BB to cut EDF size to $2b by Dec to meet IMF conditions

Highlights:

• Bangladesh Bank cutting EDF to $2 billion to meet IMF terms
• EDF once peaked at $7 billion during pandemic support measures
• Exporters face difficulty accessing low-interest loans after fund cuts
• Economists say EDF failed to diversify Bangladesh's export base
• IMF pushed reduction due to misuse and weak reserve transparency
• Forced loans from unpaid EDF credits rising sharply among exporters

Bangladesh Bank has decided to further reduce the size of the Export Development Fund (EDF) to comply with conditions set by the International Monetary Fund (IMF), bringing it down to $2 billion by December this year.

Under the $4.7 billion IMF loan deal, the central bank has committed to keeping the EDF capped at $2 billion until December 2026, with no plans to expand it during that period, a senior central bank official told The Business Standard. 

The current fund size remains slightly above that threshold.

Economists and senior Bangladesh Bank officials say the EDF has long played a vital role in supporting exporters with low-cost foreign currency loans, but IMF-imposed conditions have left the central bank with little option but to downsize it further.

The decision is part of a broader set of financial and structural reforms the government is implementing to meet IMF loan conditions. Since mid-2022, Bangladesh Bank has been gradually shrinking the EDF amid dwindling foreign exchange reserves and a persistent dollar shortage.

During the Covid-19 pandemic, the EDF had expanded to as much as $7 billion to help exporters cope with the global economic slowdown. However, as reserves began to fall and the foreign currency crunch deepened from mid-2022, the central bank started cutting the fund's size, as smaller EDF disbursements helped strengthen reserves on paper.

Infograph: TBS

A senior central bank official said, "According to our agreement with the IMF, Bangladesh Bank plans to keep the EDF within $2 billion. The larger the fund, the more credit exporters can access, but we had to reduce it to meet IMF conditions."

Exporters say that shrinking the fund has made it increasingly difficult for them to access low-interest loans from the EDF. Many now struggle to secure financing or have stopped applying altogether.

"When the EDF was large, funds were readily available and loans could be taken easily," said Mohammad Hatem, president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA).

"Now, because the EDF has been reduced, getting a loan has become very difficult," he said. "After taking a loan, repayment takes time, so funds are not always available. Due to these complications, I personally no longer apply for EDF loans."

Economists question impact

Economists agree that while the EDF has supported exporters for years, its role in diversifying the country's export base has been limited.

Professor Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue (CPD), said, "Exporters mainly use the EDF for trading, and it has certainly helped them. But the drastic reduction began when the reserves situation deteriorated and the IMF required more transparent accounting."

"It was working well, but the EDF failed to contribute meaningfully to export diversification. The government should now explore how such funds can be used to promote diversification more effectively. 

"Even though the fund has been reduced for reserve management reasons, I think it should eventually be expanded again — perhaps not to $7 billion, but closer to that level would be reasonable," he added.

Another senior Bangladesh Bank official admitted that there had been "significant misuse" of the EDF, which also influenced the IMF's insistence on reducing its size. 

"Otherwise, Bangladesh Bank could have negotiated more flexibility, as exporters genuinely benefit from this fund. Everyone in the banking sector knows who misused it," he said.

Former World Bank Dhaka lead economist Dr Zahid Hussain echoed similar concerns.

"The main purpose of the EDF was to promote export diversification, but we have not seen visible results. Our export dependence on garments remains unchanged…It's time for an evaluation or audit of the EDF to understand why the results have been so limited."

Dr Zahid Hussain, former World Bank lead economist

"The main purpose of the EDF was to promote export diversification, but we have not seen visible results. Our export dependence on garments remains unchanged," he said.

"Despite such a large financial support mechanism, diversification has not occurred. There should be an evaluation, even an audit, to understand why. EDF loans have been given at low interest rates in foreign currency, but the expected outcomes did not materialise," Zahid added.

He pointed out that the EDF had not spurred new sectors like leather, agro-processing, or light engineering as was once hoped. 

"Even within garments, the idea was to diversify beyond traditional items like jeans, sweaters, shirts and t-shirts into higher-value products – but that hasn't happened," he said.

EDF misuse, rising forced loans

Investigations by Bangladesh Bank have revealed irregularities and misuse of EDF loans by some exporters. 

A senior official said some borrowers failed to repay loans on time, turning EDF credits – which are funded from reserves – into large "forced loans".

"These loans were meant to help exporters bring in more foreign currency earnings," he said. "But in many cases, buyers abroad failed to make payments, resulting in no export proceeds and growing forced loans."

For example, a state-owned bank's forced loans against EDF credits rose by 410% in 2021 – from Tk1,400 crore the previous year to Tk7,141 crore, according to its annual report.

When borrowers fail to settle letters of credit (LCs) by the maturity date, local banks must still pay foreign banks, leading to forced loans being created in the borrowers' names. This issue has affected both import and export transactions, the official added.