A World Bank (WB) proposal for Bangladesh to receive single-currency loans, alongside the usual credits taken through special drawing rights (SDR), a basket of five currencies, is under government consideration.
Officials say Bangladesh, being a lower-middle-income country, is one of the top recipients of World Bank's International Development Association (IDA) concessional credits.
The IDA-fund recipients borrow through SDR whose value is linked to the currency basket of US dollar, euro, pound sterling, Japanese yen, and Chinese yuan. Bangladesh denominates the SDR in US dollar as it receives loans from the World Bank's soft-lending window.
A senior official at the Economic Relations Division told the FE that the World Bank a few months back inquired the ERD whether Bangladesh would like to take IDA loans also in any of the five-currency basket.
After receiving offer from the World Bank and holding a subsequent meeting the ERD has written to the finance division, the central bank and others concerned to evaluate whether or not taking single-currency loans will be beneficial.
The ERD official said that, in the last fiscal year, Bangladesh took 500 million SDR-denominated budget-support loan from the World Bank, and when it was converted to the US dollar, the amount came to $507 million.
He said in single-currency-loan arrangement, if Bangladesh takes loan in Japanese yen or US dollar or any other currencies in the basket, the country will have to pay back in the same currency.
"The SDR does not fluctuate very much," he says, adding that, in the past year, the US dollar fluctuated flippantly.
"If we had taken loan in Japanese yen last year, we might have been benefited. But there is no guarantee that same will happen this year or next year," he notes.
The single-currency-denominated concessional credits are similar to SDR-denominated IDA concessional credits in almost all aspects. The key differences are in the currency of commitment/repayment and the pricing, according to the World Bank.
According to the programme feature, the pricing of single-currency-denominated concessional credits is set on a financial-equivalence basis. For example, at the time of the setting of pricing, the recipient of a credit, and the IDA would be financially indifferent to the denomination of the credit, be it SDR or any of the single- currency options offered.
Thus, the nominal level of service charges, and interest charges for countries on blend terms, for a single-currency-denominated credit may differ from a traditional SDR credit, and may also differ between currencies.
The difference between the traditional SDR-credit service charge and a service charge denominated in single currency which is called basis adjustment will vary depending on prevailing foreign exchange, interest rates, and type of credit.
The SDR as a basket of currencies is less volatile than its individual components, but for many IDA countries, SDR credits create extra currency risk and challenges in managing the liabilities.
A survey by the World Bank on treasury-and debt-management officials in the IDA countries has also found the same, thus in response to client requests, the IDA introduced the single-currency-lending pilot programme in 2012 and later extended for three more years in April 2015.
Starting from IDA18, the IDA allows its clients to apply the concessional borrowing in either SDR or the five SDR currencies.
The IDA says borrowing in a single currency reduces currency exposure particularly for countries with revenues in one foreign currency or countries with local currencies pegged to one of the SDR composite currencies.
Also, it can provide an opportunity to better match the currency of revenues with debt, offer the opportunity to benefit from currency diversification, create opportunities to hedge currency exposure, provide better matching of credit terms with project expenditures, and simplify and strengthen the financial management of debt portfolios.
A senior official at the ministry of finance says they are scrutinising the nitty-gritty of the IDA single-currency loan before providing an opinion to the ERD.
Dr Zahid Hussain, a former lead economist at the World Bank's Dhaka office, told the FE that SDR-denominated IDA comes with 1.25-percent interest and 0.75-percent service charge while in case of single-currency loan the total charge is around 2.5 per cent.
"Despite the interest rate in single-currency loan being higher than SDR, the rate is still lower than the loans available in the market," he says about merits of multilateral loans comparative to bilateral borrowings.
Thus, he thinks, single-currency loan can be beneficial to Bangladesh if it can further enhance the financing volume under IDA.
Mr Hussain said that in the case of SDR, the risk of extreme fluctuation of prices is comparatively low since when price of one currency goes up, then another goes down. Thus it creates a balance.
On the other hand, single currencies have the chance to fluctuate a lot.
"We need to explore all the options," says the economist in his suggestion. In case of IDA, the grace period and repayment period are much longer than the bilateral loans.
Bangladesh received a total of $18.5 billion in IDA credits during the period of fiscal years 2014-23 and $577.51 million as grants. Under a new country-partnership-framework programme the country will also receive $18 billion during 2023-27 fiscal years.
syful-islam@outlook.com