BPC cancels $1b ITFC loan plan as fuel prices drop

The state-owned Bangladesh Petroleum Corporation (BPC) has backed away from a decision to borrow an additional $1.4 billion from the International Islamic Trade Finance Corporation (ITFC) following a drop in fuel prices in the global market, officials said.

The government agency planned to take the large loan from the international lender in addition to its regular borrowings for the fiscal year 2022-23 to surf through a heated fuel market and a rampaging dollar crisis.

Sources at the finance ministry and BPC said the state-owned corporation was struggling to open letters of credit (LCs) due to fuel and dollar crises and requested ITFC to provide the loan.

A delegation of the international lender came on a two-day visit to Bangladesh on December 8 to discuss the loan request. 

However, officials said the delegation has now been informed that BPC will not be taking the additional loan for the time being following recommendations from the Economic Relations Division (ERD).

“The ERD is discouraging BPC from taking the loan. Besides, the price of oil has come down in the international market. As a result, BPC will not have to suffer from the dollar crisis even if it does not take new loans,” a BPC official told The Business Post on condition of anonymity.

The official said, “At one point [due to the dollar crisis], public and private banks were not agreeing to open LCs as per the exchange rate of the central bank. We had to regularly lobby the central bank to open an LC through banks.

We even had to buy dollars at higher prices to open LCs with some private banks.

“The situation has changed a bit now.”

BPC Chairman ABM Azad said it was not possible to open LCs on a regular basis from local banks. “Therefore, new loans were sought to keep the opening of LCs for fuel import steady. But as the crisis is gone, that loan is no longer needed.”

Moreover, ITFC’s interest rate has gone up since the dollar crisis began, wreaking havoc across the globe. Previously, ITFC’s loan interest was 3.5 per cent. However, when negotiations began for the additional loan, the interest rate stood at nearly 5.5 per cent.

ITFC, a member of the Islamic Development Bank (IsDB) Group, provides loans to Bangladesh at an interest rate of 2.8 per cent, in addition to Secured Overnight Financing Rate (SOFR), which stands at around 3.5 per cent currently.

ITFC was established with the primary objective of advancing trade among the Organisation of Islamic Cooperation (OIC) member countries. As a member country, Bangladesh also has ownership in the bank. BPC takes short-term loans from ITFC on a regular basis, and the lender releases the money in instalments for the borrower’s LC payments. BPC repays the loan exactly six months after opening the LCs. 

ITFC’s interest rate changes regularly in line with global conditions. At the time of repayment of the loan, it is to be repaid at the prevailing SOFR.

BPC is responsible for importing, distributing and marketing oil and petroleum products in the country. The agency has to open 15 to 16 LCs every month on average to import about 15 lakh tonnes of crude oil and 40 lakh tonnes of refined fuel.

According to BPC sources, diesel accounts for 75 per cent of the total fuel consumed in the country. The government is looking for new sources to buy diesel at relatively low costs.

Negotiations are going on with Brunei and India in this regard. Because of this, it may take more time to get the oil from there. The pressure on foreign exchange reserves is increasing because of buying oil at higher prices.