NATIONAL dailies have reported that Bangladesh’s leading economists have opposed a proposal by apparel manufacturers. The proposal demands a sovereign guarantee from the government against a foreign loan for setting up a garment industrial park in Munshiganj.
The two China companies have shown their interest to finance for development of the industrial zone as the garment owners sought foreign loans. Hong Kong KRD International Investment Group Limited in December last year agreed to give loans worth Tk 1,400 crore at low interest rates to the garment factory owners with a condition of sovereign guarantee.
Reports have it that, the garment factory owners have engaged in hectic lobbying with influential government officials to get the sovereign guarantee against the foreign loan. As per the suggestion of Bangladesh Bank and Board of Investment, they completed preliminary work to form a company comprising representatives from the Bangladesh Garment Manufacturers and Exporters Association and the BKMEA to receive the loan.
From the economists’ point of view, it will be very risky for the government to give a sovereign guarantee as the government will be responsible for the repayment of the loan if the garment factory owners default. It is worth mentioning that usually the government does not issue sovereign guarantees for any private project. According to a national daily report, a number of prominent economists’ unequivocally discouraged the government to provide a sovereign guarantee since the proposed garment industrial zone is completely a private sector project.
The foreign financing companies have already agreed to reset its condition for financing as the government is unwilling to issue the sovereign guarantee against the foreign loans for the private sector. Now the garment owners are aiming for a “letter of comfort” from the government about which, again, the economists’ position is diametrically opposite. In the economists’ view, if the government issued a letter of comfort it would tarnish the credibility of the government if the factory owners became defaulters. They also held the view that, the government should not issue a letter of comfort as there might be a possibility of legal complexity if the factory owners failed to repay the loan.
Previous records show that big borrowers were big defaulters. In this backdrop, we share the concern of the prominent economists and we hold the view that the government should neither provide sovereign guarantee nor give a “letter of comfort”. Reiterating some economists’ position we think government should rather give incentives to the private banks to issue loans to set up the garment industrial park. This will not only minimize the risk on government’s side but also it will channel the excess liquid money to a productive export oriented business. Even in that case proper scrutiny in giving loans should be maintained so that a case of domestic default may not arise.
Don’t repeat mistakes by issuing sovereign guarantee for private loans
