Assignment On

Impact of Foreign Commercial Loan on domestic credit market of Bangladesh

Course name:Project management

Course code:FIN-3601

Submitted To

Amzad Hossain Sazzad Shikder

(Coordinator for MSS program in economics & Banking)

Submitted By

Name:Nelufar Islam Tunisha

ID no: EB171242
Semester: 6th
Section: B

Date Of issue
14 .05.2020

Date of submission
17.05.2020
Introduction
The intention of this study is to get an indication of the trends and
uses of private sector commercial borrowing from sources in
Bangladesh. In this assignment, I try to describe impact of foreign
commercial loan on domestic credit market of Bangladesh.
Firstly we must understand that foreign commercial loans are which
loans given by the foreign branches that are headquartered in
a foreign country, but operate branches in different countries.
As a middle-income country, Bangladesh is required foreign grants
and loans for the betterment of the country. There is no or little study
regarding the foreign grants and loans in Bangladesh and its impact
on the economic development of Bangladesh that is why the objective
of this study was to overcome this gap and to find out the actual
scenario of foreign grants and loans in Bangladesh. Bangladesh
received foreign grants and loan every year proportionately from IDB,
ADB, WB, Japan, UAE, UK, China, Saudi Arabia etc. donor agencies
and countries but it varies from year to year. Though gradually
Bangladesh increases its economic conditions but it should give
concentrates on the payment of previous loans and being conscious on
use of foreign grants and loans.
Impact of foreign commercial loan on domestic credit market of
Bangladesh
The Covid-19 pandemic has thus far spread to 208 countries and
regions of the world, significantly affecting the global economy.
Since the virus has been growing exponentially, even the developed
countries have been unable to contain its spread. As a result, people
are dying in the affected areas at an alarming rate. We can’t even
think how deadly the highly contagious disease will turn if it spreads
from moderate to a strong category in India or Bangladesh.
Bangladesh is the most densely populated country in the world,
however , to our concern, the healthcare facilities in the country are
too limited to serve its 160 million-plus population. If we look at the
sector-wise resource distribution of operating and development
budget for the fiscal year 2019-2020, we would see the health sector
has received merely 4.9% of the total allocation.
Meanwhile, the education and technology sector has received 15.2%
allocation which is more than 3 times higher than the health sector
allocation. Due to poor investment in healthcare infrastructure
nationwide and scarcity of medical equipment i.e. testing kits, and
doctors to combat Covid-19, the government is passing a very hard
time.
The government should act promptly to allocate further resources to
healthcare infrastructure development to tackle this pandemic. Till
now, there is no vaccination for this virus. Thus isolation and
lockdown are the only means to stop the spread of this deadly virus.
Bangladesh outlook
The unprecedented Covide-19 pandemic has caused disruptions to
global trade, business, and education. Bangladesh is equally affected
by this contagion.
Increased connectivity to international financial markets poses
increased risks to developing countries like Bangladesh.
Increasingly economic growth has been becoming reliant on
debt. Such inflows of external resources can lead to exchange
rate appreciation, loss of competitiveness and a negative
impact on export earnings. Over the past decade there has been
a rise in the accumulation of private, non-financial corporate
debt.

While a country like Bangladesh relying on low-skill

manufactures has enjoyed export success, that success has
come at the expense of economic diversification, the key to
growth in the long run. But as the global economy is slowing
down because of virus, Bangladesh is likely to experience
diminished export earnings and slower growth which in turn
will reduce tax revenue leading to fiscal deficits. All these will
cause to challenge the debt sustainability.

Public debt in Bangladesh stood at US$91 billion in 2018

accounting for 34 per cent of GDP. This figure is used by
investors to measure a country's ability to make future
payments on its debt, thus affects the country's costs and
government bond yields.

Public debt in Bangladesh is projected to rise to US$121

billion by the end of this year. Most of the public debt is
domestic and denominated in the local currency accounting for
56 per cent of total public and publicly guaranteed debt (PPG)
in 2018. External debt is mostly owed to multilateral and bi-
lateral creditors. In recent years there has been an increase in
private external debt accounting for about 15 per cent of total
external debt in 2018.

