Reflections on the MIGA offer of $1 billion loan to Bangladesh

Amidst reports on increasing external debt, a news on external (Adani) contract deemed detrimental to the country's interest, and Bangladesh's journey with a new IMF loan tied to conditionalities, a 'high-interest' loan offer by MIGA (Multilateral Investment Guarantee Agency) of the World Bank baffled many. 

The paper draws attention to an Ekattor TV interview where the Vice President of MIGA elaborated on the rationale. The Ekattor news also carried an apt response from the Governor of the Bangladesh Bank (BB). 

Reportedly, the offered loan is meant for an insurance fund to support opening of LCs to import essential goods, fertiliser and animal feed. From a segment of the interview broadcast, the following key points (paraphrased) may be listed.

1. Big importers have links and can manage. The small businesses face difficulties in accessing foreign currency, and therefore need to be supported with a special fund that MIGA proposes to lend.
2. Though not clearly audible, the MIGA VP possibly mentioned an interest rate of 6% p.a., while the Bangladesh Bank governor mentioned 9%. It is possible that the 9% includes the 6% plus a service charge and a risk premium.
3. The loan is meant to be short-term, reportedly, for a year. MIGA VP notices the short-term difficulties that require 'temporary' support, and he expects the exchange rate (of Taka) to stabilise within a year!
4. While MIGA was approaching the Bangladesh government with the loan, the Vice President sought endorsement for high interest rates from the private sector who, the VP insisted, should be asked if the interest rate was too much!

When asked, the BB governor noted that international development partners (lenders) had historically provided loans at interest rates below 3%. There was no hiding the intention that no loans with high interest rates would be entertained by BB. 

Before one could rest with that assurance, Ekattor TV broadcast another interview of a researcher-cum-economist who had previously worked with the IMF.  While this representative of the 'civil society' considered the MIGA interest rate high, his attempts to justify the borrowing sounded odd. The essence of his observations and arguments are paraphrased below:

1. The domestic prices of essentials are rising even though the world prices are on decline. This, he claimed, is largely due to failure of private importers to open LCs for imports, since the banks are unable to provide required foreign currencies.
2. The dollar crisis (shortage of foreign currency), if removed 'temporarily', will open up imports and ease the market of essentials.
3. The government is not (will not be) responsible for the loan. Since it will be the business community who will import, the choice should be left to them. The government did not have to take this decision (object MIGA proposal) – this could have been left to the business community!
4. Asked if the business community could directly approach the WB and negotiate a deal (bypassing the government), this ex-IMF researcher's response was rather vague – "generally, international organisations 'talk' with the government", he said. He remained silent on who would be accountable for repayment. Instead, he went on to elaborate on the implementation -- a facility would have to be created (with no mention of who would create it) so that LC could be opened with a local bank, and the fund would either come from MIGA, or from other sources with MIGA guarantee.
5. Since the importers have to buy dollars from non-bank sources at 5 to 6% above the bank-offered rates, it was suggested that they may be willing to pay 6 to 8% interest rate on more readily available funds (from MIGA). All economic reasoning failed when it was suggested that the BB governor could go for a 'market test' and consult the private business if they would like to borrow at higher interest rates. 

The exchanges narrated above deserve attention since, apparently, attempts were made to rationalise a loan offer to assist the country to overcome a bad patch, asserting that it is a temporary one, and stability would be achieved at the end of one year! The key take-aways, along with a few observations from the author are summarily outlined below.

