Financial costs have at least doubled for companies that have taken out dollar-denominated borrowing from external sources due to the depreciation of the Bangladeshi taka against the US greenback.
Borrowers have been affected by the drop of at least 25% in the local currency in two ways: interest and principal payments have increased.
This came after the dollar hit 110 Tk amid a shortage of greenbacks caused by higher import bills.
This means that if a business had borrowed $100, it would receive 8,500 Tk before the local currency exchange rate skyrocketed.
Now, borrowers would have to repay around Tk 11,000 for the same loan. Similarly, businesses would have to pay higher interest.
In March, private sector external debt rose 53% to $24.9 billion. It was $16.2 billion in the same month a year earlier, according to Bangladesh Bank data.
At the current dollar rate, the private sector will have to pay an additional Tk 62,250 crore while servicing the loans. However, since borrowers benefit from a grace period and longer repayment terms, the amount may vary.
The cost of funds for Walton Hi-Tech Industries PLC nearly quadrupled to Tk 473 crore in the recently closed financial year 2021-22 from Tk 124 crore a year ago.
The company’s loss from currency depreciation was more than Tk 304 crore during the year.
The main factor behind the increase in net finance charges was the significant depreciation of the taka against foreign currencies, particularly the US dollar and euro, Walton said in its financial reports.
When she took out the loans, the exchange rate was Tk 80 to Tk 85.
According to Muhammed Omar Faruk Ripon, CFO of Walton, although it has risen to 95 Tk in the banking channel, the dollar actually costs between 95 and 98 Tk currently.
“If there had been no currency depreciation, Walton’s profit would have increased by at least Tk 304 crore,” he said, warning that the problem is going to be acute in the coming months. since the local currency has depreciated sharply since June.
Consequently, the local electronics giant’s profit suffered as it did not choose to raise product prices and pass the burden on to consumers despite rising raw material and operation costs.
“We have foreign loans and we have to pay interest for them. But the interest charges have increased due to the depreciation of the local currency,” Ripon said.
Walton isn’t the only company bearing the brunt of currency depreciation. It hits all companies that have borrowed from external sources or imported raw materials.
As the world’s most important currency, the dollar often rises during turbulent times, in part because investors view it as relatively safe and stable, according to a New York Times article.
Soaring inflation, rising interest rates and global uncertainty over the Russian-Ukrainian war propelled the US greenback significantly higher against nearly every currency.
In Bangladesh, the dollar exchange rate on the interbank exchange platform, where banks buy and sell to each other, stood at Tk 96 yesterday, up more than 12% year-on-year .
But for importers, it has cost around Tk 105 in recent months amid the shortage of dollars.
The businessmen alleged that they were selling US dollars at Tk 93 to Tk 95 to the banks, when they had to buy them at Tk 110 when settling the letters of credit.
Raw material prices rose due to the depreciation of the local currency, prompting companies to raise prices for finished goods to absorb rising production costs.
However, says Ripon, prices cannot be increased sharply because such an adjustment would erode consumers’ ability to buy.
“So we tried to increase efficiency to deal with the situation.”
A senior official at a steelmaker, which has a large volume of foreign loans, said his company had incurred additional financial costs due to currency depreciation.
“As the taka has been artificially overvalued in previous years, we have kept a provision to deal with currency fluctuations. Yet the provision is not enough to deal with such a surge in financial costs.”
Kamruzzaman Kamal, marketing director at Pran-RFL Group, who borrowed from international sources, said: “It is obvious that we have to pay more to repay foreign loans due to currency depreciation. Yet foreign loans are more lucrative than others. local loans.
There is only one way to avoid the erosion of profits that places the burden on consumers by raising product prices.
“But this is not always possible given its impacts on customers,” he said, adding that Pran was reducing costs, eliminating waste and increasing efficiency and productivity to deal with the situation. .
Ahmed Shaheen, additional managing director of Eastern Bank Ltd, said a negative impact of the lower taka on dollar borrowers was expected.
“However, most of the borrowers’ loans in Bangladesh are not denominated in dollars. This has helped them avoid incurring a huge loss.”
Companies that sell their products in the local market have been hit the hardest compared to exporters, he said.
Companies in Bangladesh take out dollar loans mainly for three reasons: the funds are at a reasonably lower cost, have a longer repayment period, and local lenders do not have adequate capacity to provide large loans.
Monzur Hossain, research director at the Bangladesh Institute of Development Studies, says the risk of foreign currency fluctuations is common for dollar borrowers.
“So they should have the policy of minimizing risk.”
One of the strategies for the private sector can be to increase efficiency so that it does not lose competitiveness after raising the prices of goods, the economist said.