The government is approaching various donor agencies for dollars, overlooking interest rates and other conditions in a bid to overcome the shortfall in foreign currency. The move aims to maintain the foreign currency reserve by meeting additional import costs and keeping the dollar exchange rate stable.
The government has approached four major donor agencies -- International Momentary Fund (IMF), World Bank, Asian Development Bank (ADB) and Japan International Cooperation Agency (JICA) -- over the last three months and sought at least $7 billion or Tk 660 billion after adjusting with the existing market price.
Bangladesh is more interested in budget support in addition to receiving project assistance because the government can spend funds for budget support in any sector. However, donors impose some conditions while providing budget support.
The government is also trying to get the funds from project assistance to be released through budget support. Bangladesh received funds from the World Bank and ADB for various projects and now the finance ministry wants the remaining funds be released through budget support.
Why dollars are necessary
Global commodity prices have soared for several months because of the Russia-Ukraine war amid the revival of economy after the coronavirus pandemic. Import costs increased amid the fall in remittance last fiscal. The price of the dollar jumped from Tk 86 to Tk 95 a dollar, with dollar rates crossing Tk 115 in the kerb market. Foreign reserves decreased to meet additional costs of import, resulting in a big deficit in the balance of payment.
Speaking to Prothom Alo, planning minister Shamsul Alam told Prothom Alo, “The dollar market became volatile as remittance fell and import costs increased last fiscal. Dollar supply must be increased to control the soaring dollar price so it will better if we get as much dollars as we can.”
“Since we are in a safe zone on loan payment capacity, there is no problem to take loan, and budget support has been sought from various donor agencies including IMF,” he said adding, the economy is witnessing some sort of uncertainty, so it is a good time to take budget support because loan on budget support is easier than domestic loans.
How much Bangladesh expects
Bangladesh receives the highest loans from the World Bank. The finance ministry sent a letter to the World Bank in the last week of May this year seeking USD 1 billion in budget support to tackle various challenges during this crisis. The World Bank is yet to respond.
Sources said the finance ministry wants to start talks on the loan proposal soon and these funds will be available in four instalments.
Other than these, talks are on with the World Bank on sector-wise budget support for USD 700 million under two packages – USD 450 million for environmental protection and USD 250 million for employment.
According to the sources in the Economic Relation Department (ERD), the government sought USD 1 billion in loan from ADB at the end of May this year and both parties started bargaining at the beginning of this fiscal. The ADB wants to provide this fund for economic recovery and social safety net programme and this budget support proposal may be approved in its board meeting in next 2-3 months.
The Finance Division sent a letter to IMF on 24 July seeking funds to ease the existing economic pressure. The letter highlighted the state of the economy saying funds are necessary on an urgent basis for budget support and for maintaining balance of payment. According to the Finance Division, talks will begin soon on availing USD 4.5 billion. The government is approaching IMF for dollars after about a decade.
Last month, JICA president Akihiko Tanaka visited Bangladesh. Finance minister AHM Mustafa Kamal sought budget support during a meeting with Akihiko Tanaka on 25 July. According to the Economic Relations Division (ERD), Bangladesh may seek USD 500 million from JICA.
Speaking regarding this to Prothom Alo, Zahid Hossain, former lead economist of World Bank’s Dhaka office, “To contain the pressure of inflation and dollar crisis, an urge to ‘bring in dollars’ has emerged. Bangladesh has sought for budget support from several donor agencies, including the International Monetary Fund (IMF). It will bring some relief in the balance of payment. We know what needs to be reformed. Such reforms are also essential for the economy. Therefore, it is better to make these reforms in our interest by means of the conditions of the donors."
In his opinion, reforms are needed in the revenue and financial sector, government cost management and in the coordination structure of fuel oil price.
Budget support comes with various conditions from donor agencies, but those remain almost similar and include reforms in finance sector, adopting new work plan to increase revenue collection, updating laws, revising subsidies, identifying actual beneficiaries of social safety net programme and ensuring the receipt of allowance.
$16 billion in soft loan
The government is also eyeing soft loans in addition to hard-term loan. The International Development Association (IDA) of the World Bank is a big source for soft loans and Bangladesh will receive loans from IDA the in current fiscal for the next three years.
According to the finance ministry, Bangladesh may receive about USD 6 billion from IDA20 in four categories in next three years. Some USD 2 billion may come from core IDA with lowest interest and easy terms. Another $2 billion may also be given in loan with libor (London Interbank Offered) rate for various projects aimed at reviving the economy. Besides, loan with easy terms will also be available for multilateral project for trade at regional level and infrastructure development.
The World Bank launched the IDA20 replenishment, aiming to support countries in their recovery from the Covid-19 crisis and transition to green, resilient, and inclusive development.
This time, IDA20 created another category on short-term maturity loan with a 12-year payment period including a six-year grace period and this loan may be given for the construction of mega infrastructure in energy sector, and money from these projects return quickly.
In the meantime, ADB will provide Bangladesh USD 12 billion in loan under its country partnership strategy (CPS). Some USD 2.36 billion was disbursed last year, with about USD10 billion still available for loan.
USD U48 billion in pipeline
Donor countries and agencies promise funds from time to time, but huge amount of it lies idle in pipeline due to lack of capacity in project formulation and implementation.
According to ERD sources, currently, there are USD 48 billion or approximately Tk 4.5 trillion in pipeline. As of last fiscal, Bangladesh has received $111.36 billion in loan and grants from various donor countries and agencies since its independence in 1971, with Japan, World Bank, ADB and other donor agencies providing about 70 per cent of loans.
* This report appeared in the print and online editions of Prothom Alo and has been rewritten in English by Hasanul Banna and Ashish Basu