Bangladesh bids to borrow variable-spread credits worth 2.2 billion RMB, equivalent to Tk 36.96 billion, from the Asian Infrastructure Investment Bank (AIIB) to ensure fund flow in Cottage, Micro, Small, and Medium Enterprises (CMSME) sector.
The central bank will implement a project namely 'Sustainable Development for CMSME' with the funds that have to be repaid in 20 years, officials said.
The government will soon send a proposal to the AIIB for the loan. But before that it is brainstorming in which currency the credit will be comparatively beneficial.
Earlier, the Economic Relations Division (ERD) in a letter to the finance division said, "There are differences in rate of interest of currency-based credits of the AIIB so selection of currency is highly important while taking loans."
Moreover, it said, forex-reserve situation, interest-rate variations, exchange-rate instability of different currencies, currency risk, repayment of current and future trade balance in various currencies, and repayment of principal and interest of loans in different currencies need to be considered and reviewed while selecting a credit currency. It also mentioned the AIIB had already agreed to provide $700 million as budget-support credit to Bangladesh this fiscal year--and the process was underway.
The central bank recently gave a comparative cost analysis of the credit in USD, RMB and Euro where it says if the loan is taken for the tenure of 20 years, the interest rate will be 6.43 per cent, 2.78 per cent, and 4.06 per cent respectively.
The interest rate will be lowest in the case of borrowing in the Chinese currency, RMB, the central bank said.
It further said the Federal Reserve System (the Fed) has already lessened policy interest rate which in the long run may hover between 2.0 per cent and 3.0 per cent. On the other hand, the Shanghai Interbank Offered Rate (SHIBOR), though much below the Secured Overnight Financing Rate (SOFR), in the long run the rate may stand close to 3.0 per cent.
"Considering the cost-effectiveness the interest expenses may be lower in case of loan taken in RMB than the USD," says the central bank.
The Bangladesh Bank explains that due to exchange-rate facility the repayment will be reasonable if loan is taken in RMB and the USD gets strengthened. China, being an export-oriented country, may keep RMB devalued for long for export gains. Thus, taking loan in RMB will be beneficial.
However, the central bank suggests that while borrowing in RMB is cost-effective in the short-to medium terms, the long-term risks must be taken into account in view of the economic policy, stability, and geopolitical risks.
Also, the Bangladesh Bank has said in case of conducting international operations or investment activities borrowing in different currencies can act as a hedge (portfolio concept) against currency fluctuations, which can be helpful in maintaining balance in debt management from the perspective of risk management.
Taking funds in RMB will be an advantage in the case of repayment of international loans, adds the central bank.
A senior finance official told the FE that they were still scrutinising the pros and cons of taking loans in RMB from the AIIB in line with the central bank's proposal.
Finance Adviser Dr Salehuddin Ahmed recently asked the central bank to expedite fund disbursement in favour of CMSMEs as they were allegedly not getting adequate loans.
According to the Bangladesh Economic Review 2024, the banks and nonbank financial institutions disbursed Tk 2.293 trillion as CMSME loans in 2023.The CMSME loans and advances were worth Tk 3.042 trillion at the end of 2023 which slightly fell to Tk 3.039 trillion in March last year.
syful-islam@outlook.com
