In the present days, most of economies are open. Every economy depends on external sector at every step. There is thus the need for inflows from external sources to meet the need for cross border transactions. Export is one of the sources of inflows. But the sector is vulnerable, which needs support. It is said that exchange rate facilitates to promote export. But reality shows that depreciated exchange rate benefits export sectors; it has no sensitivity to export demand. To promote export, different supports such as cash incentive, low corporate tax, low cost finance etc. are provided.
Bangladesh operates a fund known as Export Development Fund (EDF) to facilitate input procurements for export sector. In late eighties of last century, Bangladesh government established EDF with IDA credit of US$25 million. With the contribution of $5 million by the government, the size of the fund was $30 million. The fund was operated by the central bank, declared through revised policy guidelines in 2009 through issuance of a master circular. According to the circular, the size of the fund was $300 million. The size became $5 billion in 2020. The present size is reportedly $7 billion is around Tk 70,000 crore. The interest rate in 2009 was 6-month LIBOR + 2.50 per cent. Present rate of interest is 4 per cent.
It is reported that central bank manages the fund from foreign exchange reserve. As such, this is a part of the gross international reserve. But International Monetary Fund (IMF) said, as per media reports, EDF needs to be kept out of the reserve. Hence, the present reserve as declared by central bank should be lower by the amount of fund. International reserve should contain a country's foreign assets. In addition to reserve maintained by central bank, liquid assets are held abroad by commercial banks. This should have also be a part of international reserve though this is not considered as foreign assets by central bank of the country. It is known that commercial banks' position is considered as part of reserve in many countries. Country's foreign assets held abroad by banks are used for settlement of cross payments. Loans from EDF are temporary supports to banks against their import loans to exporters. Refinancing helps banks to revolve foreign assets for settlement transactions more than expected. Loans from EDF support exporters to import at reasonable price. Insider information shows that EDF is popular to exporters. There is a question -- why.
Exporters are allowed to import inputs from external sources and from domestic sources on usance terms up to 180 days. It means that exporters can import on credit basis. Import payment can be settled on realisation of export proceeds. But procurement on credit is costly. As such, exporters prefer buying inputs on cash terms for which they seek low cost fund from EDF. Alternatively, inputs can be procured under buyer's credit at prescribed rate. But the cost for buyer's credit is costly compared to loans from EDF.
Bangladesh export sector is being observed as developed to a good extent, including backward linkage industries. Forward linkage industries like readymade garment factories execute imports based on export orders. But this model is not possible to be applicable for backward linkage industries. They need batch production for expected future orders, for which bulk import is required. The rules of EDF allow imports against specified orders for direct exporters and bulk imports for backward linkage industries making local deliveries to exporters against back to back letters of credit (LCs). As such, EDF plays a vital role to support export sector.
It is observed that different new conditions are added to the rule book for EDF. As per business insiders, new instructions for EDF operations result in difficulty to avail loans from EDF by many exporters. Does it indicate that EDF is going to be phased out? This is a question. Maybe it is to be phased out soon since central bank has very recently introduced green transformation fund (GTF) in Taka. This may lead to phase out of GTF in foreign currency.
EDF is a way of pre-shipment financing for procurement of inputs. Bangladesh export is dependent on readymade garments which depend on back to back imports in foreign currency from home and abroad. Inland procurement should be in local currency. But local delivery in foreign currency is treated as export trade which fetches fiscal benefits. As a result, inland procurement on back to back basis needs to be executed in foreign currency. Hence, financing windows need to be in foreign currency. In this case, EDF plays a perfect role.
What should be the solution in place of EDF is a crucial question, solution of which needs to be sought. As we know that exporters import inputs under back to back LCs on sight basis. Backward linkage industries import inputs in bulk on sight LCs. Both parties need foreign currency for input procurements before repatriation of export proceeds. The supports are presently available through EDF. In its place, exporters have different options -- credit facilities from suppliers under usance LCs, payments from external sources against imports under usance LCs, and import finance from banks in Taka.
As said earlier, export is a vulnerable sector which needs low cost finance. Hence, without refinancing windows from the central bank, financing cost will never be effective to exporters for being competitive in international markets. Considering this view in mind, EDF can be replaced by Taka fund at lower cost. Under the arrangement, banks will finance exporters in compliance with credit parameters for procurement of inputs and make payments in foreign currency with creating loans in Taka. The loans need to be reimbursed from refinancing Taka fund by the central bank. The loans will be settled on repatriation of export proceeds at exporters end. In this case, banks will adjust the loans after encashment of foreign currency into Taka. But foreign currency fund may be lower, due to currency depreciation, compared to what was paid earlier for settlement of payments against procurements. In such a situation, banks should be allowed to realise additional Taka to make good the shortfall in foreign currency. Alternatively, banks may be allowed to extend foreign currency loans against settlement of payments and realise in the same currency together with interest out of the repatriated export proceeds. Banks will make repayments along with interest to central bank in Taka.
There are different challenges for management of Taka fund. The size may be bigger compared to any other refinance schemes available in the system. Upfront import payments before repatriation of export proceeds may not be easy for banks in the context of the depth of market liquidity. In this case, banks need to be allowed to use fund from their offshore banking operations as per requirement without binding any limit. Central bank can, otherwise, extend swap line or overdraft facilities to banks to facilitate import transactions.
Without low cost windows, exporters may not be able to accommodate extra cost in the name of supplier's or buyer's credit. Concerned authorities should continue EDF programme with the support of funding from multilateral agencies as it was started in the last century. In its absence, Taka fund should be made operational, as outlined above for the sake of smooth cross border transactions.
