Cenbank co-finances $100m to Petrobangla's LNG import fund

The Bangladesh Bank is contributing $100 million as part of a $500 million syndicated fund spearheaded by the International Islamic Trade Finance Corporation (ITFC) to provide loans to the Bangladesh Oil, Gas and Mineral Resources Corporation (Petrobangla) to import liquefied natural gas (LNG).

The Energy Division confirmed the Bangladesh Bank's co-financing in the ITFC led fund through a letter on Wednesday.

Sources said this is the first time that Petrobangla is seeking loans for LNG imports. The loan in question has a duration of six months and carries an interest rate of 2%, plus the SOFR rate.

According to the Federal Reserve Bank of New York, the Secured Overnight Financing Rate (SOFR) on 18 September was 5.31%.

The ITFC is not providing these funds directly to Petrobangla from its own resources. Instead, it is part of a co-financing agreement within a syndicated financing structure, with the Bangladesh Bank contributing $100 million from its foreign exchange reserves, according to sources.

As a result of this Petrobangla loan, the central bank's actual foreign exchange reserves will experience a minor reduction. The International Monetary Fund (IMF) under the BPM6 methodology excludes the portion of such loans or investments that are funded in foreign currency when calculating foreign exchange reserves.

On 23 July, during a meeting convened at the Economic Relations Division (ERD), Petrobangla Chairman Zanendra Nath Sarker put forth a proposal to secure a $500 million loan from the ITFC.

However, the representatives from the central bank who attended the meeting expressed their reservations regarding the proposal.

According to Petrobangla sources, the ITFC was not willing to extend loans without co-financing from the Bangladesh Bank. It is a standard practice for the ITFC that loan funds are not disbursed without financial backing from the central bank of the recipient country.

Following this, government policymakers, including those from the Energy Division, recommended that the central bank participate in co-financing the loan. After several reviews, on 20 September, the Bangladesh Bank agreed to provide 20% co-financing for the $500 million loan.

Currently, Petrobangla is in the process of finalising an agreement with the ITFC, and the funds will be released once the agreement is in place.

Petrobangla Chairman Zanendra Nath Sarker told The Business Standard that Petrobangla wanted to obtain a loan from the ITFC. The proposal was confirmed following discussions with the Energy Division, ERD, and the Bangladesh Bank.

Khondaker Golam Moazzem, research director at the Centre for Policy Dialogue (CPD), said, "These commercial loans, requiring repayment within a short time frame along with interest, may introduce volatility to the country's foreign exchange reserves. The pressure to repay within six months can potentially disrupt other crucial imports."

"Rather than heavily relying on LNG imports, it is imperative to prioritise domestic gas extraction and exploration. We should emphasise the government's plan to drill 24 gas wells by 2024. Borrowing to import LNG from foreign sources can increase strain on reserves and exchange rates, which would be detrimental to the overall economy," he added.

Professor M Shamsul Alam, energy expert and senior vice president of the Consumers Association of Bangladesh (CAB), emphasised that procuring fuel on credit is not a viable solution, as such loans must be repaid with interest.

"This could have repercussions on the general public. Instead, the focus should be on curbing wastage, addressing irregularities, and placing emphasis on domestic gas extraction and innovation," he further said.

In the past 15 years, the Bangladesh Petroleum Corporation (BPC) has been obtaining loans for the procurement of fuel oil. For the current fiscal year, BPC has successfully secured a $1.4 billion loan from the ITFC, with co-financing from the Bangladesh Bank.