Bangladesh seeks $1 bln IMF loan, eyes wealth fund

A man reads the Koran as he begs on an overhead bridge in Dhaka August 30, 2010. Bangladesh is seeking a $1 billion credit facility from the International Monetary Fund and is thinking of setting up a sovereign wealth fund from its foreign exchange reserves.

LONDON (Reuters) - Bangladesh is seeking a $1 billion credit facility from the International Monetary Fund and is thinking of setting up a sovereign wealth fund from its foreign exchange reserves, its central bank governor said on Monday.

Bangladesh has a current account surplus and would use the IMF facility for budget support, Atiur Rahman told Reuters in an interview on the sidelines of a conference in London.

"The World Bank has committed over $6 billion (to Bangladesh) for the next few years, we are negotiating with the IMF about one more billion ... this is for the flexible facility," Rahman said.

"It should not take long because the IMF director visited us and we are moving to Washington next month -- we will cut a deal somewhere."

The IMF's flexible credit line (FCL) has fewer strings attached than traditional IMF loans and was originally aimed at strongly performing emerging economies.

Only three countries -- Mexico, Poland and Colombia -- have established flexible credit lines so far, although they have not drawn on the resources.

The IMF's executive board agreed last month to amend the programme by doubling the duration to up to two years and increasing the amount of credit available.

Under the new precautionary credit line, the IMF said any of its 187 member countries could request access and the board would decide on a case-by-case basis which ones qualify.

Bangladesh's economy grew by nearly 6 percent in the year to June 2010 and the government is looking for 6.7 percent growth in 2010/11, helped by strong exports and remittances.

The country received its first credit ratings earlier this year -- Ba3 from Moody's and BB-minus from Standard & Poor's -- and is included in the MSCI frontier markets stock index.

Rahman said Bangladesh preferred to borrow from multilateral agencies than to issue sovereign debt, as this was cheaper.

SOVEREIGN WEALTH FUND

Bangladesh's foreign exchange reserves have doubled in 15 months to record levels of $11 billion, and the country is considering setting up a sovereign wealth fund, Rahman added.

"We are working closely with the international financial agencies ... we would like to try that idea. This would not be a big deal, maybe half a billion (dollars) or so," Rahman told Reuters Insider television.

Bangladesh was looking at the Singapore sovereign wealth fund model, Rahman said, and was also looking at launching an infrastructure fund.

While sovereign wealth funds in Africa and the Middle East are usually based on oil reserves, the Asian sovereign wealth fund model manages excess foreign exchange reserves transferred from the central bank by investing in long-term assets for future generations.

Through acquisitions, these funds help to develop domestic industries, making their economies less reliant on exports.

If it launches the fund, Bangladesh would join several frontier market countries, including Azerbaijan and Nigeria, which have established or are in the process of setting up sovereign wealth funds (SWFs). SWFs manage $3 trillion globally and their assets are seen doubling in less than 10 years.

Bangladesh raised its repo rate by 1 percentage point to 5.5 percent last month, and Rahman said further near-term rate hikes were possible given rising inflation.

Inflation picked up to 8.70 percent in June, from 8.65 percent the previous month on the back of rising food prices, data showed last month.

Containing food inflation is a major challenge for the government as nearly 38 percent of Bangladesh's more than 150 million people still live on less than $1 a day and they spend more than 70 percent of their income on food.

"(Inflation) is a worry, but on average we are still around 7 percent. We hope we will be down to 6.5 percent," Rahman said.

Asked if there could be further monetary tightening in the short term, Rahman said "yes".

The central bank in May suspended a plan to ease capital controls, and Rahman said there were no plans to revive it.

(For more news visit Reuters India)