The government, for the first time, is set to receive 'blended' loan from the World Bank in a bid to get fund at low-interest rate, officials said.
The loan is a mixture of hard-term and soft credit.
The decision has been taken as the rate of interest on scale-up facility (SUF) fund of the World Bank is considered very high compared to that of International Development Association (IDA) credit, they added.
The move to arrange 'blended' loan also stems from the possibility of losing the scope to get concessional loans in near future as the country is set to graduate from least developed country to lower-middle income status.
Under the blended loan category, the mixture of SUF loan's 3.35 per cent interest rate with IDA credit's 0.75 per cent interest rate will convert the rate to 1.60 per cent which the finance ministry officials find as a viable option.
The government, with the blended loan, wants to implement the central bank's 'investment promotion and financing facility-II (IPFF-II)' project under which private sector initiatives will be financed for infrastructural development.
Finance Minister AMA Muhith recently approved such a proposal of finance division for sending it to the World Bank for consideration.
According to officials, the first phase of IPFF-I had US$ 60 million fund of which World Bank gave US$ 50 million IDA credit at 0.75 per cent rate of interest and the government provided $10 million as counterpart fund.
Seven private sector power plants were financed from the fund which added 178 megawatt electricity to the national grid.
The second phase of IPFF-I has a total of $307 million fund where the government's share is worth $30 million. The rest comes from the World Bank's IDA credit. The phase has so far financed four power plants having a total generation capacity of 356 megawatts, three water treatment plants, one inland container depot, and a countrywide fibre optic cable network project.
Until now some $ 81.8 million was re-paid as principal and interest of the loans and none of the borrowers had become defaulter. The phase is scheduled to be completed by December next.
After taking out loan from the World Bank's IDA, the central bank in IPFF-I passed the fund to local commercial banks and financial institutions at nearly 6.0 per cent rate of interest which they lent to private entrepreneurs at nearly 8.0 per cent rate.
Officials said, several months back the government planned to start IPFF-II considering the success of IPFF-I and sought $ 350 million IDA credit from the World Bank. The World Bank responded positively to the proposal and fielded a mission to discuss the issue with the economic relations division (ERD).
During the discussion, the World Bank team proposed providing loan from the SUF fund instead of IDA credit for IPFF-II. The loan from SUF fund will cost 3.35 per cent interest with a 24-year repayment period having five-year grace period. On the other hand, the IDA credit carries only 0.75 per cent interest with 36-year repayment period.
Central bank officials during the discussion with World Bank team opined that loan from SUF fund will be costly. Later, they in a written communication to the ministry of finance (MoF) expressed their reservation on borrowing high cost loan from World Bank's SUF fund.
When the finance division drew attention of World Bank team to the high rate of interest, they came up with an alternative proposal of mixing SUF's loan and IDA loan which will reduce the weighted average interest rate.
The World Bank also mentioned the blended loan option in its aid memoire for the IPFF-II. However, the World Bank didn't state the share of SUF and soft loan in the blended loan.
The finance division and central bank officials have reviewed the World Bank's proposal and their calculation found that if $ 200 million is taken from SUF fund and $ 400 million from IDA credit, the weighted average interest rate of total $ 600 million will stand at 1.60 per cent.
"It will be a viable option for us. The rate of interest will remain at tolerable limit if private sector infrastructure projects are financed from the mixed fund," a senior MoF official told the FE.
He said IPFF project has played an important role in financing private sector infrastructural development and capacity building on public-private partnership (PPP) issue. "Continuation of the project will have positive impact on the country's economy."
Another MoF official opined that Bangladesh will lose the opportunities of availing concessional funding like IDA credit following continued economic development of the country.
"The government may consider taking some non-concessional loans alongside soft loans in productive and growth supporting projects," he noted.
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