1. Bangladesh happens to be the country of origin for the two individuals whose views were highlighted above. The exchanges remind one of a proposition that the post-neocolonial global governance of weaker countries often engages people with same country of origin – some working with multilateral agencies, some legally establishing allegiance to countries in the North, and some belonging to a segment in the local society that Branco Milanovic terms 'comprador intelligentsia' ("Straight talk ...", TBS, 25 March, 2023). In such a setting, running a government upholding the long-term interests of the people in that country in corporate-like manners is a difficult task. Some degree of rationality (and professionalism) has to be upheld. While the BB governor's statement on MIGA-offered interest rate exceeding all past norms is praiseworthy, such assertions may fail to withstand the pressures from multiple agencies!
2. The MIGA offer appears more a trade finance that one normally observes tied to sources from which the three groups of commodities are to be imported. Sometimes, international trades face deferred payments, and recently observed discrepancy between reported export value and realised export proceeds lend support to the presence of such practices among private businesses engaged in international transactions. One would expect that the World Bank, often praised for its role in social development in the developing world, comes up with better rationale for proposing a high-interest loan instead of offering import trade finance. Attention may be drawn to two related issues. First, the war in Ukraine has disrupted the traditional supply chains for many essentials, which subsequently opened up opportunities for other grain (and fertiliser) producing countries. Informal communication with traders suggests that LCs are opened for imports, reportedly for grains, from Canada. It is very much possible that the producers and traders in these countries are keen on facilitating imports with finance. 
3. Second, with international payments increasingly moving out of US dollars, one expects excess (dollar) liquidity in the global financial system. In both cases, charging high interest rates can only be justified if the intermediary agencies negotiating the financing contract (MIGA in this case) are charging abnormally high service charges, a phenomenon common to investment banking! Higher markups in a shrinking market, in order to support the over-sized organisation, is not an unknown market outcome!
4. The emphasis has been on the market of essentials. Those having trust on the Prime Minister's assurances, may at most be concerned about lack of purchasing power among extreme poor. The ministers have assured of adequate stock of foodgrain and of social protection measures. Thus, import of foodgrain with high interest loans is hard to justify. If at all such a crisis arises, it ought to be the government who borrows and takes full responsibility, and not a fund tied to private businesses when the latter alone is not in a position to engage in international financial transactions that comply with prudential regulations for financial markets.
5. The MIGA VP's claims on large businesses having access while small businesses having no access to foreign exchange, contradict his conclusion on availability of foreign exchange – via banking channel or hundi.  Clearly, there is an implicit acceptance that the country can import essentials. However, some agencies may be disturbed by the changing roles of agencies in bulk imports. One may recall the 1990s when local agencies joined hands to import bulk wheat. Subsequently, individual business groups, in collaboration with their global partners (grain merchants in particular), matured to a level that allowed independent imports by many of these groups.  Recent reports however suggest that (one or) a few burgeoning business groups, with offices in Singapore and/or Malaysia and having close links to Indian business houses, allegedly, have been controlling the bulk imports. The knowledgeable players in the market suggest that the traditional in-country bulk importers now act as intermediate distributors of those imports (or buy parts of the bulk imports through auctions).  If the description matches the current status, the VP's remarks may be read to interpret the MIGA proposal as an attempt to revive those (medium-sized) importers and bring them out of the grip of a newly emerging trading group. An assessment of country-level costs and benefits would suggest that there are better ways to address anomalies in markets than to burden the country with additional (dollar) debts.
6. It is unclear why the parties interested to lend (or support Bangladesh's borrowing from MIGA at a high interest rate) did not proceed to clarify the agency to be made accountable in case of defaults or delays in repayment.  It is commonly understood that it is the Bangladesh Bank, representing the government, which is either the borrower or the guarantor of all private borrowings. In a previous ERG study, interests of bilateral and multilateral lenders to place loan projects under direct supervision of the Bangladesh Bank had been discussed.  This had happened in spite of external loans to the government being targeted to private or quasi-private agencies, as well as, when it was private borrowing. Needless to say, that the burden lies on the sovereign and therefore the tax-paying citizens of this country. 
7. An alternative interpretation of letting an international lender operate freely in the domestic financial market would raise serious questions on the sovereignty of the country, and the speculation of (greedy) private businesses running the economic governance of the country would get further fuel. The emphasis on 'temporarily' and 'short-term' lending appear misleading. A debt is never a temporary or a short-term issue unless it is paid in full, and the adverse (as well as the positive) implications of a wrongly (rightly) used debt may have long term bearings.
8. Finally, one needs to account for the demands arising from private borrowers of short-term foreign loans. A recent TBS news (Tonmoy Modak, 10 May, 2023) reported reduction in outstanding private foreign debt from $16.42 billion to $14.08 billion. The report also notes that such "borrowers are now subject to pay the highest 8.5% interest on their short-term foreign loans". The news adds further scepticism, primarily because Bangladesh is often adversely affected by undue transfer of resources from public coffers to private pockets. 

There is no denial that the supply of essentials ought to be ensured to finally derive the benefits of the costly investments made on infrastructure, often with external borrowing. It is also important to ensure a smooth supply of raw materials (fertiliser and animal feed) that will ensure adequate agricultural production. 

Do we go for a costly supply chain with a high-interest loan, only to be abandoned after a year? Or, do we bear with a regime of uncertain supplies and attempt to negotiate alternative trade contracts with traditional partners to reduce that uncertainty, emphasising on a path of 'temporary' austerity? 

It is worth repeating that the emerging extractive import regime of bulk commodities (grains and fertiliser) can be dealt with by the authority in power – after all, such market powers could flourish only with the patronage of the political power!

The views expressed are of the author and do not necessarily represent those of the Economic Research Group, where he is currently the Executive Director. Contact: sajjadzohir@gmail.com

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.