WB agency offers $1b guarantee for food imports

The Multilateral Investment Guarantee Agency (Miga), a wing of the World Bank Group, has offered to guarantee $500 million to $1 billion in foreign loans to ease imports of essentials and improve food security in Bangladesh at a time of rising commodity prices and dollar crisis.

Miga, the political risk insurance arm of the World Bank Group, has also expressed willingness to guarantee foreign currency loans from foreign lenders to set up an export development fund for the ready-made garment industry.

A number of foreign commercial banks have already expressed willingness to provide the short-term trade loan, repayable in one year, to Bangladesh under the Food Security Import Facilitation Programme of Miga, sources at the Bangladesh Bank told TBS citing an email sent by the Miga Head for South East Asia and Australasia Timothy Histed.

"The Bangladesh Bank would use the funds to structure a programme that will allow commercial banks to earmark funds to open import LCs for food security. When the LC matures, BB would provide the foreign currency to the authorised dealer bank to meet the payment obligations," reads the email received by the central bank governor and high officials of the government on 4 January.

Histed also expressed keenness to send a delegation to Dhaka to negotiate the interest rate and other terms to finalise a loan agreement.

The availing of foreign currency loans on Miga's guarantee will ease the ongoing problem faced by Bangladeshi banks in getting import LCs (letters of credit) confirmed by global banks due to dollar crisis, hopes the government.

"Foreign banks do not want to confirm our LCs. In this context, if foreign banks provide loans in foreign currencies on Miga's guarantee, issues in importing food products will be removed," Senior Secretary of the commerce ministry Tapan Kanti Ghosh told TBS.

"Preliminary discussions had taken place with Miga. They wanted to be a guarantor for Bangladesh in getting dollar support for importing food products. We asked them to send their offer in detail and they have done so," he said.

Biswajit Saha, executive director of City Group – leading importer of essentials in the country, echoed the commerce secretary, saying, "Foreign banks do not trust our banks. As a result, they do not confirm our LCs. There are even instances that the confirmation of LCs opened in September last has not been received yet.

"In this situation, it will be very good for us if the World Bank's associate agency becomes the guarantor and foreign banks pay the exporters in foreign currency on behalf of authorised dealer (AD) banks."

Traders will be able to import food products with the foreign currency available under this loan facility within three months of signing an agreement, said Bangladesh Bank officials, adding that this fund will be managed similar to the Export Development Fund.

Importers are facing significant delays in getting LCs opened for the import of essential food and food-related items such as wheat, edible oil, sugar, fertilisers, and feedstock because local authorised dealer banks are struggling to source foreign currency.

Commerce Minister Tipu Munshi has said traders taking part in the task force meeting on commodity prices last Wednesday also underlined the problems they are facing while opening LCs for the import of consumer goods.

To solve this problem, the commerce ministry has written to the Bangladesh Bank to reserve a certain quota of dollars from remittance and export earnings to spend on importing consumer goods.

Meanwhile, the commerce ministry's Task Force on Review of Commodity Prices and Market Situation, at its meeting last week, said that LC opening against imports of essential commodities, particularly edible oil, sugar, chickpea and date that see a rapid surge in demand in Ramadan, saw a sharp decline over the last quarter of 2022 due mainly to dollar crisis, causing a fear of supply shortage and price hikes ahead of the month of fasting.
 
Apparel sector hopeful about Miga's EDF offer

Miga's offer in helping to set up an export development fund (EDF) for the garments industry also comes as good news especially at a time when the government has scaled back lending from the existing $7 billion Export Development Fund (EDF) from which borrowers get loans in dollars.

Amid talks of downsizing the existing EDF, the central bank has created a new Tk10,000 crore Export Facilitation Fund (EFF) for exporters to give loans at low interest for the import and procurement of raw materials for production in the country's export-oriented industries, according to a circular issued on 31 December.

Exporters, however, fear huge financial losses if taking loans from the EDF is made difficult and they have to buy dollars to pay off import bills by borrowing money in taka from the newly formed EFF. They also fear a "disaster" in some exporting sectors, including textiles. 

When informed about Miga's offer to help form an EDF, Mohammad Hatem, executive president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), told TBS that it would be very good if a dollar fund is formed for the garments industry as proposed by Miga, especially in the present situation when the government is contracting EDF funding.

"But in this case, the terms and conditions and the interest rate are very important," he added.
 
How it works

Miga has sent an "illustrative example of an Import LC as a part of the Food Security Import Facilitation Programme" to the Bangladesh Bank for discussion on the import of food products and its payment process using the foreign loans which it will provide guarantee for.

According to the illustration, an importer will first submit an LC application to an AD bank for an eligible import under the import facilitation programme. The AD bank concerned will then apply to the Bangladesh Bank to earmark the foreign currency.

After that, the AD bank will open an LC and then advise the exporter via an overseas bank with confirmation.  Then, the exporter will ship goods to the importer and submit documents to the overseas bank. The overseas bank will negotiate the documents and make the payment to the exporter. The overseas bank will then forward claims and documents to the AD bank.

AD bank will then apply to the Bangladesh Bank for a disbursement  for the claim received from the overseas bank. Then, foreign currency will be disbursed to the AD bank's foreign currency clearing account with the Bangladesh Bank. Then, the AD bank will make payment to the overseas bank. The importer will make payment to the AD bank in taka. The AD bank will then repay to the Bangladesh Bank in foreign currency or in taka equivalent, as per agreed terms.

Miga has assured Bangladesh that it will have access to foreign currency to meet its payment obligations under the LC and availability period will be up to three months.

The multilateral organisation also said that the Food Security Import Facilitation Programme is intended to alleviate Bangladesh's food security situation which has recently come under stress on account of the difficulty faced by importers to open LCs. Items that will be considered eligible for import must be related to food security and will include grains, edible oil, fertilisers, sugar, feedstock etc.

It will be made available to all ADs who are involved in opening LCs for the import of eligible imports relating to the country's food security. AD banks who have existing LCs outstanding or intend to open LCs for the import of eligible imports can apply to include these in the import facilitation programme.