Rising short-term foreign debt pose economic risks

A continued increase in short-term external debt (STED) may entail a higher risk to the domestic economy, because such loans put significant pressure on the foreign exchange reserves, according to a latest Bangladesh Bank report.

The Financial Stability Report, 2021 – published on Monday – mentions that STED had occupied 39.33 per cent of the reserves that year. An analysis of the central bank data shows that at the end of June 2022, short-term external debt took up 49.31 per cent of the reserves.

On October 12, the country’s reserve position fell to $36.33 billion. Even if the STED had not increased after June this year, repaying the debt will take up 57 per cent of the reserves. A number of experts have voiced concerns over the country’s economic situation.

Zahid Hussain, former lead economist of the World Bank Dhaka Office, said, “External short term loans must be repaid within a year. If such loans hit 100 per cent of a country’s reserves, it is a red flag.

“Most of the STED are buyer’s credit and deferred LCs. We can see that some banks have been unable to settle deferred LCs. Under such circumstances, if the amount of incoming STED goes down, and Bangladesh has to repay the entire amount, the USD crisis will spiral out of control.”

The report highlighted that at the end of 2021, the outstanding amount of external debt increased 80.5 per cent to $90.8 billion, compared to 2017. Of the 2021 figure, $72.7 billion was long-term and $18.1 billion was short term last year.

Total external debt amount was $50.3 billion in 2017, and of this figure, long-term debt was $39.6 billion and short-term was $10.8 billion.

At the end of June this year, external debt position rose to $95.85 billion, and of this figure, $20.64 billion was short-term and $75.21 billion was long term debt. As of June 29 this year, the reserve position was $41.86 billion.

The central bank report however mentions that external debt has been playing an important role in the economic growth of Bangladesh by largely meeting growing investment demand of the country.

However, rising external debt may crystallize some risk to losing capital in future when bulk of debt servicing will be required on accumulated debt.

The external sector has tilted to moderate risk with growing current account deficit and considerable rise in private sector short-term external debt.

Private sector foreign debt increased to $25.95 billion in June this year, from $23.08 billion in December last year, according to the Bangladesh Bank.

Moreover, 68.4 per cent of private sector external debt was short term loan until June 2022, which was 67 per cent in December 2021.

What about banking sector health?

The Financial Stability Report, 2021 also shed light on the banking industry health of last year, using two key indicators – non-performing loans (NPL) and capital position.

According to the report, asset quality of the banking sector slightly deteriorated as gross NPL ratio showed a marginal increase in 2021. The gross NPL ratio of the banking sector reached 7.9 per cent in 2021 from 7.7 per cent in 2020.

The banks and financial institutions (FIs) would remain moderately resilient to different shock scenarios. The stress test results indicate that loan concentration to top large borrowers and considerable level of NPL in some banks could raise concerns about overall financial stability.

Proper corporate practice in following the guideline on large loan/single borrower exposure would be helpful to reduce the risks on banks’ exposure to large corporate or to specific groups, sectors or regions, recommends the central bank.

Capital to risk-weighted assets ratio (CRAR) of the banking industry decreased to 11.08 per cent in 2021 from 11.64 per cent in 2020. The ratio however remained above the regulatory minimum capital requirement of 10 per cent.