Shasha Denims, a garment exporter, had plans to expand its operations by setting up a new factory with 210 looms at the Dhaka Export Processing Zone, aiming to increase its annual revenue by over $12.5 million. The company, capable of producing over 27.5 million yards of garments annually, also intended to invest in an associated garment factory to boost its turnover by Tk 4 billion and create employment for 2,000 people.
However, rising interest rates have hampered the plans of the fully export-oriented and publicly listed company, reports bdnews24.com.
Shams Mahmud, managing director of Shasha Denims Ltd, said: "We had decided to invest Tk 6 billion in these new factories and expand the business, but now we've stepped back. It's not viable to do business by borrowing and paying such high interest rates."
Shams told bdnews24.com that the company has scaled down its investment to Tk 1.6 billion, focusing only on essential investments.
"This is the amount that we cannot avoid. We are only making that investment," he added.
Shasha Denims, one of the major players in the garment sector, currently employs 1,600 workers across its three dyeing units. The company, which won the national export trophy last year, reported an annual revenue of Tk 7.88 billion in the 2022-23 fiscal year.
Shasha Denims is not the only company affected by these high interest rates. Entrepreneurs across industries, from large corporations to small businesses, are facing similar challenges.
The liquidity crunch in the banking sector and rising interest rates are creating significant barriers to business expansion, increasing production costs and hindering job creation.
As a result, low-income earners, who are struggling to cope with inflation, are finding it increasingly difficult to find work or secure wage increases.
Inflation has been hovering in the double digits or close to it for nearly two years, largely due to the economic stagnation brought on by the global Cobid-19 pandemic. The situation worsened when the Russia-Ukraine war destabilised oil markets, and the rising exchange rate of the US dollar further exacerbated the crisis.
The country's economy was already in turmoil when export orders from the West began to decline, and inflation spiralled out of control, causing immense hardship to regular people.
Despite recommendations from economic analysts to let market forces dictate interest rates and raise the policy rate, the '9-6' interest cap remained in place.
However, the cap was lifted in 2023 under pressure from the International Monetary Fund, or IMF, allowing interest rates to be determined by the market.
As the central bank raised the repo rate to control inflation, the cost of loans soared, making business operations even more challenging. Import costs surged as well, further straining businesses.
After the fall of the Sheikh Hasina government and the interim government's assumption of power, the central bank raised the policy interest rate twice, pushing the loan interest rate from 9 per cent to 14 per cent in just one year.
This rapid rise in interest rates has alarmed business leaders, who are concerned that inflation, which remains high at 9.92 per cent, is still not under control despite the rate hikes.
DECREASE IN LCS, DECLINE IN PRIVATE LOANS
One key indicator of declining investment in the country is the decrease in the opening of letters of credit, or LCs, for imports.
According to Bangladesh Bank, LC openings for imports dropped by 13 percent in the first two months of the current fiscal year 2024-25.
The central bank said LC openings stood at $10.03 billion in July and August, down from $11.51 billion in the same period last year, a 12.85 per cent decline.
Similarly, LC settlements in the first two months of the fiscal year amounted to $10.34 billion, compared to $11.89 billion in the same period last year, a 13.03 per cent decrease.
In June 2023, private sector credit growth stood at 9.84 per cent, down from 10.58 per cent in the same period last year. By the end of June 2023, the total credit disbursed to the private sector was Tk 16.41 trillion, compared to Tk 14.94 trillion in June of the previous fiscal year.
INTEREST RATE HIKE CALLED A 'DISASTROUS DECISION'
In July 2020, the average interest rate on bank loans was 7.79 per cent, but by July this year, it had risen to 11.57 per cent.
After the interim government took power, economist Ahsan H Mansur, who had long advocated for raising interest rates to control inflation, was appointed governor of Bangladesh Bank.
Following his appointment, Mansur raised the repo rate by 50 basis points to 9 per cent on Aug 25.
A month later, he raised it by another 50 basis points to 9.50 per cent.
The previous government had already raised the policy rate by 25 basis points in January and 50 basis points in May this year.
As a result of these four consecutive hikes, loan interest rates at the customer level reached 14 per cent.
Shams said, "Raising interest rates to control inflation is a contractionary measure in the context of Bangladesh. While it can function as one method of curbing inflation, it is a disastrous policy for investments."
