Short-term external debt at 67% of forex reserves

Even though Bangladesh’s short-term foreign debt declined in the first quarter (July-September) of FY2022-23 compared to the fourth quarter (March-June) of FY2021-22, the proportion of such debt has increased compared to the position of the useable foreign exchange reserves.

According to Bangladesh Bank (BB) data, in June FY22, the short-term debt amount was $20.64 billion and it dropped by 7.54 per cent to $19.08 billion in September FY23.

Compared to the useable reserves, the proportion of such debt was 61 per cent in June and it increased to 67 per cent in September.

In June, the country’s reserves were at $41.86 billion and it declined to $36.44 billion in September. However, in line with International Monetary Fund’s calculation, $8 billion should be excluded because around $8 billion have been invested — including $7 billion in the Export Development Fund.

Analysts say if the ratio of short-term external debt (STED) to forex reserves increases, the pressure on the economy will rise as well. Currently, the increase in this ratio indicates that the country’s reserves are decreasing and the amount of foreign debt is surging.

Zahid Hussain, the former lead economist of the World Bank’s Dhaka office, told The Business Post that if such loans become 100 per cent equal to a country’s useable forex reserves, that is a red flag.

“STEDs must be repaid within a year. Most of the loans are buyer’s credit and deferred LCs. We can see that some banks have also been unable to settle deferred LCs,” he said.

Echoing his remarks, Policy Research Institute Executive Director Ahsan H Mansur said, “Although Bangladesh is not there yet, it is already under pressure to repay such debts due to the dollar crisis.

“However, previously deferred LCs can play a role in taking the 67 per cent to 100 per cent if/when they get converted into STED. The best way to tackle that will be to try and extend the loan repayment deadline.”

Prof Mustafizur Rahman, a distinguished fellow of the Centre for Policy Dialogue, added, “An increase in STED in proportion to forex reserves will undoubtedly increase the debt repayment pressure and it will further raise the dollar demand and depreciate the taka.”

“Moreover, since the central bank does not want to provide support from the reserves, the banks will fail to pay the debts, which may create more problems for the economy,” he told The Business Post.

How STEDs are increasing

A continued increase in STED may entail a higher risk to the domestic economy since such loans put significant pressure on the forex reserves, the BB said in a report published in October last year.

According to economists, due to the declined demand during the Covid-19 pandemic, interest rates have fallen drastically across the world. While the import payment deadlines were extended, the number of STEDs went up.

According to BB data, at the end of 2018, the total amount of such loans stood at $9.03 billion. At the end of 2019, it was $9.74 billion and the amount rose by only $1.25 billion to $10.99 billion at the end of 2020.

But 2021 saw a big jump in the number of such loans. At the end of that year, STEDs increased by more than $7 billion to $18.08 billion. And by September 2022, the amount of this debt increased to $19.08 billion.

The majority of short-term loans belong to the private sector. At the end of September, $17.31 billion in STEDs belonged to the private sector and $1.77 billion to the public sector.

In this regard, Mustafizur said, “Most of these private sector loans have been taken for international trading. It should be checked who is taking the loans for which sector. But nothing should be done to harm the normal trading.”

Economists say one of the biggest reasons for the STED jump in 2021 was the low-interest rates. If Bangladesh takes time to repay them, the cost of debt servicing will rise because both the interest rates and the price of the dollar have now increased.

Ahsan said, “If this cost increases, I don’t think the dollar crisis will go away easily or soon. I feel that the BB governor’s claim that the dollar crisis will be resolved very soon is political.

“How long this crisis will last depends on how well the government manages the current economic crisis and on the positive growth of exports and remittances.”