From left, Mustafa K Mujeri, director general of BIDS; Salehuddin Ahmed, a former central bank governor; Atiur Rahman, governor of Bangladesh Bank; AB Mirza Azizul Islam, former caretaker government adviser; and Monzur Hossain, senior research fellow of BIDS, attend a seminar on monetary policy in Dhaka yesterday.

Economists were divided yesterday over allowing local firms to borrow from external sources amid the stubbornly high bank lending rates in the country.

Salehuddin Ahmed, a former central bank governor, raised the question as to why foreign borrowing by the private sector was encouraged suddenly.

In its monetary policy statement for July-December, the central bank set the private sector borrowing ceiling at 16.5 percent for the second half of the year, with 2.5 percent coming from foreign borrowing. “I am afraid this could go up to 5 percent.”

Ahmed said foreign borrowing for the private sector should not be encouraged this much, as there is excess liquidity in the market.

“It would be difficult for borrowers to repay the loans if they don't earn. As a result, it might put strain on the foreign exchange reserves. Plus, there might be losses if the foreign exchange rates fluctuate.”

Ahmed said the central bank should put more emphasis on why the lending rates are not going down -- the predominant reason behind the private sector's clamour for foreign loans.

AB Mirza Azizul Islam, a former finance adviser of caretaker government, said the foreign borrowing could cause currency and maturity mismatch.

As per his knowledge, this was the first time any indicative target for foreign borrowing has been given in the monetary policy statement.

“I am not totally against it as bank lending rate is high in the country -- it can be allowed to help entrepreneurs cut their production cost.”

He said foreign borrowing could be allowed for industries whose earnings are in foreign currencies, as it will not strain the country's reserves.

“If the earning in exclusively domestic currency and the loan will have to be serviced in foreign currency, then there will be currency mismatch. There might also be maturity mismatch if borrowing is for one year while production will come after five years.” 

He, however, said the central bank has to be careful, as money from abroad is being borrowed at higher interest rate, with one loan from China costing as high as 6 percent. 

Ahsan H Mansur, executive director of Policy Research Institute, said creditworthy entrepreneurs have the rights to borrow from anywhere, as they are not getting loans at lower interest rates from the local market.

Bangladesh Bank Governor Atiur Rahman said the central bank has opened up the scope for foreign private borrowing to make local firms competitive as their competitors abroad enjoy lost cost loans.

“We are providing money to borrow from abroad to the industries that are export-oriented and import-substitution. They are either earning foreign exchange or saving foreign exchange. All of them are rated.”

“There is nothing to be concerned at this stage,” Rahman said, adding that the central bank will monitor the issue along with the Board of Investment.    

Rahman said most of the foreign borrowings are mid-term loans with loan repayment period ranging between four and seven years. “I see no immediate mismatch.”

With $22 billion in reserves at its disposal, the central bank does not need to worry about the risks it did when the reserves were $10 billion, the BB governor said.

He said time will come when the rate of interest in taka will go down and that of the international market will go up as the recovery is gathering steam. “At that time, we will able to take the foreign borrowing to a stable position.”

The debate over allowing local firms to borrow from international sources came at a seminar on the central bank's latest monetary policy statement at the Bangladesh Institute of Development Studies (BIDS) in the capital.

Hassan Zaman, chief economist of the central bank, said the advantages of private sector foreign borrowing outweigh related risks.

Foreign borrowing with its lower interest rates makes Bangladeshi firms more competitive in export markets and encourages local output and employment growth, he said, adding that the exchange rate risks can be managed through hedging products.

“BB is also encouraging quarterly repayments to smooth outflows,” Zaman said.

Meanwhile, the BB governor said the central bank is seriously thinking about the issue of asset quality and asset liability mismatch.

“This is bit of a rigid market. We are trying to take to flexible exchange and interest rates so that Tom, Dick and Harry can't come and take money using a paper and go away,” Rahman said.

There is no bad news over inland bills purchase (IBP) following a major scam, as supervision has improved, he added.

About some banks dispute with Sonali Bank over unpaid IBP, he said the banks will have to resolve their liabilities by September.

“It is their business how they will do it. We will simply deduct the money if we find any unresolved IBP after September. That is as simple as that. The major liability lies with banks as they have signed the documents without checking their authenticity.”

His comments came after Zaid Bakht, a director of Sonali Bank, said banks were refusing to purchase the state-run bank's IBPs worth Tk 1,760 crore.

The governor also said the market is incomplete in some areas and the central bank is working with the securities regulator in areas such as trade in receivables, issuance of corporate debts and hybrid financing like private equity and venture capital.

He said the corporate bond market is not vibrant in Bangladesh as the tax incentives which existed in the past are not given anymore.

“We will have to work with the National Board of Revenue so that we can revive the fiscal incentives such that the local corporate bond market develops.”

Mustafizur Rahman, executive director of the Centre for Policy Dialogue, said the central bank should provide incentives to entrepreneurs who want to set up industries outside of Dhaka and Chittagong.

Mirza Azizul Islam said on one hand, the excess liquidity in the banking system has gone up and on the other hand, the demand for credit has gone down. But, the interest rate has not fallen proportionately yet, as the banks are fixing the price.

Zahid Hussain, lead economist of the World Bank's Dhaka office, said the rate of interest has not gone down as there is competition between banks.

Mustafa K Mujeri, director general of BIDS, moderated the discussion, while Monzur Hossain, senior research fellow of BIDS, made a presentation on the monetary policy.