China has expressed its interest in extending a large amount of loans in its own currency, the yuan, and Bangladesh is exploring ways to accept and make its best use amid ongoing financial woes.
The authorities in Bangladesh have already initiated discussions to formulate a set of specific proposals to China in this regard. The US dollar is now the medium of exchange for bilateral trades with China, and Bangladesh is now mulling settlement of the import liabilities using loans obtained in yuan.
China is now the largest source of imports for Bangladesh. The authorities believe that the loan may play a crucial role in addressing the dwindling forex reserves in Bangladesh.
It was learnt that China aims to offer more than CNY 36 billion – equivalent to $5 billion – in the form of a ‘trade facility’. As this type of loans come under stringent conditions, the authorities are likely to seek a long-term loan under comparatively flexible terms, according to the commerce ministry and the economic relations division (ERD) sources.
The development came at a time when China aims to promote its currency in international trade and transactions and bolster its position against the US dollar. The country is already conducting international transactions in Yuan with a number of nations, including Russia.
China currently stands as one of the crucial trade partners for Bangladesh, with the bilateral trades, mostly imports, amounting more than $20 billion. Bangladesh spends a whopping sum of dollars to settle the import liabilities, and the officials' concerned are considering the Chinese loan as a respite.
Tapan Kanti Ghosh, secretary to the commerce ministry, said they are considering receiving the loan to settle the import liabilities with China, in an effort to release the pressure on dollars and strengthen the forex reserves.
However, the central bank would determine ways for its utilization, he said, adding his ministry would form a committee to discuss the overall aspects of the loan.
Discussion on loan proposal
The loan discussions began in February this year when the Chinese ambassador in Dhaka, Yao Wen, sought a proposal for a loan equivalent to to $5 billion during a meeting between the commerce ministers of both countries, on the sideline of a ministerial conference of the World Trade Organization (WTO) in the United Arab Emirates.
Bangladesh began extensive discussions over the loan following China's interests. The ERD held an inter-ministerial meeting last month as the commerce ministry requested it to dig into the pros and cons of the loans.
The commerce ministry, at the meeting, asserted that the loans could be used to address the trade deficit with China, while the finance ministry advised to keep the interest rate within 1 per cent and ensure a long repayment period. The revenue board (NBR), meanwhile, clarified that they would not waive the taxes on loan interests.
However, all the participants agreed that a loan in the form of a trade facility may transform into commercial loans, with a high interest rate and short repayment period. Considering the current situation, the government may go for a long-term loan in the form of the budget assistance, with a flexible interest rate.
It was learnt that Prime Minister Sheikh Hasina is expected to visit China in July and that the loan negotiations might be finalised beforehand.
Trade deficit over $19 billion
Bangladesh’s import from China has been gradually increasing but not the export in comparison with the amount. As a result, the trade deficit is increasing continuously. In fact, the deficit has tripled in the last decade.
A Bangladesh Bank source said the products of $6.32 billion were imported from China in 2012-13 fiscal year against the export of a mere $460 million. The deficit was $5.85 billion.
But Bangladesh imported goods of $19.81 from China and imported commodities worth $680 million. This means the trade deficit was over $19 billion.
China 4th highest lender to Bangladesh
The loan China has been disbursing to Bangladesh is also gradually escalating. Actually, China stands at the 4th position among the 32 countries and organisations that lend money to the country.
The World Bank, Japan and Asian Development Bank (ADB) are currently leading in the list.
Currently, China provides nearly 10 per cent of the total loan Bangladesh receives annually. The amount is over $1 billion for the last two years. Of the total loan China provided to Bangladesh so far, $3 billion (about 40 per cent) has been granted in the last four years, with an interest rate almost the same as the other countries and global lenders.
The problem, however, is that the time to repay the loan is much less, which is just 10-15 years excluding the grace period. This means, the amount of instalment is higher.
Calculations showed that if the country takes a loan of $1 billion from China, it will have to pay on average $100 million of the principal annually for the next 10 years, excluding the grace period, against $33.3 million annually, to say, the World Bank.
Speaking about this Zahid Hussain, former lead economist at Dhaka office of the World Bank, told Prothom Alo, “China is trying to enhance the use of its currency, yuan, in global trade. The country is interested in strengthening its position by boosting the reliability of its currency. As part of this effort, China is interested in lending this huge amount of money to Bangladesh in yuan.”
Zahid Hussain further said pressure on dollars would lift to some extent if the import cost is paid in Yuan but the effectiveness of the loan depends on the conditions.
He said it had to be considered whether the loaned money would be used to pay import cost or in repaying the loan of any other country.
Zahid Hussain also pointed out that the rate of interest and repayment time also have to be considered. The loan can be taken if everything is in favour of the borrower, he stressed.
* The report, originally published in the print and online editions of Prothom Alo, has been rewritten in English by Misbahul Haque and Shameem Reza