Govt to avoid being guarantor of loans to reduce risk

The government plans a significant reduction in loan guarantees for state-owned enterprises in a bid to boost the capacity of the institutions and reduce external debt burden.

Finance ministry sources have revealed that under the new measures, the government will cease to guarantee loans for government institutions or projects except for those deemed genuinely important in the public interest e.g. the TCB's open market sale of essentials at subsidised rates and import of fertilisers.

This strategic move is expected to enhance the efficiency in managing government enterprises, particularly ones that have been running at a loss for long and have become overly reliant on government assistance. 

Aim to increase profitability and financial strength

By limiting their access to loans without government guarantees, especially if their balance sheets are weak, the government aims to encourage these enterprises to improve their profitability and financial strength.

The move comes against the backdrop of a staggering 70% increase in the volume of guarantees against loans provided by various domestic and foreign lenders to state-owned enterprises since 2019.

According to information revealed in the budget for the current fiscal 2022-23, the government had extended guarantees of Tk92,602 crore against loans taken by various state institutions until 30 June 2022, which was Tk57,000 three years ago. 

Officials from the Finance Division anticipate that the guarantee amount will reach around Tk98,000 crore by the end of the current financial year. This indicates a net increase of approximately Tk6,000 crore in guarantees during the ongoing fiscal year.

Finance Division officials have expressed the need for caution regarding future guarantees stating the need to avoid escalating foreign debt at high-interest rates. 

Turning down guarantee requests

The government has already turned down loan guarantee requests from a number of institutions as it aims to avoid accumulating high-interest foreign debt, an official told TBS.

Typically, interest rates on loans, whether domestic or foreign, acquired by state institutions are based on prevailing market rates.

The government issues guarantees or counter guarantees on loans acquired by state-owned financial institutions and other enterprises to facilitate the implementation of its policies and programmes. In case these institutions fail to repay the loans on time, the responsibility for repayment falls on the government, potentially impacting its future financial position.

IMF plan to improve financial statement

To address these concerns and reduce risks associated with loan guarantees, the government has announced plans to improve financial statements and de-risk 100 state-owned enterprises in line with the International Monetary Fund's (IMF) prescriptions.

The global lender has asked for strengthening and modernising policy frameworks and institutions to enhance macroeconomic stability. As per the IMF term, the government has to publish a "fiscal risk statement, covering major risks from state-owned enterprises, guarantees, and public-private partnerships (PPPs) as part of the FY25 budget documentation. 

Officials from the Monitoring Cell stated that the process has already started with 10 institutions.

The IMF has assessed Bangladesh's debt-to-GDP ratio as bearable, considering the country's economic situation. 

Currently, Bangladesh's debt accounts for 36.35% of its GDP. The IMF maintains that Bangladesh can sustain a debt level of up to 55% of GDP without major issues. 

Nevertheless, despite the relatively low debt burden, the government remains cautious about acquiring high-interest loans.

Strengthening state-owned institutions

Former finance secretary Mahbub Ahmed endorsed the government's initiative saying that it was necessary for the sake of strengthening the state-owned institutions. Also, it is necessary to take a cautious stance with regard to foreign loans, especially in the present economic situation, he added. 

Zahid Hussain, a former lead economist of the World Bank's Dhaka office, acknowledged the government's rationale for reducing guarantees, pointing out widespread mismanagement, inefficiency, and corruption plaguing most state-owned institutions. 

He emphasised the need for comprehensive initiatives to develop these institutions, including improvements in management skills, the eradication of irregularities, and the promotion of profitability. Privatisation or closure of non-viable institutions could also be considered, he suggested.

Majority of SOEs making loss

Finance Division officials have highlighted that the majority of state-owned enterprises are currently operating at a loss due to improper resource utilisation, inefficiency, mismanagement, and corruption. Some organisations suffer from excess manpower, resulting in an absence of meaningful work. 

Consequently, loan repayments become challenging, and numerous organisations frequently request loans from the finance department, they observed. 

Additionally, some institutions want loan interest from the Finance Division. Recently Sonali Bank has written to the Finance Division requesting to waive interest on loans under Enterprise Growth and Bank Modernisation Project. That is, at the end of the day, the government has to pay this amount, continued the officials.

Reports indicate that Krishi Bank, Rajshahi Krishi Unnayan Bank, and Karmasangsthan Bank have acquired loans from the Bangladesh Bank to sustain their operations, but their incomes have not increased, and loan repayments have been delayed. Consequently, the government has extended the guarantee period to accommodate these challenges.

Similarly, the Trading Corporation of Bangladesh (TCB) has encountered difficulties repaying its loan from Sonali Bank. The government has resorted to subsidising the repayment through budgetary allocations. 

The Finance Division recently denied the TCB's proposal to purchase rice bran oil, refraining from providing guarantees. 

The Bangladesh Agricultural Development Corporation (BADC) also finds itself in a similar situation.

While Bangladesh Biman authorities claim to be repaying their loans on their own, the organisation still has outstanding arrears with various institutions, including the BPC. 

The national carrier has taken out loans from domestic and foreign banks to procure aircraft and spare parts, with approximately Tk8,000 crore loans being guaranteed by the government. 

Shafiul Azim, managing director and CEO of Biman Bangladesh Airlines, expressed confidence that the government would make decisions in line with the prevailing circumstances, assuring that loan repayments would not pose a problem for the airline as it consistently fulfils its financial obligations.

Power plants' foreign loans guaranteed by govt

A significant portion of the government's loan guarantees has been given against various power plants, with loans obtained from foreign banks. Specifically, the government has provided guarantees amounting to Tk49,515 crore for 18 power plants. However, some of these power plants are currently non-operational, while others face operational challenges due to fuel shortages.

Additionally, the Bangladesh Sugar and Food Industries Corporation has received government guarantees for loans taken by two institutions, primarily for the working capital of sugar mills most of which are operating at a loss.

Officials fear problems getting foreign funds

Commenting on this matter, Arifur Rahman Apu, chairman of the Sugar and Food Industries Corporation, emphasised the importance of organisations utilising their resources efficiently and building their own capabilities. 

He further stated that the government's decision will bring about changes in the operations of these institutions. 

He also mentioned that due to the government's reluctance to provide guarantees for the corporation, foreign companies have withdrawn their loan offers or joint venture investments.

Furthermore, the Bangladesh Jute Mill Corporation has acquired a loan of Tk491 crore as working capital for 16 mills, but it is failing to repay these loans timely. Some jute mills, experiencing losses, have been transferred to the private sector by the government. As a result, the government is responsible for repaying the debts of these jute mills.

Meanwhile, the Bangladesh Chemical Industries Corporation (BCIC) has obtained loans of approximately Tk7,000 crore from local banks with government guarantee to import urea fertiliser. Additionally, the Bangladesh Agricultural Development Corporation (BADC) has secured loans exceeding Tk10,000 crore from Sonali and Janata banks for fertiliser imports.

Naser Ezaz Bijoy, the country chief executive officer of Standard Chartered Bank Bangladesh, shared insights on the government's plan. 

He emphasised that lending institutions evaluate the repayment capacity of the borrowing institutions before granting loans. Lenders feel more secure when the government provides guarantees, resulting in lower interest rates.

The government may have a strategic approach when providing guarantees, he observed, adding that maintaining a low level of foreign debt is beneficial for any country. However, government guarantees may be necessary for new initiatives such as Green Field projects, and low-interest rate loans.

Bijoy reassured that Standard Chartered Bank, as a lending institution, remains optimistic about Bangladesh. The country's foreign debt as a proportion of GDP has not reached a critical level, providing a sense of comfort.