Why private sector turns away from foreign loans

Highlights:

• Private-sector external debt fell 23% from its 2022 peak
• Total external debt reached nearly $19.94 billion in July
• Short-term debt plunged 42.48% to $10.21 billion
• Long-term debt nearly doubled to $9.73 billion
• High interest rates and taka depreciation discouraged foreign borrowing
• Debt decline may reflect repayments, reduced imports and investment

Bangladesh's private-sector external debt fell by more than 23% from its 2022 peak to nearly $19.94 billion in July 2026, as high global interest rates, taka depreciation and foreign-exchange pressures prompted businesses to pay down short-term dollar liabilities and reduce reliance on foreign borrowing.

The shift is most visible in short-term debt, which includes buyer's credit, deferred import payments and other trade facilities. It fell 42.48% to $10.21 billion between the second quarter of 2022 and July 2026, Bangladesh Bank data show.

The sharp decline indicates that local businesses have been repaying foreign obligations rather than rolling them over, while also relying less on short-term foreign credit to finance imports and working capital.

At the same time, long-term private-sector external debt has risen steadily, increasing from $4.92 billion in early 2020 to nearly double that amount, or $9.73 billion, by July 2026.

Businesses say they have increasingly shifted away from volatile, short-tenor foreign loans towards structured long-term facilities to reduce exposure to sudden refinancing and rollover pressures.

Infograph: TBS

"Foreign loans have become too expensive – 7-8%," said Mostafa Kamal, chairman and managing director of Meghna Group of Industries (MGI), which has borrowed from various foreign sources.

MGI has taken both short-term foreign loans, including working-capital facilities, and long-term project loans with maturities of five to 10 years.

"We still have foreign loans in the process, but now it has become far more expensive than it was in 2020-2021," Kamal told The Business Standard.

Interest on private-sector foreign loans is tied to the benchmark SOFR (Secured Overnight Financing Rate), which is 3.87% as of 1 October 2026, according to the Federal Reserve Bank of New York. SOFR was near zero at 0.05% in 2021 and it jumped to 1.50% in Q2 of 2022 when the global economy, including Bangladesh, recovered from Covid-19. On top of that, foreign lenders add a credit risk spread and a 20% withholding tax on interest remittances sent abroad.

Bangladesh Bank data show that private-sector external debt peaked at $25.95 billion in the second quarter of 2022, up from $13.23 billion two years earlier.

At the peak, more than $17.75 billion, or about 68% of total private-sector external debt, consisted of short-term liabilities. Four years later, in July 2026, total private-sector external debt had fallen to $19.94 billion, while the share of short-term debt had dropped to around 50%.

Fahmida Khatun, distinguished fellow at the Centre for Policy Dialogue (CPD), said the decline in private-sector external debt was likely the result of several pressures working together.

High global interest rates have made foreign borrowing more expensive, while the depreciation of the taka has increased the amount businesses have to repay in local currency against dollar-denominated loans.

"Though foreign exchange reserves are increasing, they are not enough. With foreign exchange scarce and access to dollars uncertain, private companies probably avoided new foreign debt and repaid existing obligations where possible," said Fahmida.

The sharpest decline has been in short-term debt, which fell 42.48%.

"This may partly reflect reduced use of trade credit and short-term loans to finance imports," the economist said.

"When import payments are difficult or costly, businesses may cut or delay imports, seek more domestic financing, or reduce their reliance on short-term foreign credit," she told TBS.

Bangladesh Bank's reporting classifies private-sector short-term external debt as including trade credit and other short-term liabilities. The decline, therefore, may reflect changes in these financing flows as well as actual loan repayments.

"This reduction can lower exposure to foreign currency and refinancing risks. But it should not automatically be seen as a sign of stronger businesses. It may also indicate that the private sector is postponing investment, facing tighter access to finance, or operating with lower imports and production," said Fahmida.

The decline in total external debt could mean repayments have exceeded new borrowing. However, determining the precise causes would require data on new borrowing, repayments, trade credit and investment, she said.