Energy Bangla - IDB Urged not to Change Interest Rate on Fuel Loans

The energy division on Wednesday requested the Islamic Development Bank not to change the interest rate on $400 million loans in the pipeline for disbursement to the Bangladesh Petroleum Corporation as any immediate change in the rate would hamper tight fuel oil import schedule.

The IDB recently proposed a new 5.5 per cent fixed-interest rate on the annual loans it provides to the BPC, shifting from the existing formula-based interest rate — LIBOR (London Interbank Offered Rate) plus 1.50–1.75 per cent.

The division in a letter informed the IDB headquarters in Jeddah on Wednesday that it had started processing the loans that were in the pipeline and had taken approval from the relevant ministries, said sources in the division.

‘Any change in the loan interest rate will force the division to start processing again and to take approval from the ministries such as finance and law for changing the interest rate which might take some times. It will delay the disbursement of the loan, hampering the import schedule,’ said a division source referring to the letter.

Special assistant to the chief adviser M Tamim told on Tuesday they would request the IDB not to change the interest rate as the BPC would be in trouble in continuing with fuel import if the rate was changed.

The BPC imports around 1.5 lakh to 2 lakh tonnes of refined fuel oils a month, mostly from Kuwait and the IDB is one of the major sources of funds for paying monthly import bills as it provides around $1.2billion to $1.4 billion a year.

‘If the BPC fails to get in time one of the tranches of the IDB loans that are in the pipeline, it will not be able to open the letter of credit to import fuel from Kuwait,’ said the energy division source.

Sources in the division and the BPC said the total amount of the IDB loans that were in the pipeline was around $575 million, of which the IDB would not be able to change interest rate for $75 million as it was in the final stages of disbursement.

‘For the time being, our concern is more than $400 million as we have not started processing the rest of $100 million. We will again contact the IDB on the $100 million tranche after the interest rate issue for the $400 million is settled,’ said another source.

Apart from delay in processing loans, the interest rate on $400 million would also be higher as per the latest bank proposal for fixing the rate at 5.5 per cent, he said.

The IDB apparently fixed the interest rate after the LIBOR rate decreased sharply in the last few months and potential interest rate for the BPC came down to only around 4.3 per cent from around 6–7 per cent it charged in 2007.

The LIBOR rate, which was 5.44 per cent in January 2007, came down to 4.22 per cent this January before going down to only 2.48 per cent this April because of worldwide economic recession fuelled by the economic recession in the United States.

‘If the existing LIBOR rate is followed, the BPC would need to pay the IDB an interest rate of about 4.30 per cent [LIBOR 2.48 plus 1.75 per cent] on the $400 million whereas as per the IDB proposal the interest rate would be 5.5 per cent,’ said the source.