Foreign borrowing costs to climb with Tk depreciation

The significant depreciation of Taka, rising interest rates on foreign borrowings, and tight global financial conditions could trigger a severe hike in the cost of external debt and debt burden, exacerbating the already heavy repayment pressure hovering over Bangladesh’s shoulders.

Released on Wednesday, the Bangladesh Bank Quarterly Report added that inflationary pressures on the public will continue to mount in the coming months, which in turn would cause the ongoing economic uncertainty to linger.

This significant appreciation of USD against Taka impacted foreign debt, which stood at $92.69 billion at the end of September of 2022, up from $90.79 billion in December of 2021. The foreign debt position was at record high $95.23 billion in June last year, show central bank data.

In a recent report, the World Bank had also warned that the low and middle-income countries will suffer a mounting pressure of debt servicing in 2023-24 due to the hike in private sector foreign debt, increase in interest rates, and depreciation of currencies against the greenback.

According to the International Monetary Fund’s (IMF) Global Debt Monitor 2022, Bangladesh’s private debt, loans and debt securities had occupied 38.27 per cent of the country’s GDP in 2021.

With the 2022 growth outlook, interest rates are much higher, and many currencies are depreciating, this is why the burden of debt is likely to increase further.

After Russia invaded Ukraine in February this year, Bangladesh has witnessed a continued depreciation of Taka against the USD. The local currency devalued by 24.41 per cent against the USD last year, despite a series of initiatives to cool down the forex market.

The interbank exchange rate hit Tk 86.20 per USD for the first time on March 23 last year, a month after Russia invaded Ukraine. The USD rate then continued to rise throughout the year, going as high as Tk 107 per USD under the interbank exchange rate.

The central bank quarterly report pointed out that the slowdown of major economies and overshooting cost-of-living driven by persistent and increasing inflationary pressures may persist in FY23.

The CPI inflation (point-to-point) increased significantly to 9.10 percent in September 2022 from 7.56 percent in June 2022, according to Bangladesh Bureau of Statistics data.

This rise in inflation was prominent in both food, and non-food inflation, originating mainly from rising global commodity price-induced import costs, and significant depreciation of BDT against the USD, the central bank report shows.

Twelve-month average CPI inflation increased from 6.15 per cent in June 2022 to 6.96 per cent in September 2022.

How was Q1?

Bangladesh economy has maintained a broad-based growth performance during the first quarter of FY23, aided by favorable outcomes in agriculture, industry, and service sectors with some discomforts in the external sector development and internal price situation.

Regarding the issue of current account balance, the report adds that the current account deficit (CAD) went down to $3.61 billion in Q1 FY23 on the back of a receding trade deficit due to the depreciation of the exchange rate, and several policy initiatives for increasing export and remittance inflows while limiting luxury and unnecessary imports.

Broad money growth slowed to 8.64 per cent at the end of Q1 FY23 compared to 11.19 per cent during the same period of the previous year, mainly driven by the contraction in the Net Foreign Asset (NFA).

The banking regulator expressed optimism that Bangladesh’s growth performance is to be marginally moderate in FY23 despite the current external and internal macroeconomic challenges.