Reserves to get a boost with $800m budget support from ADB, AIIB

Bangladesh is set to receive $800 million in budget support from two development partners this month, providing significant relief for the government at a time of declining foreign exchange reserves and challenges faced by businesses in meeting import bills due to a shortage of US dollars.

The Economic Relations Division (ERD) has confirmed that the Asian Development Bank (ADB) and the China-led Asian Infrastructure Investment Bank (AIIB) will each contribute $400 million towards this financial assistance.

In addition to these two organisations, a budget support agreement of approximately $230 million is scheduled to be signed with the Japan International Cooperation Agency (Jica) this month – although in yen, according to sources at the ERD.

ERD officials said preparations are currently underway for the agreement with Jica to be signed next week.

The ADB will raise its budget support proposal for Bangladesh at the organisation's board meeting on 13 June. Subsequently, an agreement regarding this proposal will be signed between Bangladesh and the ADB the next day, according to the ERD.

ERD officials said the budget support agreement with the AIIB will be signed the day after the agreement with the ADB is initialled.

Unlike the ADB, the AIIB's budget support proposal does not need to be presented in its board meeting. Nevertheless, the proposal has already been sent to the board members, who have already expressed their approval, they said.

Typically, budget assistance is disbursed promptly after the loan agreement is finalised. Therefore, the $800 million is expected to be released within the next 7-10 days.

This budget assistance will be available at a slightly higher interest rate, and Bangladesh will have a relatively shorter repayment period for the debt.

Experts have acknowledged that although the interest rate is high, budget support is currently necessary for Bangladesh due to the ongoing dollar crisis.

Zahid Hussain, former lead economist of the World Bank's Dhaka office, told The Business Standard that considering the current economic situation of the country, the budget support deal will have a positive outcome.

He emphasised that the interest rates for the budget support are comparatively low. It will not be possible for Bangladesh to secure loans from commercial sources for coal and LNG imports at such favourable rates, he added.

According to the Bangladesh Bank, the country's foreign exchange reserves currently stand at $29.78 billion.

To qualify for the second tranche of the IMF loan, the country's foreign exchange reserves must reach $24.46 billion by the end of June and $25.32 billion by September. The release of the second tranche of the IMF loan is anticipated in December.

Hence, the budget support provided by the ADB and the AIIB is expected to play a crucial role in increasing the reserve and meeting the required targets.

Currently, the Secured Overnight Financing Rate (SOFR) stands above 5%. The ADB budget support will carry an interest rate of the SOFR rate plus 0.5%, along with a commitment fee of 0.15%. The repayment period for this loan is set at 15 years, with a grace period of three years.

The SOFR is an influential interest rate that banks use to determine the pricing of derivatives and loans denominated in US dollars.

On the other hand, the interest rate for the AIIB loan will be calculated based on the SOFR rate plus a variable spread. The commitment fee for this loan will be 0.25%, along with a front-end fee of 0.25%. The repayment period for the AIIB loan is 26 years, with a grace period of three years.

For the current financial year, this will mark the first budget support received from both the ADB and Jica. However, earlier in the fiscal year, AIIB granted Bangladesh $250 million in budget support.

Additionally, in April, the World Bank extended $500 million to Bangladesh, including $324 million with zero interest and charges. The repayment period for this loan is set at 12 years, with a grace period of six years. The remaining $176 million in budget support carries an interest rate of 1.25%, a service charge of 0.75%, and a commitment fee of 0.50%.

In the previous fiscal year, 2021-22, Bangladesh received a total of $3 billion in budget support from various development partners. In fiscal year 2020-21, the amount of budget support amounted to $1.09 billion.