Bangladesh's Export Development Fund (EDF) is facing a significant downsizing, dropping to a mere $2 billion by December, a move driven by conditions set by the International Monetary Fund (IMF). This decision has sparked a debate about its impact on exporters and the broader economy.
Here's a breakdown of what's happening:
- The Cut: The Bangladesh Bank is slashing the EDF to $2 billion to align with the IMF's terms.
- Historical Context: The fund once peaked at $7 billion during the pandemic to support exporters.
- Impact on Exporters: Exporters are finding it harder to access low-interest loans.
- Economic Concerns: Economists are questioning the EDF's effectiveness in diversifying Bangladesh's export base.
- IMF's Role: The IMF pushed for the reduction due to concerns about misuse and a lack of transparency in reserves.
- Rising Issues: Forced loans from unpaid EDF credits are increasing among exporters.
The $4.7 billion IMF loan agreement mandates that the central bank keep the EDF capped at $2 billion until December 2026, with no plans for expansion during that period, according to a senior official. Currently, the fund's size is slightly above this limit.
Economists and Bangladesh Bank officials agree that the EDF has been crucial in providing low-cost foreign currency loans to exporters. However, the IMF's conditions have left the central bank with little choice but to reduce the fund further. This move is part of wider financial and structural reforms the government is implementing to meet the IMF's loan conditions. Since mid-2022, the Bangladesh Bank has been gradually shrinking the EDF amid dwindling foreign exchange reserves and a persistent dollar shortage.
During the Covid-19 pandemic, the EDF was expanded to $7 billion to support exporters facing global economic challenges. But, as reserves dwindled and the foreign currency crunch worsened from mid-2022, the central bank started cutting the fund's size, as smaller EDF disbursements helped strengthen reserves on paper.
A senior central bank official stated, "According to our agreement with the IMF, Bangladesh Bank plans to keep the EDF within $2 billion. The larger the fund, the more credit exporters can access, but we had to reduce it to meet IMF conditions."
Exporters are now struggling to access low-interest loans from the EDF. Many are finding it difficult to secure financing or have stopped applying altogether.
Mohammad Hatem, president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), mentioned, "When the EDF was large, funds were readily available and loans could be taken easily... Now, because the EDF has been reduced, getting a loan has become very difficult."
But here's where it gets controversial...
Economists are questioning the EDF's impact. Professor Mustafizur Rahman from the Centre for Policy Dialogue (CPD) said, "Exporters mainly use the EDF for trading, and it has certainly helped them. But the drastic reduction began when the reserves situation deteriorated and the IMF required more transparent accounting."
He added, "It was working well, but the EDF failed to contribute meaningfully to export diversification. The government should now explore how such funds can be used to promote diversification more effectively... I think it should eventually be expanded again — perhaps not to $7 billion, but closer to that level would be reasonable."
Another senior Bangladesh Bank official admitted to "significant misuse" of the EDF, which influenced the IMF's decision.
Dr. Zahid Hussain, former World Bank lead economist, echoed these concerns. "The main purpose of the EDF was to promote export diversification, but we have not seen visible results. Our export dependence on garments remains unchanged…It's time for an evaluation or audit of the EDF to understand why the results have been so limited."
He pointed out that the EDF did not spur new sectors like leather, agro-processing, or light engineering as hoped. Even within garments, the idea was to diversify beyond traditional items into higher-value products, but that hasn't happened.
And this is the part most people miss...
Investigations have revealed irregularities and misuse of EDF loans by some exporters. Some borrowers failed to repay loans on time, turning EDF credits into large "forced loans."
A senior official explained that these loans were intended to bring in more foreign currency, but in many cases, buyers abroad failed to make payments, resulting in growing forced loans.
For example, a state-owned bank's forced loans against EDF credits rose by 410% in 2021.
When borrowers fail to settle letters of credit (LCs) by the maturity date, local banks must pay foreign banks, leading to forced loans. This affects both import and export transactions.
What do you think? Do you agree with the IMF's decision? Should the EDF be expanded in the future? Share your thoughts in the comments below!
