Cenbank trims EDF by $1b to ease pressure on reserves

The Bangladesh Bank has downsized the Export Development Fund (EDF) by $1 billion to $6 billion, and aims at reducing it by another $2-3 billion in the next six months, in line with the IMF's suggestion to come out of commercial lending from the reserves, sources at the central bank said.

The move is a part of the central bank's plan to phase out foreign currency lending under the EDF, which is built from forex reserves – a development that might upset exporters who have been availing low-cost finance in foreign currency under this fund for over three decades.

The IMF delegation that visited Dhaka in December last to discuss the terms and conditions for a prospective $4.5 billion loan also suggested that the central bank exclude the existing EDF loans from its reserve calculation, sources at the central banks told The Business Standard.

Infographic: TBS

In this perspective, the Bangladesh Bank has decided to phase out EDF lending in foreign currency as the fund cannot be shown in the forex reserves, said a senior executive of the central bank. The central bank has reduced the outstanding EDF loans over the past one month by speeding up loan recovery and slowing down new disbursement, he added.

Earlier, the IMF in its safeguards assessment of the Bangladesh Bank for 2021 raised objections about showing the EDF in the reserve calculation.

Meanwhile, the central bank's slashing EDF loan disbursal has exacerbated the prevailing dollar crisis in the banking channel, making banks refrain from opening letters of credit (LCs) under EDF and adding to businesses' woes.

"We are facing huge troubles as banks are not opening LCs under the EDF," Mohammad Hatem, executive president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), told The Business Standard on Sunday.

A bicycle exporter who has been availing low-cost foreign currency under EDF for over a decade said their cost of doing business will shoot up as now they will have to take out loans from banks at much higher rates compared to those they used to get under EDF.

According to industry insiders, the interest rate of EDF loans was previously determined in accordance with the London Interbank Offer Rate (Libor). Until the beginning of the Covid-induced economic downturn, the interest rate of EDF loans was fixed by adding 1.5% to the 6-month average Libor.  

However, to reduce the cost of funds amid the coronavirus pandemic, the interest rate was fixed at 2% in the first phase. Later on 20 July last, the rate was increased to 3%. Finally, the Bangladesh Bank increased the interest rate by 4% last month but the new rate has been made effective from 13 November last.

Even though the central bank has created a new fund of Tk10,000 crore this month as part of its decision to build an EDF in local currency to support exporters by providing loans at 4% interest, exporters said the local currency fund will not meet the demand for the greenback that has gained over 20% against taka since April last year. 

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said, "The newly-introduced export facilitation fund may be useful for the exporters. But as a bank, we must pay (foreign suppliers) in dollars and we have to mobilise it from the market."

IMF's claim about overstatement of reserves

The IMF claimed that the central bank was overstating its foreign exchange reserves by $7.2 billion through the inclusion of non-reserve assets including EDF with it underestimating related risks, which, the global lender said, might misguide the government in taking decisions about using the reserve money.

The foreign exchange reserves of $46 billion as reported at the end of June 2021 – when the IMF report was prepared – was overstated by 15%, said IMF, adding that originally, the forex reserves would be $39 billion.

At present, the gross foreign currency reserves of the country stand at $32.48 billion, but if the IMF calculation is taken into account, the figure will be nearly $25 billion, according to central bank sources. 

According to IMF analysis, a forex reserve able to meet the import bills for three months is considered safe for a country. From that point of view, Bangladesh has the ability to meet import expenses for more than three months with its current net reserve of foreign currency. 

Misuse of EDF loans

The Bangladesh Bank in its inspection found that loans given from the foreign exchange reserves have been misused by some exporters – by not paying back to the lenders timely, they turned those loans into huge forced loans.

Borrowers are given foreign currency loans at a minimum cost from EDF with an intention of bringing in more export proceeds. But, in the cases of many of these loans, no export earnings were generated with buyers failing to pay back the money, resulting in a piling up of forced loans in banks, according to findings of the central bank.

For instance, forced loans against EDF in a state-owned bank surged by 410% to Tk7,141 crore in 2021 from Tk1,400 crore in the previous year, according to the annual report of the 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 in import and export.

Refinance from EDF halted for several banks

The central bank has stopped refinancing several banks from EDF due to non-payment of outstanding loans on time. Due to this, a cumulative refinance amount of over $200 million of the banks has gotten stuck.

But, the banks concerned are doubtful about getting fresh EDF loans from the central bank even if they pay the dues, said officials.

Heads of treasury departments of several banks told TBS that usually, a specific code is to be mentioned while opening back-to-back LCs for the import of raw materials under EDF loans. 

One of the officials said, "In this case, a bank makes its customers' LC payments almost immediately. Later, the central bank pays us these dollars from EDF. This practice has been going on for so long." 

But, amid the present uncertainty about getting funds from EDF, many banks are refraining from opening LCs under EDF.

The head of the treasury department of a bank, who did not wish to be named, said that they stopped opening LCs under EDF on Wednesday due to the non-availability of dollars from EDF. "Now we are opening LCs for deferred payments of six months or more in case of back-to-back LCs of raw material imports only. These LCs will be paid upon receipt of export proceeds."

Several officials of the Bangladesh Bank – who are involved in policy making for the central bank – said that the terms of lending under EDF have been made stricter. 

Exporters who have imported raw materials with EDF loans, but are not bringing export proceeds properly, are not being given loans from this fund, they said, adding that banks have also been instructed not to send the loan requests of these exporters to the central bank.

Dollar crisis worsens

The downsizing of EDF has created pressure on the demand and supply of dollars in the country's banking channel, causing the prevailing dollar crisis to exacerbate further, said bankers.

Due to the non-availability of dollars from EDF, traders are turning to commercial banks, but they are not getting dollars as per demand due to an insufficient supply of dollars in the banking sector, they added. 

Even imports of many essential goods are being disrupted, they maintained.

For instance, coal cannot be purchased for coal-fired power plants as LC payments cannot be made due to a lack of dollars. Already, Rampal coal-fired plant has halted power production because of the depletion of coal stocks.

The head of the treasury department of a private bank told TBS that the ongoing foreign currency liquidity stress is intensifying due to the reduction of loans from the central bank's EDF. "We are trying to handle the situation. But how can I open LCs if I do not have dollars? So, I am forced to be somewhat conservative."

The EDF commenced operation in 1989 with the participation of the International Development Association (IDA) and the government, with an initial fund of $30.16 million to provide foreign exchange refinancing facilities to exporters. With growing exports, the size of the EDF grew too. In June 2016, the fund was enhanced to $2 billion. Furthermore, $200 million was allocated to refinance the green projects. 

In order to boost the export sector of the country, Bangladesh Bank enhanced the volume of the EDF from time to time. To overcome the Covid-19-related disruptions in the export business, the fund was temporarily enhanced to $7 billion on 27 February 2022 from $6.00 billion in two steps to meet the increasing demand of the exporters.