WB Proposes $350M Loan Guarantee for BD's LNG Imports

The facility, offered through the World Bank's Multilateral Investment Guarantee Agency (MIGA), will provide a 100% guarantee for letters of credit (LCs) issued by both local and international banks to Petrobangla, Bangladesh's state-owned energy company. This will ensure smoother and more secure access to LNG supplies, alleviating concerns over energy security.

According to a document shared with the government, which was obtained by The Business Standard, the loan guarantee will be one percentage point cheaper than the current financing from the International Islamic Trade Finance Corporation (ITFC), used by Bangladesh for LNG imports.

Moreover, the proposal includes the possibility of expanding the facility beyond $350 million, albeit with reduced coverage from the World Bank.

Government’s Response and Next Steps

Energy and Power Adviser Muhammad Fouzul Kabir Khan indicated that the government is considering the proposal favorably, citing lower interest rates and extended repayment terms as key advantages that could ease the settlement of suppliers' dues. The Economic Relations Division (ERD) is overseeing the discussions and will determine the final guarantee amount and formalization timeline.

A senior ERD official, speaking anonymously, explained that the proposed revolving letter of credit facility functions as a flexible bank guarantee, enabling multiple payments for LNG supplies without the need to issue new guarantees for each transaction. Once the funds are used, the facility automatically renews, ensuring continued access to LNG imports.

The official described MIGA’s proposal as a "positive development" for Bangladesh’s energy sector, noting that it could help mitigate the challenges associated with LNG financing. However, ERD intends to negotiate lower upfront and guarantee fees.

How the Facility Works

Under this agreement, Petrobangla will be able to open LCs with several international banks, including HSBC and Standard Chartered. The selection of banks will be finalized in coordination with the World Bank. Petrobangla can secure loans against these LCs, with a repayment period of nine months.

While the initial proposal covers LNG imports, there is potential for the guarantee to be extended to include fuel oil imports in the future.

In parallel, discussions are underway to potentially double the guarantee amount, with the possibility of utilizing domestic banks for opening LCs.

ITFC Financing and Comparisons

Currently, Bangladesh depends on ITFC for financing LNG and fuel oil imports. Under the current agreement, the country borrows from ITFC at an interest rate of SOFR plus 1.80%, along with a 0.2% administrative fee. The World Bank's proposed facility, by comparison, offers a more attractive financial arrangement, with an interest rate ranging from SOFR + 0.84% to SOFR + 1.01%, and a 9-month repayment term.

The World Bank's guarantee also has lower upfront and guarantee fees (0.90% and 0.30%, respectively) compared to the ITFC loan terms, making it a more cost-effective option.

Energy Demand and Cost Benefits

Bangladesh’s daily demand for natural gas is 380 crore cubic feet, while Petrobangla can supply only 250 to 280 crore cubic feet, importing 100 crore cubic feet to bridge the gap. The World Bank’s document highlights the financial advantages of the new facility, noting that reducing reliance on oil-based power plants could save the country up to $2.5 billion annually. A more reliable gas supply could also reduce electricity generation costs by up to 10%, offering substantial economic benefits.

MIGA’s Role and Past Projects

MIGA has been instrumental in supporting key infrastructure projects in Bangladesh, such as the $407 million guarantee for the Bhola 220MW power plant and $357 million for the Ghorashal Polash Urea Fertilizer Plant. Other major projects backed by MIGA include power plants in Sirajganj and Ashuganj, demonstrating its ongoing support for Bangladesh's energy sector.

Foreign Reserves and Payment Challenges

Due to a shortage of foreign reserves, Bangladesh has struggled to meet timely payments for LNG and fuel oil imports. As a result, foreign suppliers are losing confidence, and the country faces higher costs, including penalties for delayed payments. According to Bangladesh Petroleum Corporation (BPC), it currently owes $60 million to fuel suppliers, while Petrobangla’s outstanding debts to foreign LNG suppliers stood at approximately $470 million as of December 2024.

To address this, the energy ministry has requested Tk5,000 crore in subsidies from the finance ministry to settle LNG dues. Delays in payments could jeopardize long-term contracts and reduce Bangladesh's access to the spot market, further escalating energy costs.

In conclusion, the World Bank’s proposed loan guarantee represents a timely and cost-effective solution to Bangladesh's LNG financing challenges, with the potential for significant long-term benefits for the country's energy security and economy.