Bangladesh Bank to downsize EDF fund

The Bangladesh Bank has taken an initial decision to downsize its Export Development Fund (EDF) to take some pressure off the fast-depleting forex reserve, according to officials.

Rather than providing the exporters with EDF loans in dollars for capital machinery and raw material imports, the banking regulator is now considering an alternative refinancing scheme for businessmen in local currency taka, said a number of top central bank officials.

Central bank Executive Director and Spokesperson Md Mezbaul Haque said since there have been confusions whether the EDF loans are a part of the forex reserve, the Bangladesh Bank wants to redesign the loan scheme for exporters a little differently.

"We have never said the need for EDF loans is over. But, in future, EDF loans may not be in its current form; the facility may be continued in alternative forms," he told The Business Standard.

The $7 billion export development fund has been formed from the foreign currency reserve, offering loans to exporters in foreign currencies. Exporters are allowed to repay the loans up to 270 days with 4% interest from their export proceeds.

On condition of anonymity, a central bank official told TBS that the Bangladesh Bank has already tightened its grip on EDF loans. "For example, if we now get back Tk10, we are then lending Tk8 max from the EDF. The remaining amount is being adjusted with the reserve."

During talks with the International Monetary Fund (IMF) over a prospective $4.5 billion loan, the central bank was asked not to count EDF loans while estimating the forex reserve.

Citing IMF's explanation to that, the central bank official said the 270 day repayment period for EDF loans means the central bank actually does not have the money in hands during that time.

"It's a vulnerability. Besides, there are uncertainties over the global economic outlook as major economies fear a global recession. There is a concern that Bangladesh's demand for dollars will increase in the upcoming months thanks to our import dependency. Therefore, the central bank wants to shrink the EDF loans in dollars and boost the net reserve," the official added.

The official believes EDF loan downsizing will streamline the reserve and enhance foreign currency liquidity for import payments.

If the refinancing scheme in taka replaces the EDF fund, the central bank will provide businessmen loans from the scheme in taka. Then they would buy dollars from the banking channel and pay for the capital import.

Mohammad Hatem, executive president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), said, "The central bank has always taken effective measures to balance the import-export flow. We will appreciate the authorities if the central bank forms such a scheme in taka."

Banks fear further dollar squeeze

Though EDF loan downsizing is expected to offer some relief to the strained reserve, it may escalate the dollar demand further in the banking sector. Bankers said if the EDF fund is trimmed by $2 billion, exporters will look to manage the amount from the bank channel.

"This may bring back the greenback crisis in banks just after the current brief pause," Syed Mahbubur Rahman, managing director & CEO of Mutual Trust Bank Limited (MTB), told The Business Standard.

He, however, lauded the EDF fund trimming move by the central bank.

The Export Development Fund was also raised to $5 billion in April 2020 as the country's reserve was on the rise during the pandemic on the back of a plummeting import and a strong remittance inflow. Until April 2020, the interest of the loan was at a six-month London Interbank Offer Rate (LIBOR) plus 1%-2% interest rate.

Later, the fund was raised to $7 billion.

As Covid waned and economies rebooted with strong pent-up demands, the reserve started to fall sharply early-2022 on the back of burgeoning imports.

In June this year, when reserve was diminishing sharply, the Bangladesh Bank found that loans given from the foreign exchange reserve are being misused by some exporters, turning those into huge forced loans due to failure in payment to the lenders on the due date.

In the case of many of these loans, no export earnings were generated with buyers failing to pay back the money, resulting in the piling up of forced loans against the EDF in banks, according to findings by the Bangladesh Bank.

Forced loans are created when clients fail to make their LC payments on maturity dates, and yet banks have to meet their obligations to foreign banks. Delay in LC settlement can happen both for import and export.

The Bangladesh Bank in November this year raised the interest rate of EDF loans to 4%, which is still cheaper than the six-month LIBOR rate of nearly 5%.

On 21 December, Bangladesh's forex reserve stood at $34.01 billion.