Economists call halt for pvt firms' foreign borrowing

Private companies should pursue a "wait-and-see policy" before going for foreign borrowing as interest rate spiked on the global financial market nowadays, economists suggest. Many firms are on the hunt for forex support.

The cost of foreign funds has increased up to nearly 11 per cent as the secure overnight financing rate (SOFR) is now hovering around 5.39 per cent. Foreign lenders can add up an additional interest of up to 3.5 per cent to the SOFR.

Moreover, a 20-percent "withholding tax" has been imposed in the current fiscal budget on interest payments for foreign loans.

However, as the interest rate on foreign loans remained high, the government last month declared a waiver on the "withholding tax" on interest payments for foreign loans until February this year for a relief.

The scrutiny committee on foreign loan/supplier credit, headed by Bangladesh Bank governor Abdur Rouf Talukder, in a meeting last month gave approval to scores of local companies for borrowing from abroad to foot import bills as the local banks are failing to supply adequate foreign currencies for opening letter of credit.

Some global lenders are found charging the borrowers interest up to SOFR+ 3.30 per cent per annum which economists find "very high" for businesses to bear.

Data showed SOFR (earlier LIBOR) as low as 0.07 per cent in 2021 and the lower trend had continued until 2022. The interest rate took an upturn thereafter.

Contacted, Dr Zahid Hussain, a former lead economist of the World Bank's Dhaka office, told the FE Friday there is an expectation that this year the rate of inertest in the international market would not go further up, rather decline.

"The private-sector borrowers thus need to wait to get loans at lower interest rate," he said.

Mr Hussain forecasts that the rate may not decrease in the first quarter but the way inflation rate fell in the United States and the European Union, a cut in interest rate from the second quarter is inevitable.

He says the SOFR is now at around 5.4 per cent, and in case of Bangladesh, the lenders may add an additional 4.0 to 5.0 per cent (including credit-adjustment spread) totalling around 10 per cent which is relatively high as "you have to repay the loan interest in US dollar".

"If the SOFR comes down between 3.0 and 4.0 per cent, the borrowers can get loans at lower interest which will be convenient for them," suggests Mr Hussain.

He suggests that the central bank should ask the private sector to keep an eye on the interest rate before borrowing.

On the other hand, also the borrowers can be suggested to go for "variable rate" instead of a fixed rate so that they can enjoy advantage if rate goes down, he notes.

Dr Zaidi Sattar, chairman, Policy Research Institute of Bangladesh (PRI), says interest rate on loans in the global market will go down gradually, and if the private sector wants to enjoy that rate, they will have to wait some time.

"If they want to take loan now, they will have to pay higher interest rate," he says.

However, Mr Sattar thinks that the private sector can be given the go-ahead for foreign loans now as Bangladesh's forex reserves are increasing slowly.

[email protected]