Exchange rates big burden for foreign debt repayment

Mahfuja Mukul: The biggest burden in paying the foreign debt taken by the private sector of the country is the high interest rate of the loan and the exchange rate of taka against the dollar. In the last two quarters, the taka has depreciated by 30 percent against the dollar. In some cases, it exceeded 42 percent. As a result, the dollar has to be bought at a higher price for debt repayment. At the same time, the interest rate in the international arena has increased from an average of 100 percent to around 8 and a half percent. Additional interest has to be paid. Overall, additional payments have to be made against foreign loans. As the entrepreneurs are under pressure, the foreign debt of the country is also increasing. However, the external debt position of the private sector has decreased due to reduced repayment of previous loans and new borrowing.
According to the report of the central bank, the foreign debt status of the private sector in the country was $2 thousand billion till last September. Out of this, short-term debt is $1,250 million and long-term debt is $8,500 million. In contrast, 80 percent of the interest rates are market-based. That is, the interest rate that will be maintained at the time of repayment of the loan will have to be paid. At the same time the exchange rate will be at the time of repayment, the loan must be repaid at that rate. Due to this, the amount of loan repayment is increasing. Long term loans taken 4 to 10 years ago. At that time, you got less money with dollars against the loan, but now you have to pay it by buying dollars with more money. Short term loans are generally taken for a period of four to six months. Both parties can extend its term based on mutual agreement.
But it has to pay extra interest. Due to Corona and global recession, Bangladesh has extended the repayment period of short-term loans, especially of the private sector, several times.
The price of the dollar in December 2021 was Tk 85.80. Now it has increased to Tk 112. Accordingly, the value of the taka has decreased by Tk 26.20 or 30 percent. But most of the private sector entrepreneurs are not getting dollars at that price from the banks. They are buying dollars at Tk 122. In some cases, at a higher price. Accordingly, the value of the taka has decreased by Tk 36.20 or 42.20 percent. Due to devaluation and increase in dollar value, now the debt has to be paid by buying dollars at a higher price than expected.
Interest rates in the international market have been increasing since the middle of last year. All the foreign loans taken by private sector entrepreneurs of Bangladesh are taken on the basis of London Inter Bank Offer Rate or Libor Rate. The interest rate of the loan was fixed by adding two and a half or three percent to this. Now that the Libor rate has gone up, so has the interest rate. Before Corona, Libor rate was 1.5 to 2 percent.
According to this, the loan interest was 4 to 4 and a half percent. Currently the Libor rate has risen to 5.90 percent in dollars and 4.8 percent in euros. Adding two and a half percent to this, the interest rate stands at 8.40 percent in dollars and 7.30 percent in euros. It has to pay extra interest against the loan.
Meanwhile, the external debt position of the private sector has decreased due to repayment of previous loans and reduction of new loans. By September 2022, the debt position had increased to a maximum of $2,600 crore. Now it has reduced to $2.1 billion. During the period under discussion, the debt position decreased by $5 billion dollars.
Sources said the private sector’s long-term debt of $1.62 billion is targeted to be repaid by 2023. The short-term debt repayment target is $1,600 crore. Most of these have been paid off. The long-term debt to be paid in the coming year is a maximum of $181 million. Of this, principal debt is $146 million and interest is $35 million. Short-term debt repayment is about $1 thousand 200 million. Due to decrease in foreign exchange earnings, the repayment of foreign debt has to be accelerated. Reserves are now shrinking especially under the pressure of repayment of foreign debt.