Export Development Fund for non-traditional exports

The export sector earned US$ 27 billion in 2012-13 with a target of reaching US$ 30.5 billion in the next fiscal year.  Export has been considered  as a significant contributor to  the current account balance  of the country, according to the Monetary Policy Statement (MPS) of January-June 2014 published by the Bangladesh Bank. The country recorded a surplus of US $ 1384 during July-November 2013 period compared to a surplus of US $ 433 during the same period of the preceding fiscal year.  During the reporting period export showed 18 per cent growth against 4.4 per cent growth in import.  
Export growth has been promising over the years, despite the bumpy ride.  After recording 41.5 per cent export growth in 2011, the country saw a meagre 6.0 per cent growth in 2012, which then picked pace to become  11.2 per cent  in 2013. Present growth is an indicator of the country taking gradual strides towards self-sufficiency. Some positive policy initiatives announced recently by the government has helped the country in maintaining favourable growth despite  political unrest.  
The Bangladesh Bank (BB) has undertaken various initiatives to support economic growth including  broadening the scope of Export Development Fund (EDF), reducing the borrowing cost of EDF fund, allowing for loan rescheduling
facilities, etc.
To identify scopes for regulatory reforms in the area of Financial Sector Development, the research team of Business Initiative Leading Development (BUILD) has been diligently soliciting issues from the private sector businesses.  One of the issues that took precedence was how Export Development Fund (EDF), offered by the Bangladesh Bank, was geared towards benefitting only a handful sectors. BUILD undertook a month-long study to find out the inequities, so that some policy interventions can be made to improve the cost competitiveness of emerging and non-traditional export sectors.
BUILD surveyed stakeholders including exporting firms and different state-owned and commercial banks. Detailed discussion sessions were conducted with officials of the Bangladesh Bank. The team reviewed the pertinent policies, including  Import and Export Policies, Guidelines for Foreign Exchange Transactions (GFET) and directives
of the Bangladesh Bank through
circulars.
The study revealed some interesting facts, starting from how the Fund itself was created in 1989 to promote the export of non-traditional items manufactured in the country. Back then, the International Development Association (IDA) arranged an Export Development Fund (EDF) as per the request of the Bangladesh Government, primarily with US$ 31.2 million.  Gradually, as the country's Balance of Payments strengthened, increasing amount of funds started being allocated annually to support exporters. Through this fund, Bangladesh Bank supports a loan refinancing scheme at nominal interest rates. EDF is a very cheap access to financing in foreign exchange for input procurements by manufacturers producing final output for direct export, and also by producers of local deliveries of intermediate outputs to manufacturers of the final export to meet their short-term liquidity requirements.
Fund allocated for EDF has grown manifold over the last few years, from a modest US$ 100 million (Tk 10 crore) in 2006, the fund stands at a whopping US$ 1.0 billion at present. The allocation amount grew.  Revisions in the allocation amount were in tandem with country's strategy to bolster export and to mitigate export losses inflicted by the global meltdown, political crisis, etc.
Through EDF structure, Authorised Dealer (AD) banks can borrow US Dollar funds from the EDF against foreign currency loans extended to manufacturer-exporters for input procurements. EDF financing is admissible for input procurements against back to back import LCs/inland back to back LCs in foreign exchange.
The main objective of creating an Export Development Fund (EDF) was to assure a continued availability of foreign exchange to meet the import requirements of non-traditional manufactured items. This facility is currently available to a few exporting sectors for diversifying into higher value exports and diversifying into new markets.
The EDF is held and managed by the Foreign Exchange Reserve and Treasury Management Department (FRTMD) at the head office of the Bangladesh Bank. Until December 2009, interest rates charged on the loans disbursed  in USD to AD banks at six-month USD LIBOR rate, with the ADs charging interest @ six-month LIBOR+1.0 per cent from the manufacturer-exporter clients. In essence, the interest rate borne by the exporters amounted to less than 3-4 per cent for the loan tenure.  EDF loans from the Bangladesh Bank are repayable by the ADs upon receipt of proceeds of the relative exports (except in case of loans for bulk import of cotton and other textile fibre by BTMA member mills)  in all cases within 180 days from dates of disbursement, extendable by the Bangladesh Bank up to 270 days upon application to it explaining the necessity of a longer period for repatriation of export proceeds.
From January 01, 2010, the Bangladesh Bank charged an additional 1.0 per cent on EDF loan disbursements and allowed ADs to charge 1.5 per cent as their own fee, resulting in interest rate of six  month LIBOR + 2.5 per cent. This was effectively less than 5.0 per cent rate of interest, compared to commercial bank lending rates of 13-17 per cent. At present, to help exporters overcome hardships from the ongoing disruptions in normal shipment activities, interest rates on EDF loans have been revised by Bangladesh Bank at six-month US$ LIBOR + 0.50 per cent, while ADs charge  exporter-borrowers at six-month LIBOR + 1.50 per cent for disbursements. But this is only for six months commencing from December 15, 2013. With EDF providing short-term finance to exporters at a fraction of the costs, it seems only natural that the fund allocated for EDF would be fully utilised but only US$ 860 million has been disbursed till date from its formation in 1989.
