the offshore banking unit (branch that offers loans in dollars) of his bank was a blessing. It could get quick dollar support for imports at a good rate – the last time being 8%. But recently the commodity importer had to pause. Global interest rate has been on the rise and a 20% "withhold- ing tax" imposed in the current budget on interest pay- ment has made foreign loans costlier further. The cost of borrowing has now shot up to around 11%. The importer asked his bank to arrange dollars from the local market instead for payment of import bills. "As he was one of our valued customers, we tried our best to arrange dollars from the market for him. Yet, we could not arrange the required amount – $10 million," said a frustrated treasury banker. This is how businesses are suffering from the imposition of the tax on interest pay- ments for foreign borrowings from 1 July this year. Analysts and bankers predict that this measure will sig- nificantly impede the growth of the industrial sector within the country, given that entrepreneurs have relied on these cost-effective loans to fuel their business expansions. For instance, DBL Group, which is one of Bangladesh's leading textile and apparel manufacturers and exporters, used to take foreign currency loans directly from international development finance institu- tions, such as the International Finance Corporation (IFC), British International Investment, and some other organisations. The group that borrowed $96 million from international development finance institutions last year is now feeling discouraged in availing this kind of loans anymore. "It seems we are penalised for being compliant and disciplined," said MA Jabbar, managing director of DBL Group. "For getting loans from inter- national development finance institutions, we had to invest to ensure compliance." A senior official of a pri- vate bank said foreign loans are more important now than any time before to keep the economy going. He said banks will ultimately have to provide dollars if they want to import with a loan in taka. On the other hand, if the loan is available in dollars, the import expenses can be settled directly from there. As a result, the pressure on the supply of dollars in banks is reduced. It seems we are penalised for being compliant and disciplined. For getting loans from international development finance institutions, we had to invest to ensure compliance -- [MA Jabbar, Managing Director, DBL Group] Due to the new taxation policy, the cost of dollar loans will increase significantly. Former senior official of the International Monetary Fund (IMF) Ahsan H Mansur told The Business Standard that such a policy should be made after detailed study. The gov- ernment could have announced this year that tax will be imposed on the foreign loans from next year, he said. If this was done, businessmen and banks would get time to pay the loan. Now, they will suffer due to the sudden taxation. The loans taken before this policy are also taxed, he said. Countries that have double taxation avoidance agreements with Bangladesh may get some relaxation, meaning they have to be informed in advance when imposing taxes. But the loan taken from the rest of the countries will have an adverse effect, he said. How the tax measure pushes up costs The interest
rates in the international market are now linked to the Secured Overnight Financing Rate (SOFR) instead of the formerly LIBOR. Foreign loans are subject to an added interest (margin) of up to 3.5%. In light of the US Federal Reserve's policy rate increase, the SOFR already surged to 5.35% from as low as 0.25% during the Covid-19 pandemic and below 1% even in early 2022. Consequently, the interest rates for loans on the international market have experienced a corresponding spike.Bankers have said an individual availing a $2 million loan through buyer's credit or from an offshore banking unit for a one-year term would incur approximately $180,000 in interest. Under the new withholding tax on
interest payments, businesspersons would be liable to pay around Tk39 lakh in taxes on interest payment. While foreign companies are obligated to cover this tax, they typically pass on the burden to borrowers. Also, loans obtained five years ago, if repaid with accu- mulated interest, would also attract taxes under the new guidelines. Prior to the imposition of this tax, a Bangladeshi customer securing a loan from an interna- tional lender would have faced a maximum interest rate of 8%, compared to at least 9% for local loans. Presently, obtaining a dollar-denominated loan from overseas translates to an interest rate of nearly 11%, surpassing the 10.10% interest rate for local loans. Bankers said the NBR introduced this tax, which will discourage borrowing in dollars. Any reduction in for- eign loans due to the added taxes could potentially erode the nation's foreign exchange reserves, now at $23.3 billion, they warned. According to data from the central bank, as of March this year the foreign debt owed by the private sector surpasses $22 billion, of which $13.66 billion is short-term. The outstanding short-term loan amount through offshore banking units was $2.92 billion at the end of June this year, Bangladesh Bank data shows. Businesses' worries With more expensive foreign loans and trade finance facili- ties, manufacturing sectors might be forced to scale down their production, ultimately resulting in decline in supplies and overall trade activities. "We have been expanding for the last several years by availing low- cost foreign currency loans.
