bank.

Former Bangladesh Bank governor Saleh Uddin Ahmed told The Business Standard that reserves are falling because the Bangladesh Bank is constantly selling dollars while the inflow of foreign currency has decreased. 

He said the main reason for the dollar crisis in Bangladesh is the decrease in inflows and that it will not end until the inflows increase. 

Questioning the government's restrictions on imports to reduce the outflow of dollars, Saleh Uddin said, "How long will this last? The restriction will need to be removed at some point for the sake of the country. If capital machinery is not imported from abroad, industry production will be disrupted, employment will fall, and national growth will go down along with it. So, these restrictions have to be withdrawn at some point."

He also blamed the decrease in export earnings and remittances for the dollar crisis, urging the need to increase export and remittance income. 

He also noted that any increase in the incentive on remittance will not solve the problem.

"Another method must be found out such as the diversification of exports. Our country's export sector is dependent on only one product (manufactured garments). Exports should be encouraged with incentives in other sectors. Besides, it is very important to create export markets outside of Europe and America," the former governor added.

Saleh Uddin also said another way to solve the dollar crisis is by bringing in foreign investments. "Market regulation may not benefit from crawling pegs. If the country can be made investment-friendly, the dollar inflow will increase."