Overall Bangladesh remains at low risk of debt distress as

reflected in total debt service as percentage of goods, services
and primary income. The figure stood at 6.33 per cent in 2018.
But looking at this figure over the last 40 years or so one
ought to be careful as it fluctuated between 38.5 per cent in
1986 and 4.7 per cent in 2016. But the trend of the ratio has
been mostly in the single digit level since 2001.

For Bangladesh the case for domestic borrowing is rather

compelling, even though domestic borrowing quite often can
be more costly than external borrowing. Increased reliance on
domestic borrowing has its own complications when sovereign
debt restructuring becomes necessary. Therefore, it is
necessary that domestic debt remains completely under
domestic jurisdiction separate from external sovereign debt.
This will enable the country to weather through any economic
downturn caused by any external debt crisis.
Major Findings of the Analysis

Thirteen companies in various sectors like RMG, footwear, knit

garments, agricultural products, air transport, telecommunications,
chocolate confectionary and food, shipping lines, power generation,
pharmaceuticals, electric generation, cement and steel mills were
selected for the analysis. Results show that these loans have been used
mostly to import foreign capital machineries to expand existing
projects and to establish new ones as well. The summary results are
interpreted in the following paragraphs.
In terms of the loan use most of the companies uses borrowed fund
mainly to import capital machineries either to start new projects or to
expand the existing one. Some of the external loan has been used to
pay off local loans, and one company used the loan to pay LC
payments (Deferred LC). The analysis results suggest that the loans
were used productively, except for one company who faced difficulty
in purchasing land for the new project and had to reimburse majority
of the disbursed loan.
The analysis result also pointed to some difficulties in external
borrowing such as:
i) Virus slow down the whole global economy that effect also
Bangladesh foreign market.
ii) Due to exchange rate fluctuation some companies-which do not
export, face losses in local currency since they need to pay in
dollars.
iii) One company which borrowed from the offshore banking unit
of a local bank, faced significant losses as the bank was unable
to continue foreign exchange financing-and switched to higher
cost local financing.
iv) One company sighted the lengthy procedure of loan approval as
a major hurdle to acquire loans.

Recommendations
I would like to make the following recommendations but this
recommendation will be apply when virus covid-19 are finish whole
the world and global economy become good.

First, further work need to be done to find out whether indeed

companies are facing any difficulty in availing loans after getting the
approval.

Second, since Bangladesh’s debt repayment capacity has steadily

improved and these funds appear to contribute to growth, one can
consider further encouraging these types of loans. One way would be
to significantly simplify the approval process by for instance
introducing on-line submission of applications and through clear
communication over procedures.

Third, in terms of loans utilization, the borrowing companies could be

asked to report on a six month basis on use of the foreign commercial
borrowing.

Conclusion
Foreign grants and loans are indispensable for developing country as
well as for lower-middle income country and middle-income country
for the economic development as well as infrastructural
development of the developing country. As a middle-income country,
Bangladesh government takes foreign grants and loans from various
donor agencies and developed countries to continue some
development projects of the country and should take proper steps for
the proper use of that funds and find out external sources for payment
of loans. Though gradually Bangladesh increases its economic
conditions but it should give concentrates on the payment of
previous loans and being conscious on use of foreign grants and
loans.

References
Muhammad Mahmood is an independent  economic and
political analyst give the article The Financial Express news
at February 15,2020
Today Bangladesh news
Burnside, C., & Dollar, D. (2000). Aid, policies, and growth.
American economic review, 90(4), 847-868.
Burnside, C., & Dollar, D. (2004). Aid, policies, and growth: reply.
American economic review, 94(3), 781-
784.
Buszko, M. (2016). Profits and Risks of Foreign Exchange Mortgage
Loans: Case of Poland. In Business
Challenges in the Changing Economic Landscape-Vol. 1 (pp. 129-
145): Springer.
Carson, C. S. (2004). International Monetary Fund (IMF).
Encyclopedia of Statistical Sciences.