Input imports by manufacturer-exporters against which an AD seeks EDF loan must be in full compliance with the value addition criterion and other requirements of the government's Import Policy Order (IPO) in force, and of foreign exchange regulations and instructions laid down in the GFET 2009 and subsequent circulars of the Bangladesh Bank.
At present, an exporter is eligible to avail of EDF facilities on the conditions stated below:
 (i) The value addition of these products must be in line with the Import Policy Order, amounting to over 20 per cent of the FOB value except in case of garments, where it has to be 30 per cent or above.
(ii) The loan should be utilised in case of importing raw materials
for manufacturing the exportable
products.
(iii) The exporter must have a valid contract with the supplier of raw
material.
(iv) The exporter must create a Back to Back L/C for importing raw materials.
According to Bangladesh Bank circulars, export-oriented manufacturing units in certain sectors like Bangladesh Textiles Manufacturer Association (BTMA) member mills, Bangladesh Garments Accessories & Packaging Manufacturers & Exporters Association (BGAPMEA) and Bangladesh Plastic Goods Manufacturers and Exporters Association (BPGMEA) are allowed to avail input imports in bulk, based on their past performance, rather than against specific export orders at hand. These three sectors, along with the recently included Leather Goods & Footwear Manufacturers & Exporters Association of Bangladesh (LFMEAB) and Bangladesh Ceramic Wares Manufacturers' Association (BCWMA), are allowed to draw EDF finance for bulk imports against estimated requirements for up to one year, based on their export performance over the preceding year.
Maximum loan limits are attached to each individual exporter. For example, in a particular year, maximum loan an individual exporter is allowed to avail is limited to US$ 500,000 for BPGMEA member firms, US$ 10 million for BGAPMEA member firms and US$ 12 million for BTMA member firms.
With only the members of five associations being allowed to  draw EDF finance for input imports EDF has strayed from its objective of making  fund available to the non-traditional exporters, particularly new exporters for diversifying into higher value added products.  Indeed, a number of potential non-traditional exporters are left out from the excellent financing facility offered by EDF.
Based on the findings of the study, BUILD devised policy recommendations that were tabled during the meeting of its Financial Sector Development Working Committee on February 04, 2014. The Committee, co-chaired by the Deputy Governor-1 of Bangladesh Bank and the President of Dhaka Chamber of Commerce & Industry (DCCI), discussed the recommendations in much detail.  
Firstly, BUILD recommended that the criteria of availing EDF in bulk should be expanded to include some of the high-potential export-oriented sectors including shipbuilding, light engineering, etc.
BUILD drew specific examples from the shipbuilding sector, which faces severe financial woes and yet are not allowed to avail EDF. Shipbuilding firms require lead time of 1-3 years with working capital requirement of 360-540 days. A circular issued by Bangladesh Bank restricts provision of short-term/working capital financing for more than 360 days, leading to financing gaps of  90-240 days for the shipbuilding sector.  Apart from this perpetual case of working capital mismatch, each export LC issued by Shipbuilding firms needs to be backed by a Performance Guarantee from the exporter's bank. Performance Guarantees by local banks need to be backed by counter guarantee from foreign banks, adding significant cost. Despite being termed as a fully export-oriented sector with enormous potential, shipbuilding sector is constrained by lack of financing options and absence of policy support such
as EDF.
Secondly, BUILD recommended that the Bangladesh Bank should also issue a single policy document for EDF or incorporate the myriad of circulars in the upcoming Foreign Exchange Guideline. The revised policy document should also provide clarity on the value addition criteria. The current clause on Value Addition Criteria that has been stated in the EDF master circular is ambiguous and incomplete; it simply mandates adherence to Value Addition Criterion according to the Import Policy Order (IPO).  IPO, on the other hand, does not address the value addition criterion of most of the sectors. Recommendations were made to allow exporters, regardless of the sector in which they operate, to be eligible to apply for EDF subject to minimum value addition criteria of  10 per cent. As such AD Banks should be authorised to calculate value addition in the time of evaluating an EDF loan disbursement (similar to their discretion in calculating value addition for ascertaining the Export Retention Quota percentage). Foreign Exchange Guidelines should include all the necessary information, detailing value addition, eligibility criteria and maximum limits of EDF loans.
Thirdly, BUILD recommended that the temporarily reduced EDF Interest Rate of LIBOR+1.50 per cent inclusive of AD Banks' charge 1.0 per cent should be continued beyond the stipulated period,  to cushion the impact of recent domestic disruptions on businesses facing cash flow difficulties. On the EDF loan fund as big as US$ 1.0 billion, this move could go a long way in ensuring  required export growth.  
Utilisation of funds allocated for EDF will increase once policies are revised to lend more clarity and allow more exporters  to apply for EDF loans. Rough calculation suggests that a one-off utilisation of US$ 800 million in EDF within the next one year, would lead to an estimated cost savings of US$ 60 million for the exporters.  It has long been recognised that the country needs to move towards an export diversification strategy to ensure sustainable export growth in the longer term.  Government has also declared the same in all major strategy documents. It is now time for the government to ensure that the broader strategy be implemented and reflected through apposite policy measures that would benefit new and non-traditional exporters.
The writer is CEO, Business Initiative Leading Development (BUILD).
 ceo@buildbd.org