Exporters set to get offshore dollar loans at 8% as working capital

Highlights:

• Bangladesh plans largest 442MW solar plant in Rampal
• Project costs Tk2,502 crore, mainly from Power Development Fund
• Completion targeted by 2030; tariff set at Tk6.18
• Rampal cheaper than Sonagazi due to lower infrastructure costs
• Rising electricity demand drives need for expanded generation capacity
• Renewable targets push investment to reduce fossil fuel reliance

In a move to lower financing costs and enhance global competitiveness, the Bangladesh Bank is set to introduce offshore dollar loans for exporters at a significantly lower interest rate.

Under the proposed scheme, exporters will be able to borrow at an interest rate of 8%, substantially lower than the prevailing 14% to 16% charged on local currency loans. The central bank is expected to issue a circular shortly outlining the operational framework, officials said.

Exporters would be permitted to use the funds for day-to-day business expenses, including utility payments, wages, and other working capital needs. The loans will be repaid from export proceeds in foreign currency, reducing pressure on the domestic banking system.

Infograph: TBS

The facility will also allow exporters to convert the borrowed dollars into the taka through currency swaps with their banks if needed, without incurring additional interest costs.

Providing exporters with such facilities will enhance their financial capacity. Consequently, this is expected to bolster their competitiveness in the international market while easing the pressure on the country's foreign exchange reserves.

According to central bank officials, the loan amount will be linked to export orders. "For instance, if an exporter secures an order worth $100 and opens a letter of credit (LC) for $60 to import raw materials, they may borrow up to $40 under the offshore facility to meet remaining operational expenses," an official told The Business Standard.

Banks will be allowed to extend these loans based on their relationships with clients, with maturities ranging from three months to one year, he said, adding that no strict cap on lending has been imposed, giving banks flexibility to assess client needs.

"Currently, there is an opportunity to take this type of loan from the banking system, but it must be taken in the taka and the interest rate is 14% or more. The main objective of providing the facility to take loans from offshore banking at 8% interest is to increase the competitiveness of exporters and support them," the official said.

The Bangladesh Bank will instruct banks to provide short-term foreign currency loans to exporters from offshore banking units, based on established banker-customer relationships. 

No further credit limits or additional conditions will be imposed on the banks. Depending on the specific requirements of the customer, banks may extend these loans for a tenure of three months to a maximum of one year.

The initiative follows a reduction in the Export Development Fund from $7 billion to $2.2 billion, a move necessitated by conditions under the International Monetary Fund programme. This reduction has significantly curtailed exporters' access to existing low-cost foreign currency financing.

What experts say

Speaking to TBS, economists and business leaders have welcomed the move, noting that exporters are facing increasing pressure due to declining global demand and rising production costs. They believe the new facility will help improve liquidity, reduce financing costs, and encourage investment.

However, experts have also highlighted risks. If export earnings are not repatriated, loan recovery could become difficult. In addition, exchange rate fluctuations could increase the repayment burden in local currency terms if the taka depreciates.

Mahmud Hassan Khan, president of the Bangladesh Garment Manufacturers and Exporters Association, said at a time when the country's export earnings are consistently declining, such an initiative to bolster export capacity and support exporters is a highly positive step. However, he noted that the interest rate for these loans should be lower than 8%.

"Currently, when borrowing in dollars from the Bill Transformation Fund and the Technological Development Fund, the interest rate is 5%. Therefore, it is only logical that the interest rate for loans from offshore banking be set at 6% or 7%," he argued.

Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, said exporters would naturally benefit if working capital credit facilities were provided through offshore banking. He noted that as businesses are currently facing a crisis, the Bangladesh Bank is introducing this facility to compensate for the reduction in credit available from the Export Development Fund.

"Once this offshore banking facility is launched, instead of borrowing for back-to-back LCs, exporters will opt for these lower-interest loans. However, the significant risk here is that the exports must be executed against the orders, and the export proceeds must be repatriated to the country," he added.

While welcoming the move, Fahmida Khatun, executive director of the Centre for Policy Dialogue, advocated for a rigorous vetting process to select eligible borrowers and ensure that these loans are not misused.

"Bangladesh's foreign exchange reserves stand at approximately $30 billion. If monthly import costs average $5 billion, it is possible to cover six months of import expenses. Therefore, it is crucial to safeguard our foreign currency and ensure it is not squandered under any circumstances," she said.

Zahid Hussain, former lead economist at the World Bank's Dhaka office, also viewed the decision to lift existing restrictions on loan disbursements from offshore banking as a positive move. He added that allowing loan distribution and currency swap facilities based on banker-customer relationships is also a logical step.

"However, if there is a significant depreciation of the taka due to exchange rate fluctuations, borrowers will have to repay a higher amount in local currency terms. The resulting additional liability must be borne by the borrowers themselves. It is crucial to ensure that they do not seek incentives or assistance from the Bangladesh Bank when such situations arise," he added.