Bangladesh Bank on Monday made dollar loans from the Export Development Fund more expensive by tying the interest rate to the secured overnight financing rate (SOFR), which is significantly higher than the current rate for EDF loans.
In a circular issued to banks’ managing directors, the central bank announced that the new interest rate structure would come into immediate effect.
Authorized dealer banks can now borrow from the EDF by adding an annual interest margin of 0.5% on top of the SOFR rate.
These banks can then charge manufacturers or exporters up to 1.50% above the SOFR rate.
On Monday, the SOFR rate was 5.33%, meaning that exporters will now face an interest rate of 6.83% on EDF loans compared with the previous rate of 4.50%.
Previously, the Bangladesh Bank charged a fixed 3% interest rate to dealer banks for EDF funds, which the banks would lend to manufacturers and exporters at a 4.50% rate.
However, as the SOFR rate fluctuates daily, the interest rate on EDF loans will no longer be set.
The Bangladesh Bank and the dealer banks will now determine the rate by adding a margin over the current SOFR rate, making EDF loans more market-based and likely more expensive.
Bangladesh Bank officials said that this shift aligned the EDF’s interest rates with global financial market trends.
The SOFR, which indicates the interest rate on loans, is published daily by the New York Federal Reserve at 8:00am local time.
Following the global phase-out of LIBOR, Bangladesh has been using SOFR since July 2023.
The EDF was initially expanded to $7 billion to support export growth.
However, due to a severe dollar shortage, the fund’s size was later reduced, and in April 2023, the Bangladesh Bank also lowered the borrowing limit from the EDF.