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Bangladesh to pour $2 billion of reserves into infrastructure fund

Critics question whether money will serve public needs or political whims

Cabling work for Bangladesh's first subway system is underway in Dhaka. (Photo by A.Z.M. Anas)

DHAKA Bangladesh is moving to put $2 billion from its foreign reserves into a new sovereign wealth fund to finance infrastructure development, but experts fear political maneuvering may soak up public resources.

The government of Prime Minister Sheikh Hasina has endorsed a blueprint for the South Asian nation's first sovereign wealth fund to be seeded with $2 billion, and officials hope the fund will launch as early as July. Bangladesh has more than $32 billion in foreign reserves and has been considering a sovereign fund since 2015.

"It's a small amount of money. Yet we'll get a fund of our own," Mahbub Ahmed, a senior secretary at the Finance Ministry, told the Nikkei Asian Review.

If established, the sovereign fund will take minority stakes in public-private partnership infrastructure projects in foreign currencies, dwarfing the state-owned Bangladesh Infrastructure Finance Fund, which has a capital base of roughly 25 billion taka ($313 million). The move comes after a string of aborted attempts in recent years to establish funds of $500 million to $5 billion by issuing sovereign bonds.

A legal framework is being worked out, and officials said the fund, which is to be allocated $2 billion annually for five years, would be administered by professional managers capable of handling large infrastructure financing and project risk. Some observers expect that the legal framework will open the way for the involvement of major global investment banks and similar companies as advisers or consultants.

While the mandates for the sovereign fund and BIFF overlap, Ahmed noted that the existing fund invests using the taka, the local currency. BIFF has invested the equivalent of $146 million in PPP projects since its establishment in 2011, according to its own figures.

Construction work continues on the subway in Dhaka. (Photo by A.Z.M. Anas)

Public investment in infrastructure is equal to less than 2% of Bangladesh's gross domestic product -- a proportion that the World Bank has said should be raised to 10% a year to attain the 7.5% to 8% GDP growth rate needed for the country to become a middle-income nation by 2021.

Bangladesh's economy grew by 7.1% in the financial year ended June 30. To close the infrastructure gap, the government's seventh "Five-Year Plan" through 2020 estimates that the country needs to invest as much as $410 billion, twice the size of its GDP.

BETTER RETURNS Officials championing the new fund said it would offer stable and flexible sources of financial firepower locally, and ensure better yields on the foreign reserves. Returns on Treasury notes and bonds have dived below 1% since the global economic crisis, but the fund can earn higher returns -- 4% or more -- from lending to private infrastructure projects. At the same time, Bangladesh is borrowing in foreign currencies from China and other countries at a cost of 3% to 4%.

"The idea is to build reserves in good times and invest those in growth-promoting and revenue-earning projects for the future," said A. R. M. Nazmus Sakib, another secretary at the finance ministry, who is closely involved in the process. "The beauty is we can earn interest income while lending at cheaper interest rates."

S. M. Formanul Islam, executive director and CEO of BIFF, agreed that sovereign wealth funds are "ideal" in countries like Bangladesh, where commercial banks are less interested in long-term projects while funding from donors is not reliable. "The need is real given the development route Bangladesh is heading down. Otherwise, there is no other source to finance long-term projects," Islam said.

Past projects have stalled when lenders pulled out unexpectedly. One example is the construction of the $3 billion Padma Bridge. In 2012, the World Bank cut its $1.2 billion credit line after allegations of corruption involving a consultancy contract surfaced. The Japan International Cooperation Agency, the Asian Development Bank and the Islamic Development Bank also withdrew committed funds, leaving China to step in in 2014 to help Bangladesh build its longest bridge.

Nonetheless, Islam believes there is no need to set up a separate vehicle and that the government should instead lend greater support to BIFF. He said the creation of a new agency for a similar purpose would send the wrong message to the market. Instead, he said, the government could explore other options such as lending to BIFF on more favorable terms or injecting fresh equity to boost its capital base.

Other experts are also worried about the establishment and monitoring of the new agency. Ahsan H. Mansur, executive director at the Policy Research Institute, a Dhaka think tank, said: "Governance is very important ... oversight functions are also important." Mansur headed the Middle East division at the International Monetary Fund for five years until 2007.

Managing the fund will be the most difficult part, said Salehuddin Ahmed, a former central bank governor, referring to the need to deflect political influence. Ahmed, who now teaches at BRAC University in Dhaka, is also opposed to wholesale transfers from foreign-exchange reserves, saying that authorities must draw no more than the $10 billion planned over five years.

Mustafa K. Mujeri, a former chief economist of the Bangladesh Bank, echoed the same view: "We shouldn't waste reserves," he said. Mujeri, now executive director at the Institute for Inclusive Finance and Development, a private think tank in Dhaka, also warned that investments in low-productivity sectors would make returns "risky."

"This fund should be utilized in a way that serves the purpose for which it has been formed. Otherwise, this will lead to enhanced country risk," he said, adding that Bangladesh could face a downgrade of its sovereign credit rating.

Such fears were dismissed by Shitangshu Kumar Sur Chowdhury, a deputy governor of Bangladesh Bank, who said that the cabinet would not have approved the fund's formation if there were to be any adverse impact on the country's reserves.

Chowdhury led a seven-member committee formed in 2015 that submitted a report to the government in December, recommending the establishment of the sovereign fund.

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