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Bank & Finance - November 5, 2023

Govt taking loans from foreign banks

In foreign currency

Mahfuz Emran: To reduce the pressure on the country’s foreign exchange reserves and to deal with the existing dollar crisis, the government has taken the initiative of taking commercial loans in foreign currency from foreign banks. As part of this, efforts are being made to take loans from India and Saudi Arabia. This issue may be discussed during the upcoming visit of the Prime Minister to Saudi Arabia. Apart from this, initial discussions have been held with India as well. The central bank is said to be in talks with several other major foreign commercial banks.
According to sources, the country’s foreign exchange reserves are decreasing at a steady pace. There is no way to stop the decline in reserves. Even with strict import controls, the dollar crisis can’t be solved. Increasing the price of the dollar is not increasing its flow. If the dollar price increases in the bank, it also increases in the open market. It has become very difficult to handle the situation all together.
Meanwhile, the reserve has been decreasing for more than two years. In August 2021, gross reserves rose to a maximum of $4,806 million. Since then, reserves have been declining. On Thursday, gross reserves decreased to $2,643 million dollars. Reserves decreased by $2,163 million during the discussion period. That is, in 2 years, the reserve has almost halved. A large part of the reserve has been spent on the import of essential goods including fuel.
Meanwhile, the export income of the main materials to increase the reserve has suffered a big blow. Exports fell below $4 billion in October. In that month, the export income came to $376 million. $431 million came in September. From July to September of the current financial year, the export earnings were in the region of $4 billion. This time it came to the house of $3 billion. Export earnings last crossed $5 billion in June.
The pace of remittances, the second instrument for increasing reserves, is also on the decline. Although October has increased by almost 30 percent compared to last year’s October. However, it has decreased by 4.5 percent during July-October of the current financial year. It was up 2 percent in the same period last fiscal. Remittances increased to $198 million last month, but there are fears about the future. Because Oman has stopped issuing visas, Sweden is having problems. In addition, expatriates are unable to find work abroad during the recession. As a result, many are unable to send remittances. Foreign investment, grants and other incomes are also slowing down. All in all, the flow of foreign exchange has decreased. Due to this, the pressure on the reserve is increasing. To reduce this pressure and increase the flow of dollars, the government plans to borrow foreign currency from foreign commercial banks. As part of this, talks are now underway with India. Besides, efforts are being made to take loans from Saudi Arabia.
Last year, Prime Minister Sheikh Hasina discussed this issue with the Saudi King. Then he asked for Saudi credit line assistance to import fuel oil. This issue will be discussed in this visit as well. In the last financial year, fuel oil worth about $950 million was imported. Among them, Islamic Development Bank has a loan of $1.5 billion. The rest of the money is self-provided. Currently, the prices of all fuel materials are increasing in the international market. This may increase the cost of imports this year. Because of this, if you can save dollars for the import of energy materials, the pressure on the dollar and reserves will be reduced on the one hand. On the other hand, it will be possible to ensure uninterrupted fuel supply. It will increase production and economic activity.
The government had taken commercial loans from the UK branch of the foreign Standard Chartered Bank before coming to power in 1996 to deal with the reserve crisis. The loan has already been paid. Like that time, the government wants to take commercial loans this time too.
Long-term loans from Saudi Arabia to the private sector stood at $220 million as of December 2021. Last December it decreased to $120 million. Now wants to take more new loans from the country. Long term debt from India is very low. The investment of Bangladeshi entrepreneurs in India is $1.5 million. Meanwhile, Saudi Arabia does not have much investment in Bangladesh. India’s investment in Bangladesh is $130 million. Which is 3.5 percent of the total investment. Besides, Bangladesh is at the second position in the import of goods from India. As a result, short term trade credit is being taken from the country.
Meanwhile, the government has also taken into consideration the interest rate and currency stability to take the loan. The Saudi currency is now stable against the dollar. As a result, the risk of interest rate and exchange rate is less if you take a loan from this country. The Indian currency is also depreciating to a limited extent against the dollar. However, the interest rate will be higher regardless of the country from which the loan is taken. Because Libor rate or London Inter Bank Offer Rate has now increased quite a bit. The general rate of interest is determined by adding 2 or 3 percent to Libor. The average interest rate on a 6-month Treasury bill in dollar Libor rate before Corona was 1.5 to 2 percent. 2.5 to 3 percent was added to the loan interest. Accordingly, the interest rate was 4 to 5 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. Adding three percent makes the interest rate even higher. As a result, the loan interest rate is increasing. The government wants to deal with the situation with emergency loans.

Steps have also been taken to increase remittances. For this reason, the incentive rate has been increased. At the same time, the upper limit has been left to the banks. The second tranche of the loan from the IMF will be $680 million in December. Another $600 million will be received from other organizations. $130 million will be met by these two by January. Besides, initiatives have been taken to discount the dollar stuck in the pipeline.

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