Forex reserves may come under stress without quality lending

The country’s ballooning foreign exchange reserves may come under stress if the infrastructure projects to be bankrolled by the excess external capital are not monitored properly, experts warn.

They expressed the fears after the government formed the Bangladesh Infrastructure Development Fund (BIDF) on March 15 to lend money from the reserves.

The government decided to disburse Tk 5,417 crore (524.56 million British pounds) in foreign currency loans to dredge a channel for Payra Port, a seaport in Kalapara, Patuakhali.

A tripartite loan agreement was signed between the finance division, the Payra Port Authority and state-run Sonali Bank to finance the project.

The country’s foreign exchange reserves have seen a sharp accretion in recent months riding on the solid flow of remittance and lower imports caused by the pandemic-induced slowdown.

The forex reserves stood at around $43 billion last week in contrast to $32.31 billion a year ago.

Both public and private sectors have been facing a lack of governance for years, which may have an adverse impact on the use of the reserves to implement the projects.

A 10-member central bank committee has strongly recommended not to allow any private company to take loans from the forex reserves.

There is a high risk of investing the funds from the forex reserves given the weak corporate governance in the financial sector and the poor record of implementing government projects on time, economists said.

In the past, the government revised the deadlines of a majority of infrastructure projects, escalating their cost compared to the initial estimate.

If the same situation is repeated for the projects to be funded by the reserves, this will be a matter of concern for the financial stability in the country.

“Who will ensure the quality of lending from the reserves as the entire banking industry lacks corporate governance? This is a major question,” said Salehuddin Ahmed, a former governor of Bangladesh Bank (BB).

The fund may even become non-performing in case of inadequate monitoring, he said.

The central bank committee submitted the policy guidelines on March 11 to its higher-ups, suggesting how to use the forex reserves.

The committee suggested that only strategic development projects of the government be allowed to take loans from the reserves.

Strategic development projects mean the infrastructures that will have a direct link to give a boost to economic growth, said a number of members of the committee.

Bridges, highways, ports and environment-friendly power plants are considered as strategic development projects.

The central bank will disburse a maximum of $2 billion a year for the implementation of the projects. The outstanding loans under the fund will not surpass 10 per cent of the volume of the reserves.

Ahmed said forex reserves are a nation’s backup funds in case of an emergency, such as a rapid devaluation of its currency.

Countries use the reserves to keep a fixed rate value, maintain competitively priced exports, remain liquid in case of a crisis, and provide confidence to investors.

“We are satisfied with the recent increase of the reserves, but the trend will not continue always,” he said.

The former governor recalled that the country faced a food crisis in 2007-08, and many banks had been in a shortage of foreign currency at the time. The central bank supplied foreign currencies to help lenders settle import bills.

“Such a problem may reoccur,” Ahmed said.

The central bank will ensure retaining a level of forex reserves that can meet import payments for at least six months before sanctioning any funds to projects, according to the central bank guidelines.

The BB committee said the government would have to provide a sovereign guarantee to state-run banks to avail the fund from the reserves.

The development projects will avail loans through commercial banks. If the projects fail to repay the loans on time, the central bank will take control of government securities invested by the banks to recover the fund.

Banks keep a significant portion of their securities at the central bank in the form of a statutory liquidity ratio.

“Sovereign guarantee is not enough to protect the public money because there is a lack of corporate governance in the financial sector,” Ahmed said.

He warned that other projects excluding the strategic infrastructures might seek funds from the reserves given previous experiences.

In one such instance, the central bank was forced to relax the rules to reschedule delinquent loans on a wholesale basis, although it had initially received one or two applications to this end.

Also, the banking industry has been burdened with default loans for years as scammers had swindled a considerable amount of money.

“The central bank should sanction the fund from the forex reserves cautiously by carrying out an appropriate feasibility study on the projects,” Ahmed said.

Mustafizur Rahman, a distinguished fellow of the Centre for Policy Dialogue, said that the government had faced both cost and time escalation in implementing mega infrastructure projects.

If the government sets a similar example for the projects to be financed from the reserves, the initiative will not pay off, he said.

“The government should form an independent board to monitor the investment in the infrastructural projects such that the quality of lending is ensured.”

The return from the investment will decrease to a large extent if the process of procurement is not transparent, he said.

Projects will be allowed to take loans to settle import bills for capital machinery and industrial raw materials as per BB guidelines.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said that the method of using the foreign exchange reserve was unnecessary as projects could take loans from banks under the existing system.

“Development projects can easily manage funds from commercial banks if the government provides a sovereign guarantee,” he said.

The BB committee recommended a maximum of 15 years as the repayment tenure, including five years as a grace period. Projects will get the fund at a concessional interest rate of 2-3 per cent.

The central bank will initially give out the loans to state-run banks, setting an interest rate in line with the London Interbank Offered Rate (Libor).

The Libor is a benchmark interest rate at which major global banks lend to each other in the international interbank market for short-term loans.

The central bank may also consider the concessional lending rate of the World Bank or the International Monetary Fund in setting the interest rate.

Yesterday, a central banker said the BB had submitted the recommendations to the government higher-ups. “Now, it is up to the government whether it will implement the recommendations or not.”