Govt scraps Sovereign Wealth Fund for mega projects

The government has backtracked on its decision to set up a $10 billion Sovereign Wealth Fund in five years from foreign exchange reserves to finance large projects.

The Cabinet on Monday scrapped the draft law to set up the fund.

When the initiative was taken five years ago, the country's foreign exchange reserves stood at more than $32 billion, most of which were deposited by the Bangladesh Bank in foreign banks at nominal interest rates. The government had planned to ensure foreign exchange financing for mega projects like the Padma Bridge and metrorail by setting up a fund to get additional benefits by considering the reserve as "idle money".

But, as Bangladesh's remittances have been declining over the past few months and import costs have risen sharply compared to export earnings, the size of the reserves has been declining from $48 billion. Since the Ukraine-Russia war began last February reserves have dropped to $41 billion and the dollar crisis has intensified in the currency market.

Under the circumstances, to keep the foreign exchange reserve at a satisfactory level, the government has announced measures to control the import of luxury goods, suspend the implementation of less important projects and bring back the money laundered abroad.

A separate fund was initially set up under the Ministry of Finance with $2 billion in reserves, and the Department of Finance planned to increase the size of the fund to $10 billion over the next five years.

Although the Sovereign Wealth Fund has not been set up, another was set up in March 2021 by the Bangladesh Infrastructure Development Fund (BIDF) to spend the reserve money on infrastructure development, which the government has decided to use for power and port development. The fund has an annual investment target of $2 billion.

After Monday's decision to revoke the cabinet's initial approval to form a Sovereign Wealth Fund, Cabinet Secretary Khandaker Anwarul Islam said that since the BIDF was managing such a fund, there was no need to raise a new one.

Terming the government's decision logical, former chief economist of the World Bank Zahid Hossain told The Business Standard that during the current foreign currency crisis, no more money should be spent on reserves from BIDF.

The Payra Port Authority initially received a loan from BIDF funds. Sonali Bank is lending Tk 5,430 crore from the fund for a period of 10 years for the excavation of Ramnabad channel. However, some economists think that the decision to spend money on development projects from the reserve money during the current dollar crisis was not reasonable.

Finance Ministry officials said that after the Awami League government came to power in 2009, the idea of releasing sovereign bonds was initially considered for rapid infrastructure development. Abul Maal Abdul Muhith, the then finance minister, thought of releasing such bonds after Sri Lanka received a huge response doing the same.

After the World Bank withdrew from financing the Padma Bridge in 2012, the Finance Division initiated the creation of a Sovereign Wealth Fund without Sovereign Bonds to ensure the availability of foreign exchange in the implementation of mega projects including this bridge.

As the foreign exchange reserves of Bangladesh continued to increase in the following years, instead of issuing sovereign bonds for the development of the country's infrastructure, an initiative was taken to set up a separate fund under the Ministry of Finance with money from the reserves. The draft law was drafted by the Finance Division and later approved in principle in February 2017.

The then Cabinet secretary Mohammad Shafiul Alam said at the time that many countries in the world have sovereign wealth funds. The government will be able to use this fund in any sector in public interest. 

The then finance secretary Mahbub Ahmed told The Business Standard on Monday that the initiative was taken to set up a Sovereign Wealth Fund without Sovereign Bonds and with the idle money of the reserves. Later the government formed such a fund under a different name. Therefore, the cabinet has scrapped the initial approval to form the fund.