The World Bank has offered Bangladesh single-currency borrowing facility to help cover partially the risk of currency-value fluctuations that entail some loss of the funds borrowed, officials said Friday.
Economic Relations Division (ERD) officials said the global lender in a letter recently informed the government that Bangladesh could borrow a maximum equivalent to SDR 150 million in single currency for any of its fund-supported projects.
Under a single-currency lending (SCL) pilot project, the WB has set aside SDR 3.0 billion for lending across the globe. The funds could be availed by any borrowing country within two years on "first-come, first-served" basis.
Currently, the Washington-based global lender lends money to the borrowers in four constituent currencies of the SDR (Special Drawing Right)--USD, Great Britain Pound (GBP), Euro and Japanese Yen (JPY).
Bangladesh borrows in SDR. When the WB disburses the money converting the SDR to USD, Bangladesh loses some money due to the strong US currency. Besides, when the government converts the USD to the local currency, Taka, it faces the risk, in terms of fluctuation in exchange value, again.
World Bank Lead Economist in Dhaka office Dr Zahid Hussain told the FE that the Bank had taken up the SCL pilot programme for reducing the currency risk.
"Since the US dollar is getting stronger, the borrowing countries are losing while the donor disbursing funds in SDR for the borrower. So the single- currency borrowing will lessen the currency risk," he added. A senior ERD official said: "Bangladesh usually borrows in US dollar-based SDR from the WB. It creates currency-fluctuation risk in two stages-firstly, during conversion of SDR to USD and secondly, from USD to Taka. As per WB proposal, the new SCL will reduce the risk."
Additional secretary of the ERD Kazi Shofiqul Azam said they were now working to assess the proposal of the multilateral lender as to whether Bangladesh would lose its benefit from the existing borrowing system.
"If the WB offer could prove a viable and better option for Bangladesh, we would borrow in single currency," he told the FE.
A central bank Joint Director told the FE that the SCL offer of the WB is expected to be better for any of the borrowing countries.
"We always face currency risk when we convert SDR to USD and then USD to Taka. But if the government can borrow in single currency like in USD or Euro or JPY or GBP, its risk will be cut," he said.
The World Bank is Bangladesh's largest multilateral lender with its annual nearly US$700 million worth of fund disbursement and more than $1.5 billion worth of aid commitment in recent years.
The Washington-based lender has provided $14.75 billion worth of assistance-loans and grants-until the last financial year (FY) 2014-15 since FY1972 to Bangladesh government for upgrading its infrastructure and alleviating poverty.
On the SCL offer, Policy Research Institute (PRI) Chairman Dr Zaidi Sattar said when countries like Bangladesh borrow from the WB in convertible currencies (e.g. US$), though these are zero-interest loans, the borrowing country bears the exchange risk as repayments over time might cost more as the local currency depreciates against the US$ or other convertible currency.
He said "The SCL could be an attempt by the World Bank to minimize its own risks associated with fluctuation in the value of convertible currencies. Member countries that borrowed in Euro have gained (and WB lost) due to the fall of Euro in the last few years."
According to him, if the choice for a currency lies with the borrower, then it is the latter that can hedge its bet on a currency that it believes will remain stable or depreciate in value over the payment period. The downside risk is if the chosen currency appreciates in value the borrower loses, he mentioned.
The least exchange risk for the borrower will be when he can choose to borrow in local currency, if that is permissible under the SCL system. The WB did recently give a $7.5 million loan to Namibia in local currency, Dr Sattar added.
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