Bond, Bangla Bond!

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Bangla Bond has the potential to be a groundbreaking event in our history in terms of alluring foreign funds for investment in building essential infrastructures and play a crucial role to help us achieve our Sustainable Development Goal Targets. 

Some remarkable achievements have marked the past few years for Bangladesh; the country has become one of Asia’s most incredible and unexpected success stories. Aided by robust growth in the manufacturing sector and incremental rise in in-bound remittances, Bangladesh has become the second-fastest-growing nation in South Asia. According to the World Bank, Bangladesh’s GDP is projected to grow at 7.2 per cent this fiscal year and 7.3 per cent, the year following. Most importantly, Bangladesh has met United Nations criteria to graduate from “least developed country” status by 2024. Despite the accomplishments, there are several aspects of the economy which are concerning. There are a few worrying indicators which have prompted the stakeholders of our economy worried about the sustainability of the rapid growth. One of the biggest concerns for the future of our economy is the poor state of private sector investment. Despite the gradual rise in the investment-GDP ratio over the past three decades, in recent years, the share of private investment in GDP has remained static. The Private investment-GDP ratio has remained stuck at 23 per cent for the past few years, which has raised uncertainty about robust future growth. Private investment is essential to generate growth and employment for the growing workforce. In order to achieve an 8 per cent growth by 2020, the Private Investment-GDP ratio requires to be at least 30 per cent. The Government of Bangladesh has recently issued Bangla Bond to solve the stagnant private investment scenario.

Taka bonds are a more sustainable form of foreign borrowing compared to dollar denominated debts for Bangladeshi entities that only have earnings in local currency. Such issuances allow the Bangladeshi entities to avoid the exposure to currency risk while providing access to international investors who seek exposure to the Bangladeshi Taka and the corresponding higher yield. It also raises the profile of Taka in international markets, improve the country’s image and help attract FDIs. Effective use of the instrument can, therefore, boost up investments in the private sectors of the country. Going forward, it would be worth exploring whether such bonds can be issued for tenors longer than the three years tenor of the “Bangla Bond” issued by IFC recently – that will be even more effective since the private sectors in Bangladesh severely lack access to long term funds currently.”

Arif Khan
CEO and Managing Director
IDLC Finance Limited

A Game Changer
Bangla Bond debuted as a taka- denominated debt instrument, on the London Stock Exchange on November 11. Issued by the World Bank Group’s private sector lending arm International Finance Corporation (IFC), the bonds are worth $9.5 million, and the proceeds will be used for investment in private infrastructure projects, as well as public-private partnership initiatives. All bond payments (including the initial subscription amount and any subsequent coupon and principal payments) will be settled in dollars, in an amount determined based on the applicable dollar-taka exchange rate, with the investors taking on the exchange rate risk. On coupon payment dates and upon maturity after three years, IFC will take the taka earnings from its investments in Bangladesh and convert the amounts back into dollars to pay the offshore investors in the taka bonds.

Leverage of Local Currency
International investors are often interested in local currency-based bonds because they do not carry the risks of interest rate fluctuations. Concurrently, foreign investors often face significant hurdles while trying to invest in Bangladesh; they range from logistical to infrastructural impediments. Bangla Bond will make the process easier and hassle-free. The local currency bond issuance can bypass the risks of borrowing in foreign currency, which can be subject to fluctuating exchange rates; so it makes sense that local investors would prefer to borrow in local currency.

An Instant Hit!
An initiative of the International Finance Corporation, Bangla Bond has brought onboard a new set of foreign investors, it also an acid test for the sustainability of Bangladesh’s growth. The interest from investors has been remarkable, leading to a 30 per cent oversubscription of the first tranche. The proceeds of the first tranche were converted to taka and lent out to Pran-RFL Group, which was about Tk 80 crore, at 11-11.5 per cent interest. IFC plans to issue multiple tranches amounting to $300 million over the next couple of years, with the next round taking place early next year.

Looking Ahead
The listing of Bangla Bond is a silver lining among the dark clouds of uncertainty in Bangladeshi private sector. Although the size of the initial offering is meagre compared to the demands of our economy, it has the potential to be a groundbreaking event in our history in terms of alluring foreign funds for investment in building essential infrastructures and play a crucial role to help us achieve our Sustainable Development Goal Targets. 

 

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