Foreign borrowing by private sector

It is quite natural on the part of businesses to demonstrate their propensity to borrow more from cheaper sources, local or foreign. Until 2008, the local businesses, barring some special cases, were not allowed to borrow from the foreign sources that offer loans at lower lending rates than those charged by the domestic banks and other financial institutions. When substantial improvement was made in the foreign exchange reserve position, the government decided to allow such borrowing in the year 2008 only for the import of capital goods for new projects and modernisation and expansion of existing industries, in addition to other priority sectors as defined in the country's industrial policy.
A scrutiny committee at the Board of Investment (BoI), headed by the central bank governor, is empowered to approve the cases of borrowings from foreign sources by the private sector. However, in the process of such approvals neither the government nor the central bank takes any liability as far as the repayment of the borrowed money is concerned. Yet primarily because of the healthy reserve position and 'stable' sovereign rating by the international rating agencies, outside lenders and relevant others started making available a considerable volume of funds to the Bangladeshi entrepreneurs. Until March last, they, according to a report published in the FE recently, lent more than $4.6 billion -- a sum of money that is equivalent to Tk 358 billion.   
The central bank appears to be happy with the continuous rise in foreign borrowings since it has helped the reserve to stay healthy enough to cushion any sort of balance of payments (BoP) shock. The increase in external borrowings by the private sector, however, has contributed to the swelling of excess liquidity which is now estimated at Tk 275 billion, in the country's banking sector. Some other factors, including depressed investment activity, are also partly responsible for the accumulation of idle funds in domestic banks. Some bankers tend to attribute the recent fall in lending rates by the banks to the greater inflow of foreign credits to the private sector. But such an observation deserves a close scrutiny.     
Businesses have reasons to be happy to secure foreign loans though they have to meet a long list of requirements tagged to the granting of official permission for the same. But the procurers of loans and the central bank cannot be oblivious of the risks involved in such borrowings. A large-scale exposure to external financial markets poses risks to the country's macro-economic stability and profitability of the borrowers concerned, in the event of possible shocks. The Asian financial crisis of 1997 and the global financial meltdown of 2007 are a couple of cases in point. Bangladesh had remained almost unscathed on both occasions mainly due to its very low exposure to external financial markets. The entry of foreign loans substituting the domestic credits also tends to curtail the central bank's power to cut inflation.  
With a view to reducing the risks involved in such borrowings, the central bank is expected to see to it that the businesses are aware of the exchange rate risks and also of the need for hedging the same over a long period. It is, indeed, also important to ensure that the funds, borrowed from outside, are appropriately utilised by the parties concerned. There are allegations that a section of borrowers, instead of utilising the funds for the earmarked areas, deposit the same with local banks at higher deposit rates. The official guideline for foreign borrowing makes the submission of reports on the status of implementation and utilisation of approved loans on a semi-annual basis to the central bank. So, the Bangladesh Bank should engage its own personnel in the task of ensuring that the foreign loans are used properly in areas for which they are approved and sanctioned.