Govt ditches LIBOR-based payment system to secure $900m IDB credit
M Azizur Rahman | Monday, 9 March 2009
The country will receive US$900 million credit facility from the Jeddah-based Islamic Development Bank (IDB) at an interest rate of six per cent to finance fuel import from the international market, officials said Sunday.
The government's hard-term loan committee, headed by finance minister AMA Muhith, okayed the energy ministry's proposal for the loan at a fixed interest rate instead of perennially used LIBOR (London Interbank Offered Rate).
Previously Bangladesh used to avail IDB credit at LIBOR plus 2.25 per cent, but the government has for the first time went ahead with a 'mark-up' interest payment system to hedge against volatility in the global credit market.
The state-owned Bangladesh petroleum Corporation (BPC) usually borrows around $1.0 billion a year from the IDB to import fuel from major oil producing countries, which mainly own the Saudi-based Bank.
But officials said the loan facility was down by around $100 million this year amid a massive decline in global oil prices. Crude prices have plunged to $40 a barrel this week from $147 in July last year.
They said the government would gain substantially by adopting the new interest payment system.
"This year we preferred fixed mark-up interest rate because of intense volatility of the LIBOR," the BPC Chairman Anwarul Karim told the FE Sunday.
"The LIBOR is high these days due to the global credit crunch, stemming from the worst economic crisis. Because of the volatility in some cases last year we even paid as high as 7.5 per cent interest against IDB credit," he said.
The LIBOR fluctuated throughout last year from the lowest 1.8 per cent to 5.4 per cent due to the global liquidity crunch caused by the financial meltdown.
The IDB raised its mark up rate substantially in December 2008 and proposed a new rate of LIBOR plus 5.0 per cent instead of the LIBOR plus 2.25 per cent for the BPC.
The BPC did not accept the IDB proposal, which would have caused it tens of millions of dollars in interest payment, and sought the rate be fixed at 5.5 per cent instead of the LIBOR-based system in line with a previous IDB proposal.
The new rate was fixed after months of negotiations between the BPC and the Islamic Trade Finance Corporation (ITFC), a newly established window of the IDB that deals with trade financing.
"The ITFC offered the new mark up rate at LIBOR plus 5.0 per cent. It also assured that the mark up rate would never exceed 6.0 per cent in aggregate," the BPC chairman said.
A senior energy ministry official said the new IDB credit came as a sigh of relief for the BPC as it had been struggling to arrange funds from the international lenders to pay rising fuel bills in the last several months.
Apart from the new IDB credit the BPC is yet to arrange alternative financiers to import fuel though it had approached the Standard Chartered Bank, Citibank, Hong Kong-Shanghai Banking Corporation (HSBC)) and the central bank.
"We had sought $500 million loan facility from the BB and $250million -$300 million each from the StanChart, Citibank NA and HSBC. But none of them responded positively," the BPC chairman said.
The corporation will seek their assistance again, he added.
The country spent $3.1 billion in the last fiscal year to import around 3.65 million mt of crude and refined petroleum products.
Bangladesh consumes around 2.3 million mt/year of gasoil, 500,000 mt/year of kerosene, 100,000 mt/year of gasoline and 250,000 mt/year of jet fuel.
The government's hard-term loan committee, headed by finance minister AMA Muhith, okayed the energy ministry's proposal for the loan at a fixed interest rate instead of perennially used LIBOR (London Interbank Offered Rate).
Previously Bangladesh used to avail IDB credit at LIBOR plus 2.25 per cent, but the government has for the first time went ahead with a 'mark-up' interest payment system to hedge against volatility in the global credit market.
The state-owned Bangladesh petroleum Corporation (BPC) usually borrows around $1.0 billion a year from the IDB to import fuel from major oil producing countries, which mainly own the Saudi-based Bank.
But officials said the loan facility was down by around $100 million this year amid a massive decline in global oil prices. Crude prices have plunged to $40 a barrel this week from $147 in July last year.
They said the government would gain substantially by adopting the new interest payment system.
"This year we preferred fixed mark-up interest rate because of intense volatility of the LIBOR," the BPC Chairman Anwarul Karim told the FE Sunday.
"The LIBOR is high these days due to the global credit crunch, stemming from the worst economic crisis. Because of the volatility in some cases last year we even paid as high as 7.5 per cent interest against IDB credit," he said.
The LIBOR fluctuated throughout last year from the lowest 1.8 per cent to 5.4 per cent due to the global liquidity crunch caused by the financial meltdown.
The IDB raised its mark up rate substantially in December 2008 and proposed a new rate of LIBOR plus 5.0 per cent instead of the LIBOR plus 2.25 per cent for the BPC.
The BPC did not accept the IDB proposal, which would have caused it tens of millions of dollars in interest payment, and sought the rate be fixed at 5.5 per cent instead of the LIBOR-based system in line with a previous IDB proposal.
The new rate was fixed after months of negotiations between the BPC and the Islamic Trade Finance Corporation (ITFC), a newly established window of the IDB that deals with trade financing.
"The ITFC offered the new mark up rate at LIBOR plus 5.0 per cent. It also assured that the mark up rate would never exceed 6.0 per cent in aggregate," the BPC chairman said.
A senior energy ministry official said the new IDB credit came as a sigh of relief for the BPC as it had been struggling to arrange funds from the international lenders to pay rising fuel bills in the last several months.
Apart from the new IDB credit the BPC is yet to arrange alternative financiers to import fuel though it had approached the Standard Chartered Bank, Citibank, Hong Kong-Shanghai Banking Corporation (HSBC)) and the central bank.
"We had sought $500 million loan facility from the BB and $250million -$300 million each from the StanChart, Citibank NA and HSBC. But none of them responded positively," the BPC chairman said.
The corporation will seek their assistance again, he added.
The country spent $3.1 billion in the last fiscal year to import around 3.65 million mt of crude and refined petroleum products.
Bangladesh consumes around 2.3 million mt/year of gasoil, 500,000 mt/year of kerosene, 100,000 mt/year of gasoline and 250,000 mt/year of jet fuel.