The government plans on taking out long-term credits from the foreign exchange reserves to finance profitable projects.
The debts will be repaid with the revenue generated from those projects after their completion. If the earnings fall short of making the loan repayment, the government will meet the deficit by allocating funds in the national budget.
The Ministry of Finance has asked the Bangladesh Bank to prepare a guideline in this regard outlining ways in which the government can take out loans from the forex reserves.
In a letter to the Bangladesh Bank Governor Fazle Kabir and Financial Institutions Division's Senior Secretary Dr Asadul Islam on Sunday, the finance ministry said an initiative has to be taken to prepare a guideline or roadmap based on detailed analysis of the viability of using a portion of the forex reserves to provide loans for profitable projects.
Prime Minister Sheikh Hasina raised the topic of taking loans from the forex reserves at a meeting of the Executive Committee of the National Economic Council (Ecnec) on July 6, said Planning Minister MA Mannan.
He quoted the prime minister as saying in the meeting, "We take out loans in US dollars from foreign sources. Our reserves of foreign exchange now stand at $36 billion. Can we not take loans from the reserves?
"The Bangladesh Bank preserves the money on behalf of the people. We can borrow money from the reserve. Although the rates of interest of foreign debts are slightly lower, using funds from the reserve will ensure that the interest of loans will remain within the country."
The finance ministry in its letter signed by Mohammad Walid, joint-secretary of the Finance Division, referred to the discussion at the Ecnec meeting and urged the Bangladesh Bank governor to take necessary effective measures in this regard.
Officials at the finance ministry said loan support from foreign sources such as the World Bank, the Asian Development Bank, and China in large development projects in the public sector might shrink in the future because of the current Covid-19 situation. Therefore, initiatives must be taken to implement projects with the government's own fund.
In this situation, the government will meet the demand for foreign currencies taking loans from the forex reserves, they added.
While talking about repaying loans taken from the forex reserves with revenue generated from the projects concerned, a finance division official mentioned that loans taken out for the construction of the Bangabandhu Bridge on the Jamuna River have been repaid with the money earned as tolls.
The government is now making a profit from the project, he said, adding that the same will happen with the Padma Bridge.
He also mentioned that the government has undertaken an initiative to build a 10-kilometre bridge in Barishal and Bhola. Tolls will be collected on that bridge as well.
Besides, there are scopes for the government to generate revenue from projects in various sectors including power and energy, and economic zones, the finance division official added.
The prime minister last year issued a directive to collect tolls on highways. Once the toll collection is started, projects undertaken for constructing and maintaining the highways will turn profitable. Projects taken up under the Public-Private Partnership (PPP) can also be operated in a profitable manner.
"Therefore, loans taken out to implement such projects can be repaid with the revenue collected from those after their execution. If income from a project falls short of the expected amount the government will allocate funds in the budget to repay the loans taken for that specific project," explained the finance division official.
Analysts said different countries such as Hong Kong, Singapore, and China have invested their forex reserves in profitable projects.
China, in particular, has invested around $1 trillion from its forex reserves of nearly $4 trillion in the Belt and Road Initiative (BRI). In 2009, the country formed the China Investment Corporation as a sovereign wealth fund transferring $70 billion from its forex reserves.
Bangladesh too will have to create such a sovereign wealth fund or infrastructure development fund if it wants to invest money from its reserve of foreign exchange in development projects.
In 2015, after the World Bank had backtracked on its decision to finance the Padma Bridge, the government formed a committee to analyse various aspects of creating a sovereign wealth fund. Dr Ahsan H Mansur, executive director of the Policy Research Institute was a member of that committee.
He told The Business Standard that while undertaking a project, the government evaluates its social and economic impact. It does not think about the economic profit or loss of it. However, projects undertaken in the power and energy sector might be profitable, he said.
The noted economist thinks that if the government may borrow money from the reserve to invest in PPP projects after creating a sovereign wealth fund. "While implementing development projects, the government will meet the demand for foreign currencies with that fund. The government will remain as a minority shareholder in those projects. This way, it will be able to implement many large projects with less investment," he explained.
Ahsan H Mansur also said government officials must protect the interest of the general citizens in PPP investments. This is because private partners often try to present the expenditures in an inflated way. He stressed the need for proper auditing of the income and expenditures in this regard.
Dr Zahid Hussain, former lead economist of the Dhaka office of the World Bank, said the foreign reserve may be used in the Padma Bridge project. Even if the project does not turn profitable on the basis of toll collection, this will be beneficial for the national economy, he argued.
However, the number of such government projects is very few at the moment, he said, noting that even though there are scopes of good returns on projects in the power and energy sector, the government still needs to provide subsidies to these sectors.
He also mentioned that Hong Kong and Singapore assign global institutions such as Goldman Sachs to use forex reserves in financing projects.
It is very important to determine by whom and how a fund created with money from the forex reserves will be operated in Bangladesh, he said, adding that those who will be involved in operating the fund must have the necessary skill to evaluate project proposals properly.