Bangladeshi businesses are reeling under soaring production costs, driven by a sharp rise in bank loan interest rates amid a severe dollar crisis. Interest rates have surged up to 15 percent, compounded by increased fuel and transport costs, leading to a nearly 40 percent hike in production costs over the past month.
The dollar shortage has impacted all business sectors in the country. Although the official inter-bank dollar rate is set at Tk 117, traders report being unable to open letters of credit (LCs) below Tk 124, forcing them to pay nearly 50 percent more for imported goods. Many traders have suffered significant losses, with some reporting losses between Tk 100 crore and Tk 400-500 crore due to the increased dollar rate.
The Export Development Fund (EDF) has also been reduced to three billion, exacerbating the crisis for traders. The rising interest rates on loans have further increased the cost of doing business, adding pressure on both traders and consumers and driving up inflation. Small and medium-sized enterprises (SMEs) are particularly hard-hit, with many on the verge of shutting down.
In accordance with International Monetary Fund (IMF) conditions, Bangladesh Bank announced on May 8 that bank loan interest rates would be market-dependent. This policy change followed the removal of the 9 percent loan interest rate cap at the beginning of the fiscal year, part of an effort to control inflation. Consequently, loan interest rates have climbed from 9 percent to as high as 15 percent.
The central bank also introduced a crawling peg policy to determine the dollar exchange rate, resulting in a 6.36 percent devaluation of the taka in one day, setting the dollar rate at Tk 117. This devaluation has significantly increased the cost of all import-dependent commodities.
Businesses are now grappling with the dual challenge of a dollar crisis and escalating loan interest rates. Bank officials report that many enterprises are becoming unprofitable due to the higher interest rates, leading to an increase in overdue loans. Additionally, gas and electricity bills have doubled, and operational expenses, including staff salaries, have risen by about 30 percent due to inflationary pressures.
Amidst these challenges, many businesses are closing down, which is expected to further increase the volume of defaulted loans. This, in turn, will drive up the cost of goods and inflation. Concerned traders have met with Bangladesh Bank officials to seek solutions to the escalating crisis.
According to the central bank, the interest rate of bank loans will not exceed 14 percent. Businessmen from various sectors participated in the meeting at the central bank's head office last Thursday.
After the meeting, FBCCI President Mahbubul Alam said that the loan interest has been left to the relationship between the bank and the customer. As interest rates rise, the cost of doing business increases. At the end of the day, if the cost of traders increases, the impact will be on the product and the consumer. We want to solve this situation.
He said that the dollar exchange rate has been fixed at 117 taka. We want it not to be changed. The governor said the price of the dollar will be limited to 1 taka more or less than 117 taka. Banks have to do LC at the same rate. Traders have sought assurance from the governor to open LCs at this rate.
Mahbubul Alam also said that the interest rate should not be more than 14 percent as stated by the governor. It is almost a fixed interest rate. Measures will be taken in future so that traders are not affected more.
He said that we have to increase the single customer credit limit from 15 percent to 30 percent, convert short term loans into long term to protect the manufacturing sector, and take steps to open regular LCs.
Jasim Uddin, the former president of FBCCI, said that the entire banking sector is in danger. “I have conveyed to the Governor the concern of the traders regarding interest rate, exchange rate, loss due to exchange rate.” We have said that the interest rate should not increase. If the interest rate increases, the defaulted loans will increase.
Even if the credit limit of a single borrower does not increase, defaulted loans will increase. Because they are related to each other. Due to the exchange rate, large industries have suffered huge losses. There must be a roadmap to get out of it. They assured that the central bank will monitor that the interest rate does not go above 14 percent.
(The report was published on print and online versions of The Bangladesh Pratidin on May 19 and rewritten in English by Tanvir Raihan)
