A Sovereign Wealth Fund, by another name

Hasnat Abdul Hye | Monday, 12 April 2021

In 2017 I wrote an article in this paper titled "Why Bangladesh needs a sovereign wealth fund"? Two developments led me to write the eponymous article. Firstly, the refusal of World Bank to finance Padma Bridge on the unfounded allegation of corrupt practices being followed in tendering contracts. Secondly, the robust rate of growth of foreign exchange reserves that crossed the threshold of US$ 30 billion-plus. Though the alternative financing of the Padma Bridge Project had already been finalised and construction of the same had been underway, the serious thought being given by the government to constitute a sovereign wealth fund was in the air. It seemed to me that the time for the idea had not come any time sooner. The justification for the same was for everyone to see and be convinced. For one, the Fund would free the government from dependence on a foreign institution in the habit of making  unsavory innuendoes and having no qualms about showing domineering attitude. For another, a permanent source of funding with our own resources appeared to be a reality as the foreign exchange reserves assumed a safe threshold. While the government deserved eulogies for thinking big over the creation of the sovereign wealth fund (SWF), kudos were due to the dynamic export sector, particularly the garment industries and the regular remittance sent by our wage earners. Unlike most of the  SWF that came into existence over the last fifty years in the Middle-Eastern Countries, Africa and Nordic countries, Bangladesh did not enjoy the bonanza of increasing revenue earned from natural resources like oil and gas to generate foreign exchange reserve large enough to set up a SWF. Bangladesh is the only country, a LDC to be more precise (it still is until the transition period is over) that was bold and confident to give serious thought about setting up a SWF with hard earned foreign currency. No other country had shown this courage and confidence without back up from natural resources.

At the time when the idea was mooted, the SWF was proposed to be set up with US$ 10 billion, utilising $30 billion plus in foreign exchange reserves lying with the Bangladesh Bank (BB). The hedge against any possible risk for BB was to spread over the contribution to the Fund over a period of five years, with five equal tranches of $2 billion. A very cautious and prudent decision was taken by the government so that the central bank was not to be exposed to any shock or volatile situation caused by sudden depletion of its foreign exchange (fx) and unforeseen increase in demand for payment of  import  bills. It was decided at the time that the $10 billion SWF would be managed by the Ministry of Finance (MoF) and used for mainly infrastructure projects, preferably under public-private partnership (PPP). The MoF will repay the money to BB but the interest rate would be less than that charged by foreign lenders. Moreover, in projects under PPP half or a reasonable part of fx would be contributed by the private sector, thereby reducing the burden on BB. Bangladesh expatriates, insurance companies and pension funds would be invited to contribute to the SWF to augment the fund.

With financing of the mega project of Padma Bridge already finalised and the implementation underway, there was no urgency about setting up of the  SWF. The government bided for an opportune moment and the idea of a SWF was temporarily put on hold. Perhaps, the government of Bangladesh wanted to see if the growth in affects was steady and regular giving rise to a trend. Any reservation or doubt about the strength of the growth of foreign exchange reserve, if there was any, was dispelled when despite a global pandemic, the country's foreign exchange reserve made history and stood at $44.02 billion on  February 24, 2021. Steady flow of remittance even in the months when pandemic ran amok, moderate flow of earnings from exports and a low level of expenditure of exports mainly helped to increase the foreign exchange reserves by almost $10 billion in a month, crossing to $44.02 billion for the first time, according to Bangladesh Bank. The fx reserves are adequate to cover about eight months import payment and on this basis about US$10 billion can be safely used for implementation of development projects, particularly mega infrastructures, that will spare the country from borrowing. In line with the earlier idea about setting up of a SWF, a new entity entitled "Bangladesh infrastructure Development Fund (BIDF) " has been set up with foreign exchange reserves from Bangladesh Bank. The nature and operation of the BIDF leaves no doubt that it is Bangladesh's sovereign wealth fund, the first of its kind in South Asia.

The BIDF, in its maiden investment, has allocated 524.56 euros to Pyra Sea Port Authority's (PPA) and Sonali Bank. Under the agreement the PPA will pay 2 per cent rate of interest for the loan and repay the principal in seven years with a grace period of 2 years. It was been revealed that port and power sector projects will primarily be financed from the BIDF fund which will provide $2 billion or equivalent in foreign currency. It is reported that even private sector investors can borrow from the fund under terms to be agreed upon (Financial Express, March 6).

Some experts have expressed misgivings and concern about the working of the fund and have apprehension about possible misuse of the same, particularly when private sector is going to be involved (Financial Express, March 6). According to a former Governor of Bangladesh Bank, foreign exchange reserves should be used for meeting emergency needs caused by natural calamities and to pay for import bills and other foreign liabilities. This misgiving and apprehension appear exaggerated. There cannot be any doubt that  before the fund is allocated out of the forex reserves to BIDF for lending to other parties, the requirement for payment of import bills for at least six months will be taken into account by BB. Secondly, the central bank is not going to lend directly to any party like PPA, but through Sonali Bank. So, it will be Sonali Bank which will be responsible for repayment  of the loan in case of default by the borrower. Sonali Bank being in the public sector, it is in fact the Ministry of Finance that is taking the responsibility for the loan and therefore, due diligence will be made both before disbursement of loan and at the time of collection of repayment. The Bangladesh Bank is not even likely to lose interest as the Financed Division is a party to the agreement for allotment of loan. The track record of Finance Division shows that it has never defaulted in payment of interest or has deferred repayment of the principal amount. Finally, doubts have been expressed about the governance of BIDF under the Finance Division, citing the past history of state-owned and managed enterprises, particularly financial institutions. To obviate this possibility it has been suggested that instead of the Finance Division, the central bank should own and manage the fund of BIDF. This apprehension is also far fetched as the management of a SWF like BIDF will have to comply with the guidelines adopted in the Santiago Principles in 2008 under the auspices of the IMF. The apprehension that poor governance on the part of BIDF (SWF) is therefore, not only exaggerated but based on conjecture.

While all the economies in the world are reeling under the impact of pandemic, it takes a lot of courage and confidence to float a sovereign wealth fund. By taking this decisions, Bangladesh has shown that far from being 'a test case of development', it has become a model of development, defying all disbelieves.


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