The Bangladesh Bank has recently announced a reduction in the ceiling of loans under the Export Development Fund (EDF) by $5 million to $10 million for all types of borrowers.
The move is aimed at easing pressure on the country’s reserves. In a circular issued on Sunday, the central bank stated that the reduction in loan ceiling has been implemented for input procurements under back-to-back LCs against relevant export orders. This step is expected to widen the range of customers eligible for EDF loans.
What is the Export Development Fund?
An export development fund (EDF) is a type of financial assistance that supports exporters or export-oriented businesses in developing or expanding their international markets. EDFs can be offered by various institutions, including governments, multilateral organisations, or private entities. They can have diverse objectives, such as promoting economic development, diversifying exports, enhancing competitiveness, or reducing trade barriers. EDFs can also take various forms, such as loans, guarantees, insurance, or grants.
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Moreover, EDFs may support small and medium-sized enterprises (SMEs) in finance and other areas, foster innovation, encourage regional economic integration, and address market failures such as financing and insurance that are not readily available to participants. EDFs can also encourage diversity in export markets, which can help businesses to mitigate risks associated with reliance on a single market.
All about the circular
This move of trimming EDF is widely believed to be part of an effort to comply with IMF loan requirements related to the country’s foreign exchange reserves. Since its introduction in 1989, the financing facility has had three broad categories of imports that are eligible for funding. These include general imports under the back-to-back letter of credit, members of the BGMEA, BKMEA, and leather exporters, as well as bulk imports by textile millers and dyeing-yarn makers. The new circular reduces the ceiling on average by $5.0 million for each category.
The circular was signed by Md Sarwar Hossain, the director of the foreign-exchange policy department of the Bangladesh Bank, and it specifies that the new ceiling for general back-to-back LC imports is $10.00 million, down from $15.00 million, for input procurement against relevant export orders.
Further, the limit Bangladesh Bank set for import financing under back-to-back LCs by individual member-mills of the BGMEA and the BKMEA to $20.00 million and $15.00 million from $25 million and $20 million, respectively. The limit for individual exporters in the leather goods and footwear sector has also been reduced by $5.0 million to $15.00 million.
Furthermore, the maximum eligible limit for bulk imports by a member of eligible associations has also been revised downwards by $5.0 million. The cap for the Bangladesh Textile Mills Association (BTMA) is now set at $20.00 million, and the Bangladesh Dyeing and Yarn and Exporters Association (BDYEA) is set at $10.00 million.
IMF’s Foreign-Exchange Reserves target
The circular issued by the Bangladesh Bank states that other instructions related to the Export Development Fund remain unchanged. As per a foreign-exchange circular dated December 31, 2017, authorised dealers can borrow US-dollar funds from the EDF against their foreign-currency loans to manufacturers-exporters for input procurement.
Sources familiar with the matter have revealed that the International Monetary Fund (IMF) has advised Bangladesh to maintain foreign-exchange reserves above $31 billion. By reducing the EDF, the saved amount can be used to increase the foreign-exchange reserves and improve their position. As of April 5, the foreign-exchange reserves stood at $31.24 billion, which is almost 30% less than the $44.22 billion recorded a year earlier, according to data from the Bangladesh Bank.
Economists have acknowledged the effectiveness of the EDF in helping exporters expand their shipments. Nonetheless, the reduction of the EDF is a part of the Bangladesh Bank’s effort to comply with the IMF’s recommendations and maintain a healthy level of foreign-exchange reserves.
Experts’ views on the reduction
According to Dr Ahsan H. Masnur, executive director of the Policy Research Institute of Bangladesh (PRI), the Export Development Fund (EDF) is an effective program in Bangladesh and the country needs to maintain its usable foreign-exchange reserves. However, it is unfortunate that the program has to be significantly trimmed to support the foreign-exchange reserves. Dr Zahid Hussain, former lead economist of the World Bank, also mentioned that the reduction is necessary for the sake of the reserves and cited poor governance issues relating to the EDF, such as defaults on loans.
Md. Nazrul Islam, vice president of the BGMEA, stated that the reduction in the EDF facility is a new challenge for the export industry, especially amid the ongoing challenges stemming from the war in Ukraine. The export industry will face significant pressure from the banking sector as a result of the reduction in the EDF facility. The bulk importers used to borrow by means of the EDF to procure raw materials, and this reduction will ultimately affect the sector.
The outstanding EDF amount is currently at $5.2 billion. In March, the BB introduced a 4% penalty on overdue loans disbursed from the EDF. If loans and interest are not repaid by the deadline, the BB can debit the amount from the foreign-currency-clearing accounts maintained by the authorized dealer (AD) banks. The BB has observed that EDF loans are not being repaid as per its instructions.
To boost reserves, the BB formed a Tk100 billion export-facilitation fund in early January as an alternative to the EDF. The volume of the EDF has been reduced to slightly over $5.2 billion from about $7 billion before mid-2022, when Bangladesh’s foreign-currency reserves came under pressure due to a surge in import bills caused by global price increases.
