Government plans to borrow $313m from foreign exchange reserves

The government plans to use the country’s foreign currency reserves to implement a $370.96 million electricity transmission project, ignoring the warning from the International Monetary Fund (IMF).

State-owned Agrani Bank sent a proposal from North-West Power Generation Company Ltd (NWPGCL), a government-owned entity, to Bangladesh Bank.

As part of the proposal, the power company is seeking $313 million for Payra’s second transmission line project. The financing will be arranged by Agrani Bank.

Bangladesh-China Power Company, a joint venture of NWPGCL and China National Machinery Import and Export Corporation, will construct a 400 Kv double circuit transmission line, which will connect Payra, Gopalganj and Aminbazar of Dhaka to supply power from the Payra thermal power plant and the plants’ potential future power.

The government is seeking to make Payra a major power generation centre. But the electricity that will be generated at the hub cannot be supplied to other parts of the country based on existing transmission lines, a Power Division official said.

But the plan to use foreign exchange reserves comes amid an IMF warning against using it for such projects.

“The decision to use the windfall from the foreign exchange reserve to finance ‘crucial’ infrastructure projects through the new Bangladesh Infrastructure Development Fund (BIDF) raises issues of governance and external sustainability,” he said. said the IMF.

He made the observations in a report submitted to the government after an IMF team visited Bangladesh from December 5 to 19 last year.

In its first, the government approved the use of 524.56 million euros of reserves for a development project in March last year for the dredging of a channel for the port of Payra, a seaport in Kalapara, Patuakhali.

The BB has to date disbursed 27 million euros for the project.

BIDF was established to provide loans from reserves for development projects. The fund’s annual investment target is said to be no more than $2 billion, according to finance ministry documents.

The BB has pledged to finance the BIDF using the reserves up to $2 billion per year for the next five years, provided that the reserves cover import payments for at least six months, that the revenues of the project are in foreign currency and that a sovereign guarantee is provided.

The IMF said foreign exchange reserves in Bangladesh are adequate and not excessive, and the recent spike in reserves is expected to be short-lived.

“Ad hoc use of foreign exchange reserves could undermine fiscal discipline by exposing the public sector to large contingent liabilities and fiscal risks.”

Zaid Bakht, chairman of Agrani Bank and renowned economist, says that every central bank invests in safe areas after analyzing the risks so that money does not sit idle.

“From that point of view, if there is a public sector project and if there is a government guarantee, then I don’t see any problem.”

The former director of research at the Bangladesh Institute of Development Studies said a proposal from NWPGCL has been sent but has not yet been approved.

“It’s under discussion.”

Previously, the private sector had sent proposals to the BB to solicit investment from the reserves, but the central bank had paid no heed.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, an independent think tank, says standard international practice is that a country can lend from reserves, but the amount disbursed should no longer be counted as part reserves.

“But we consider it part of reserves. As a result, our reserves are artificially inflated,” he said, adding that the amount disbursed should be deducted when calculating reserves.

Bangladesh’s current reserves stand at $44.99 billion, up from $46.39 billion in June.

Reserves could decline in the medium term due to the expected normalization of remittances, the lack of a substantial recovery in foreign direct investment, an increase in imports and limited exchange rate flexibility, according to the IMF.

The IMF’s warning is relevant and many countries are struggling for lack of adequate reserves.

Turkey is an example of how foreign exchange reserves can drastically deplete. Its net international reserves fell below $8 billion on January 12, from $41.13 billion in 2019.

This led the country to sign a $4.9 billion currency swap deal with the United Arab Emirates, Qatar, South Korea and China to bolster reserves.

Sri Lanka’s official reserves stood at a meager $3.1 billion at the end of December. It has also entered into currency swap agreements with India and Bangladesh.

Pakistan’s foreign exchange reserves fell to $17.6 billion in the week ending January 7.

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