Eastern Refinery expansion: Can quick gains offset tough IsDB loan terms?

Bangladesh is weighing whether the expected quick returns from the Eastern Refinery expansion can justify accepting stringent financing conditions from the Islamic Development Bank (IsDB).

Officials say the terms are complex, but may be manageable if the project delivers results on time.

The loan remains critical in the absence of alternative funding sources.

Quick outcomes to outweigh stringent terms?

Officials involved in the negotiations say the IsDB financing comes with tight conditions, including strict timelines, layered legal requirements and variable costs linked to global benchmarks.

Under the arrangement, Bangladesh will act as the Bank's agent in procurement, handling contract negotiations, insurance and any additional costs outside the financing package.

Failure to meet key deadlines – such as signing agreements or requesting the first disbursement within six months – could lead to automatic cancellation of the loan.

Despite these constraints, officials believe the risks could be offset if the Tk31,000 crore project is implemented quickly and begins generating returns.

"Since no other development partner is currently providing financing for ERL-2, this loan is critically important for us. Once production begins quickly, returns from the project are expected to come relatively easily," a senior Economic Relations Division (ERD) official said.

The project involves installing a second refining unit that will add 30 lakh tonnes to the existing annual capacity of 15 lakh tonnes, raising total capacity to 45 lakh tonnes. Completion is targeted for November 2030.

The financing structure also adds to the complexity. IsDB will procure refinery equipment and lease it to Bangladesh under a rent-to-own model, with ownership transferring after repayment.

During construction, Bangladesh will need to make semi-annual advance payments on accrued mark-up. The rate includes a floor of 1.6% and a cap of 28% per annum, making borrowing costs variable. Additional charges may also apply for maintenance, insurance and related expenses.

Disbursement of funds will depend on meeting several preconditions, including legal approvals, confirmation of government funding, clearance from Bangladesh Petroleum Corporation, and compliance with environmental and safety requirements.

Officials say these conditions could pose challenges, but the overall assessment hinges on whether the refinery expansion can move quickly from implementation to production, easing pressure from the financing terms.