FE Report

The Asian Development Bank (ADB) Tuesday approved loans worth US$744 million for Bangladesh to help it cushion the impact of the global economic meltdown and minimise fiscal deficit, the bank sources said.

Board of directors of the Manila-based lender ADB has approved a hard-term loan of $500 million from its "counter-cyclical support facility (CSF)" fund and

another $244 million from the "public expenditure support facility (PESF)" fund.

For the $500million credit, Bangladesh has to repay it in only five years with a three-year grace period. The loan carries a commitment charge of 75 basis points and an annual interest rate of LIBOR plus two percentage points.

Experts said the loans, lion's share of which will be disbursed by December this year, might fuel inflation and make the country more vulnerable and indebted.

Former finance adviser Mirza Azizul Islam said: "The budget deficit has been projected at five per cent of GDP (gross domestic product growth), export and remittance earnings are maintaining growth and revenue-GDP ratio is almost similar to previous year. So why is the government going to borrow such huge hard-term loan at this moment?"

"Implementation of Tk305 billion annual development budget this fiscal is very challenging. This means thousands of takas will remain unutilised. The money can be diverted to financing the deficit budget," he told the FE.

"In short term, this loan might have less impact, but in long-term it will wallop the economy much," Mr Islam said adding the country had some vulnerability that could affect repayment timely against such huge loans in addition to the regular payments of the external and internal borrowings.

He said: "Bangladesh's export and revenue earnings are still poor and the manpower export is on the decline. Besides, the impact of the climate change is major threat to Bangladesh. In reality, such huge borrowing except for the productive sector could hurt Bangladesh's economy."

Mr Islam also said such hard-term borrowing will encourage the foreign lenders to disburse future loans with tough conditions rather than lending from their soft arms.

The ADB in a statement Tuesday said the $500 million loan will support the government's efforts to weather the impact of the global economic plunge and the $244 million to introduce economic and social policy reforms, essential for achieving higher and more inclusive long-term growth and strengthening social safety net programmes.

Finance ministry officials said they expect to sign the loan deal with the ADB later this month to receive the $500 million from the CSF fund and a tranche of about $100 from the $244 million PSF fund.

Although the credit is more costly, the government will take this as the country has already been affected by the second round impact of the global economic recession, a finance ministry official told the FE.