Shams pointed out the various obstacles facing the country's exports in the global market, saying: "The prices of goods have increased instead. It's impossible to keep a business viable with a working capital loan."
"We might be able to get by temporarily by deferring payments. But after LDC [least developed country] graduation, where will we get the investment money to remain competitive in the European market?" he asked.
He also claimed that eco-friendly investment policies do not adequately address these issues.
BUSINESS LEADERS QUESTION FEASIBILITY
Business leaders expressed concerns at a seminar on Saturday about the rising interest rates on bank loans, fearing it will drive up business costs and reduce profitability.
Syed Nasim Manzur, president of the Leather Goods and Footwear Manufacturers and Exporters Association of Bangladesh, said: "No country with double-digit interest rates sees its businesses profit. Currently, interest rates in Bangladesh stand at 14 per cent."
He added that this situation would deter foreign direct investment, critical for enhancing product quality, image, and global value chain integration.
Mir Nasir Hossain, former president of the Federation of Bangladesh Chambers of Commerce and Industry, or FBCCI, echoed similar concerns, saying the actual interest rate exceeds 14 percent.
He attributed the hike to the $4.7 billion IMF loan, which increased interest rates, impacting businesses negatively.
He told bdnews24.com, "Interest rates rose from 9 per cent to 14-15 per cent, and it might increase further. This rise follows a compounding effect."
He raised the question, "Which industry or business can adjust and survive under such conditions?"
SMES STRUGGLING WITH LIQUIDITY CRISIS
Entrepreneurs, particularly in the small and medium enterprise or SME sector, are facing significant challenges due to a liquidity crisis in banks.
Mohammad Gazi Touhidur Rahman, a former banker turned entrepreneur, shared his experience, saying, "Banks currently have no deposits. How can they give out loans?"
Touhidur, who runs a large factory in Narsingdi employing over 200 workers, revealed that his company is struggling to secure loans. Even when customers deposit money in banks, withdrawing it becomes an issue, he said.
Neshat Unzum, the chief executive officer, or CEO, of AurumBangladesh, a pioneering fashion startup known for introducing distinctive block print and cotton apparel, shared a similar perspective.
She said: "Getting loans is becoming impossible, and interest rates have shot up to 14 per cent, making profit generation difficult."
Both entrepreneurs highlighted the hidden conditions in loan agreements, where the repayment often surpasses the principal amount, putting additional strain on small businesses.
NOW BANKS SEEK CUSTOMERS
A deputy branch in charge of a private bank pointed out that the dynamic has shifted.
"Earlier, customers used to seek out banks for loans; now banks are hunting for customers," he said.
He explained that due to higher interest rates, his branch's loan portfolio has dropped by 80 per cent in the past year.
"One customer moved to another bank today just for a slightly better rate," he said.
The new classification of non-performing loans, or NPLs, from nine overdue instalments to six has also reduced bank revenues and increased the number of NPLs.
"Classified loans rose from 12.43 per cent to 25.25 per cent in just one quarter," he remarked, questioning how banks can afford to cut interest rates under such circumstances.
WHAT'S THE SOLUTION?
Shasha Denims MD Shams stressed the need for prompt action to restore macroeconomic stability, saying: "Investment is dampened and job generation is at a standstill. If the situation is not resolved swiftly, the economy will lose stability."
Former FBCCI president Nasir suggested that high interest rates should be addressed immediately, as they are leading to an increase in non-performing loans and making it difficult for businesses to repay.
However, Zahid Hossain, former lead economist of the World Bank's Dhaka office, offered a different perspective, arguing that inflation can only be curbed by maintaining tight monetary policies, including higher interest rates.
GOVERNMENT'S POSITION
Bangladesh Bank spokeswoman and executive director Husne Ara Shikha told bdnews24.com, "The central bank governor's directive is clear: interest rates will continue to rise until inflation comes down to single digits."
According to the Bangladesh Bureau of Statistics, or BBS, despite the challenges posed by political unrest, floods, and power transitions, overall inflation dropped below double digits in July-August, with September's point-to-point inflation rate standing at 9.92 per cent.
Regarding the current business environment, Shikha added: "Loan costs will be higher temporarily, but once inflation stabilises, interest rates will drop back to 6-9 per cent."