THE private sector is now allowed to resort to external sources to obtain loans. In order to obtain loans from these sources a private company in Bangladesh needs approval from the Scrutiny Committee of the Board of Investment, which is chaired by the Governor of Bangladesh Bank. The issue has drawn notable attention of economic commentators as the amount of loans taken by private sector from external sources has been increasing in the recent years.

One pertinent question is, why does a private company resort to external sources for loans while the domestic banking sector has no liquidity problem to meet its demand? Bangladesh Bank has recently conducted a study on foreign borrowing of the private sector. They surveyed a representative sample of 13 firms from different sectors which have taken loan from external sources. The finding of the study suggests that the main reason for them for borrowing from foreign sources are because of lower interest rate compared to domestic sources; (external: libor+3-4.5%. Domestic 14%-18%) and also because most local banks could not finance latge projects, due to their limited capital base.

However, one must recognize that unlike borrowings from domestic sources, borrowings from external sources involve two costs. One is the agreed interest which is as mentioned above is about libor +3-4.5%. Libor is the average rate of interest of intra-bank transaction of top 15 banks located in London during last one year, which usually remains less than 1 percent. So, the rate of interest a private company has to pay while borrowing from external sources will be about 5 percent. The second component of cost of borrowings from external sources is the foreign exchange cost. What investor gets against a US dollar in Bangladeshi taka at the time of borrowing is likely to be smaller than what he has to pay against a US dollar at the time of repayment. This difference refers to the second component of foreign borrowing.

Even with two components of total costs, borrowing from external sources is still cheaper compared to the borrowing from domestic sources. This situation is likely to prevail as long as the current stability of dollar-taka exchange rates remains more or less stable.

If the borrowing from external sources provides the private sector a window of opportunity to secure cheap loan, one legitimate question is then what is the

ground for being concerned about it? One of the main reason is there have been some instances where a country struggled to manage amount of dollar required to pay its total foreign borrowing. Such a situation depreciates local currency. The most recent example is India. Following the global economic and financial crisis of 2008, the government as well as the private sector took significant amount of short-term credit from the external sources. By the last quarter of 2013, India became liable to repay about 172 billion US dollar of its shortterm credit. During the same time, the country had foreign exchange reserve of about 272 billion dollar. That is the amount of immediately payable debt of India accounted for about 64 percent of its total foreign exchange reserve. As a result, the value of rupee against dollar declined significantly for some time putting a brake on country's soaring economic power. East Asian financial crisis originated from a similar ground. This is the main reason why many economic

commentators are worried already with the growing trend of the private sector borrowing from the external sources.

According to Bangladesh Bank study, about 20 private enterprises got approval of USD 936.30 million loans in 2011 which increased to USD 1579.57 million (among 81 enterprises) in 2012 and further to USD 1555.33 million (among 116 enterprises) in 2013. According to the same study, the highest amount of borrowings from external sources have been approved in case of telecommunication sector, followed by power sector. Together they constituted more than 61 percent of total approval.

Both of these sectors serve the domestic markets and hence do not earn any foreign currency. As a result they have to buy dollar from the reserve maintained by Bangladesh Bank to repay their loan taken from external sources. In contrast, an export oriented company can repay its loan taken from external sources with its export earning creating any additional pressure on the foreign exchange reserve. As the current composition of total private sector borrowings from external sources is not dominated by export oriented sectors, the pressure on country's foreign exchange reserve can potentially increase with the growth of private sector borrowing from external sources. The Bangladesh Bank study also identified that due to exchange rate fluctuation some companies-which do not export, face losses in local currency since they need to pay in dollars. This is the main reason for visible concern among many economic commentators.

However, since the size of total borrowings of the private sector from external sources is still small relative to country's foreign exchange reserve, there is nothing to be worried yet But government has to remain vigilant to foresee any formidable pressure on country's foreign exchange reserve before it is too late to avoid. At the same time, since borrowing from domestic sources are costly, and the country needs investment borrowings from external sources by the private sector should be utilized by more. Especially, the export oriented companies should be encouraged to secure more loans from the external sources. At the same time; monitoring of the utilization of these loans should also be increased.

The writer Is a Researcher at Bangladesh Institute of Development Studies (BIDS), former economist, World Bank.

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