How alarming is private sector external debt?

For the last couple of years, external debt has become one of the major concerns of the country's overall economic management, mainly due to the sharp fall in the foreign exchange reserve coupled with the fast depreciation of the local currency, Taka, against the US dollar. The foreign exchange reserves to gross external debt ratio dropped sharply within a year- from 43.80 per cent in FY22 to 24.80 per cent in FY23. However, the ratio of short-term external debt to foreign exchange reserve increased to 62.70 per cent at the end of the last fiscal year from 49.40 per cent in the same period of the previous fiscal year. Short-term external debt is around 16 per cent of the total external debt and so it matters little.
Again, the external debt to gross domestic product (GDP) ratio is still low, as it stood at 21.80 per cent at the end of the last fiscal year (FY23). Nevertheless, the persistent pressure on external debt repayments has been slowly eroding the comfort zone in this connection. The external debt-GDP ratio has increased modestly since FY16, when it was 15.70 per cent. In neighbouring India, the external debt to GDP ratio stood at 18.6 per cent at the end of June last.
Besides the public sector external debt, the slow rise in private foreign borrowing also became a factor for the overall external debt management in the last decade. Borrowing from abroad by private sector enterprises in Bangladesh usually requires the approval of the Bangladesh Investment Development Authority (BIDA) and the central bank. A high-powered committee known as the Scrutiny Committee is the top authority of the government to approve foreign borrowing proposals in the private sector. It was in 2009 when Bangladesh formally introduced the system. Before that, there was a restriction on private sector borrowing from external sources except a few.
About one-fifth of the country's gross external debt is private foreign debt. The ratio of private debt to total external debt stood at 22.50 per cent at the end of FY23, which was 27.20 per cent in FY22. The total private sector external debt to GDP ratio also declined to 4.90 per cent in the last fiscal year from 5.60 per cent in the previous year. All these statistics are not alarming for the time being.
It is to be noted that external commercial borrowing (ECB) is the biggest component of private sector long-term external debt and one-fourth of the total external private credit. Around 85 per cent of the total long-term debt is channelled to private enterprises, followed by 14 per cent to private commercial banks. Half of the long-term private external debt is diverted to power, gas and petroleum sector and one-fifth to manufacturing sector of the country. In terms of maturity, around two-thirds of the private external debt is short-term in nature. A short-term loan usually runs less than a year, though sometimes it may refer to a loan of up to 18 months.
Nevertheless, the repayment pressure of private debt is also not negligible at all. In FY17, the total debt servicing of the private loan stood at $1.05 billion, which increased to $2.90 billion in FY22. The amount, however, was reduced to $2.23 billion in the last fiscal year. Around 85 per cent of the total repayment is the principal amount of the borrowed money, and the rest is interest. Again, three-fourths of the total outstanding interest bears a floating rate.
Debt service payment or servicing of external debt is payments including both principal and interest that are made to meet the debt obligation to non-resident creditors. The debt service ratio is measured by the proportion of gross debt service payments to current receipts of Balance of Payments (BOP). It is considered an important indicator of debt sustainability.
In its latest half-yearly review report on Foreign Direct Investment and External Debt (January-June, 2023), released last week, Bangladesh Bank presented a projection of the private external debt servicing for the next twenty years. It showed that long-term private external debt servicing for the current fiscal year will stand at $1.52 billion at the end of the current fiscal year, a fall of around 32 per cent from the amount repaid in the last fiscal year. The amount, however, is projected to increase in the next fiscal year to $2.18 billion, mainly due to 'bullet payment of commercial borrowing in the banking sector.' A bullet payment is a lump sum repayment made for an outstanding loan amount, generally at maturity. It can also be a single repayment of principal on a debt.
Central bank projections also indicate that servicing of private external debt will progressively decline in the next two decades. The amount may come down to $140.82 million at the end of FY34 and further decline to $51.23 million in FY38. Usually, any long-term private debt runs for three to 25 years, and the entity's assets are used as collateral. It also requires monthly or quarterly repayments of the loan.
Thus, any pressure arising from external borrowing by the country's private sector is unlikely in the near future, although some risk factors are there. The sharp depreciation of the local currency has already made the repayment of external borrowing costly as the borrowers have to repay the loans in foreign currency, mainly the US dollar. Those who do not earn in foreign currency are already facing extra pressure to purchase dollars at a higher price to repay the loan, as the average exchange rate already crossed Tk 110 per dollar by the end of November this year.
The annual average exchange rate was Tk 106 per US dollar in the last fiscal year, as mentioned in the central bank's report, against Tk 93.45 in FY22. That's why the stock of private sector foreign debt declined by only 2.70 per cent in terms of local currency in the last fiscal year, although in terms of the dollar it dropped by 14.20 per cent in the same period. Again, the stock of total external debt (including all public and private borrowings) increased by only 3.70 per cent in the last fiscal year in terms of the US dollar, whereas it increased by 17.60 per cent in terms of taka. If the current trend of local currency depreciation continues for the next six months, the pressure on private foreign debt repayments will be increased significantly.

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