Govt borrowing from ITFC by depositing BB reserves

Special Correspondent : The Department of Energy and Mineral Resources has signed a loan agreement of $2.1 billion with the International Islamic Trade Finance Corporation (ITFC), a subsidiary of the Islamic Development Bank (IDB). Bangladesh will be able to import fuel oil and liquefied natural gas (LNG) under this agreement. Bangladesh Bank will provide 76 percent of the money mentioned in the loan agreement with ITFC. For this, $1.6 billion will be deposited in the loan fund from the country’s foreign exchange reserves.And the remaining $50 crores will be available from ITFC. Incidentally, ITFC provides loan assistance in the energy sector of member Muslim countries. In this case the organization always finance on co-finance basis. For this, the loan fund must have at least two-thirds of the funding from the central bank of the recipient country. It was welcomed by officials of the Energy Department after yesterday’s signing of the agreement with the company.However, economists and central bank officials say this is largely borrowing from their own reserves. Only $500 million of actual loan assistance from ITFC will be available under this agreement. Where the country’s reserves will be trapped 160 million dollars. As a result of this new agreement, the country’s net foreign exchange reserves are likely to come under more pressure. Officials of the Energy Department said that the loan agreement of ITFC is basically syndication finance.The organization is mainly responsible for fund management.
Under this loan agreement, crude oil and LNG import expenses will be met in the financial year 2024-25. The signed agreement will now go to the finance ministry for approval. From there, after getting the approval, the loan disbursal process will start. According to the terms of the loan agreement, the term of the short-term loan is six months.
The interest rate of this loan will be 2 percent with Secured Overnight Financing Rate (SOFR).
Currently SOFR rate is 5.31 percent.It has to be repaid six months after the time the loan is taken.After another period of six months, the money of this loan fund can be used to buy fuel. The loan agreement was signed with ITFC in the meeting room of the Ministry of Electricity, Energy and Mineral Resources at the Secretariat yesterday.Energy Secretary Nurul Alam signed on behalf of the Energy Department.M Nazim Nurdali, Chief Operating Officer of the organization signed on behalf of ITFC. Bangladesh Petroleum Corporation (BPC) is taking loan from ITFC for 15 years for importing fuel oil.In the current financial year 2023-24, BPC has signed a loan agreement of $1.4 billion with the organization.Petrobangla also joined the list of companies to collect funds from ITFC through yesterday’s agreement.Earlier, due to financial crisis, the company used to get money from the government for importing LNG.Originally, the price of LNG was adjusted by the money received as subsidy on gas.Petrobangla has used the Gas Development Fund (GDF) to import LNG due to financial constraints in the past years.The country is importing LNG from April 2018.Petrobangla has spent about $10 billion to import 1,629 billion cubic feet of LNG in the last five years. Minister of State for Power, Energy and Mineral Resources Nasrul Hamid was present at the loan agreement signing ceremony with ITFC.After signing the agreement, he told reporters, “This is a milestone for Bangladesh.”We have been taking support from IDB for a long time.
So far, their assistance was only for buying fuel oil.Petrobangla will be able to use $500 million to buy gas.BPC will use the rest of the money to buy oil.Bangladesh Bank will provide $1.6 billion out of $210 million.ITFC will pay the remaining $50 million.It will play a big role in the field of uninterrupted energy. As a result of this new loan agreement, the country’s net reserves may be under pressure, the former chief economist of the World Bank’s Dhaka office Zahid Hossainsaid, “Most of the money of this agreement will be provided from Bangladesh Bank Reserve.In this, the country’s net foreign exchange reserves may shrink further.Bangladesh has to import fuel.ITFC has been providing loan assistance for this since long.Due to the war in the Middle East, including Gaza, the price of fuel oil may increase in the world market.It is better if the contract mentions the price of fuel oil and LNG along with the interest rate.Otherwise, it is better not to comment on it.’ Since August 2021, the country’s foreign exchange reserves have been continuously depleting.At that time, according to Bangladesh Bank’s own accounting system, the amount, of gross reserves was $48 billion.On January 31, the gross reserve decreased consistently to $25.09 billion.However, according to international standards (BPM6), the country’s gross reserves were $19.94 billion on that day.And the International Monetary Fund (IMF) has net reserves of less than $16 billion.As a condition for receiving loans from the IMF, the net reserves were supposed to be $17.78 billion on December 31.To meet this condition, the central bank bought more than $1 billion from the market.But even then, the conditions of the IMF could not be fulfilled.
According to the BPM6 principle, debt and investment are excluded in the calculation of reserves of any country. Bangladesh Bank has earlier set up Export Development Fund (EDF) out of reserves. The size of the fund was raised to $7 billion during the Covid-19 crisis. Besides, $20 million were given to Green Transformation Fund (GTF), $3.85 million to Long Term Financing Facility (LTFF) fund, 64 million dollars to Payra Port Authority through Sonali Bank, $4.8 million to Bangladesh Biman and $20 million to Sri Lanka. Officials of Bangladesh Bank said that the size of EDF fund has now come down to $290 million. $20 million given to Sri Lanka has been adjusted. And investment in other sectors has also decreased slightly. Due to this, the reserve gap has decreased in the light of Bangladesh Bank’s own accounting system and the principles of BPM6. Now according to the decision of the government, if the investment in ITFC is increased, it will be removed from the net reserve of the country. This will further increase the pressure on net reserves.
No responsible official of Bangladesh Bank was seen at the signing ceremony of Energy and Mineral Resources Department with ITFC. Bangladesh Bank executive director and spokesperson Md. Mezbaul Haque told, “I am not aware of the matter. It should be known from the concerned people.
Economist Dr. Ahsan H Mansoor likened yesterday’s loan deal with ITFC to ‘a drowning man trying to survive on grass.’ He said, “The dollar crisis in the country is still quite severe. For this reason, the government will welcome any amount of loan assistance, it is natural. But loan assistance from ITFC is nothing new. The organization has always provided loans in the energy sector. But the country’s foreign exchange reserves are now quite fragile. About $2 billion fell in January. In this situation, the ability to lend from the reserve should also be seen. The loan money will be used to import fuel oil. It may no longer be a part of net reserves.
According to BPC sources, the debt of BPC to ITFC for the purchase of crude oil in the financial year 2022-23 was 1 thousand $126.66 million. BPC also paid $1,94.91 million in that financial year. According to BPC sources, ITFC has a debt of $1.4 billion for crude oil imports in the current financial year.
The annual demand of fuel oil in the country is Tk 65 m to Tk 70 million tons. 92 percent of it is import dependent. According to the annual report of BPC, BPC has imported 68 lakh 67 thousand tons of fuel oil in the financial year 2022-23. Tk 62,132.66 crore has been spent on it. The demand for fuel oil in the current financial year 2023-24 has been estimated at 78 lakh tonnes. Although no clear information has been released about the cost estimate for this large amount of import, another related estimate has shown that the cost may be Tk 65,000 to Tk 70 thousand crores. BPC is now making a profit of around Tk 45 thousand crore due to the sale of fuel oil.