FATF grey list and Padma Bridge financing

On February 17, newspapers carried two important news items, both having relevance to financing of imports. The first one carries a good news that Bangladesh's name has been taken off the 'grey list' of international money laundering watch dog-Financial Action Task Force (FATF). The second one deals with financing imports for the Padma Bridge through letter of credits without touching the foreign exchange reserve.
I don't claim to be an expert but spent several decades to unravel the nuances and implication of financing of import through letters of credit. I wish to share my thoughts with whosoever cares to read, for a reality check on the contentious issues.
First, the implications of deletion of Bangladesh's name from the FTTF grey list. This is great news and reflects the results of hard work put in by the central bank and the government to reach that end. But it will not lead to reduction of banking transaction costs as mentioned in the news reports. The foreign as well as local banks have a standard schedule of charges, fees and commissions. They have been realising these charges since long - even before the FATF was born. There will not be any change in the schedule of their standard charges. It may, however, have a sobering impact for confirmation of letters of credits but no reduction can be expected in the rate of commission. The foreign correspondents of our banks fix the rates on the basis of country risk assessed by them or Moody's, Standard & Poor's, etc., counterpart risks, i.e., financial health of the LC-opening bank in Bangladesh, history of past dealings with the bank, size of the LC, etc. FATF grey list has scarcely any relevance for this assessment. The news, as I said, is great but let us not forget the realities impinging on our import costs.   
The other issue concerns our all-important but ill-fated Padma Bridge project. It is mentioned in the news reports that the foreign exchange reserve would not be touched but import costs would be financed through letters of credit opened through banks who would procure foreign exchange from the market as is done in case of import of food grains and oil.
Regardless of how one does it, all imports in the country have an impact on the reserve. For imports involving small amounts the banks can absorb the expenditure from their working balance but for heavy payments they have to look somewhere else for foreign currency. For, every bank in the country operates with a small balance for day-to-day operation within the limits-foreign currency balance and open position limits--set by the Bangladesh Bank. The inter-bank market too is very small to accommodate large purchase of foreign exchange, be it for bulk import of food grains, POL (petroleum, oil and lubricants) or items for the proposed bridge. If left on its own, i.e., without central bank's intervention, high demand for dollar for these heavy payments would push its price to higher level or even trigger a crisis.  On the other hand, central bank's intervention to maintain exchange rate stable through infusion of foreign currency will deplete the reserve. In the final analysis, the foreign exchange reserve is what we will need to fall back on.
We, however, need not be afraid of using the reserve for this vital project. We never had it so good. Our foreign exchange reserve of over $19 billion can safely accommodate the foreign exchange costs of the bridge. We have seen many international and domestic intrigues and controversies surrounding this project that the Prime Minister and her party had promised to the nation long ago. Let us not get into a fresh round of controversy over using or not using the reserve. Regardless of what the detractors say, a large number of people braved gun shots, petrol bombs and other lethal weapons to line up at the polling booths to express their solidarity with the Prime Minister to fulfill the unfinished agenda.
What we need to be worried about is not foreign exchange but the local currency required to buy it. Increased taxation is an option but increase of taxes and price hikes of utility prices over the last few years have cut deep into the sinews of the people. Heavy borrowings from the public and the financial institutions are also not a wise choice. The following are some other viable options that I suggested in the last week's article in Financial Express (Financing options for the dream bridge over Padma, February 16, 2014):
* The project may be converted into a limited company with provision for 49 per cent shareholding by the public with preferential allotment for migrant workers who would send their subscription in foreign exchange. It will give the people of the country a sense of pride for participation in the nation-building process.
* Dollar-denominated bonds may be issued for subscription by the NRBs (non-resident Bangladeshis), including migrant workers, with interest at say 5.0 per cent per annum which would be quite attractive in comparison to the current level of low deposit rates in the euro-currency markets. The principal and interest could be made convertible into taka or dollar on maturity. This option is expected to keep the cost of borrowing low. The exchange rate of taka is likely to remain relatively stable for the coming years. In any case, the savings on interest is expected to offset the exchange risks.  
* Local currency taka bonds may be issued for subscription by the public with provision for payment of interest at a little higher than that for comparable government obligations.
The writer is a retired banker, author of books on banking and foreign exchange and columnist. [email protected]