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Bangladesh is borrowing US$1.0-billion hard-term loan from the Islamic Development Bank (IsDB) for much-needed upgrading of Eastern Refinery's oil-refining capacity by 3.0 million tonnes a year, officials say.
The government's Standing Committee on Non-Concessional Loans, headed by Finance and Planning Minister Amir Khosru Mahmud Chowdhury, approved the borrowing of this foreign loan, recently assured by the Islamic Development Bank.
The credit facility marks one of the largest single-project financial packages ever extended by the Jeddah-based IsDB to a member-country.
The critical funding package is explicitly earmarked for the long-delayed Unit-2 expansion project of the state-owned Eastern Refinery Limited (ERL) in Chittagong, a senior Economic Relations Division (ERD) official has said.
The decision signals a tactical pivot in the country's macro-energy strategy. The government is intentionally leaning into market-based, high-cost foreign debt to finance critical infrastructure.
This happens at a time when traditional concessional financing windows from development partners are getting tightened globally.
As the loan features a grant element of less than 25 per cent, it is classified under International Monetary Fund (IMF) guidelines as non-concessional or "hard-term" loan.
Situated in the port city of Chittagong, ERL, a subsidiary of the state-owned Bangladesh Petroleum Corporation (BPC), would have its second unit with a crude-refining capacity of 3.0 million tonnes per year by investing some Tk 354.65 billion or $2.89 billion.
As per the project, the government would provide Tk 212.78 billion as loans from its internal resources while the remaining Tk 141.88 billion will come from the Eastern Refinery's internal resources.
Currently, ERL has its first unit with 1.5-million-tonne capacity for refining crude oil, mostly imported from the now-troubled Gulf region.
According to the official sources, the $1.0-billion credit will come under the IsDB's "Lease Financing" model where interest rate is charged on the Secured Overnight Financing Rate (SOFR) rate plus a 1.60-percent spread.
According to the Federal Reserve Bank of New York, the SOFR rate on a 6-month basis on Tuesday was recorded at 3.66892 per cent.
Total maturity tenure of the credit will be 20 years with a grace period of five years.
Economic Relations Division (ERD) officials say the interest rate, floating on top of the global SOFR benchmark, "exposes the treasury to international market volatility".
"With global benchmarks remaining elevated, the interest burden is expected to test state coffers significantly," says one official.
Furthermore, the IsDB deal incorporates a rigid Shariah-compliant "forward lease" model.
The core objective of the capital injection is the total modernisation and capacity scaling of ERL's plant, in the wake of worldwide fuel woes amid the Middle East turmoil.
Originally built back in 1968 using French technology, ERL has long struggled to meet the nation's rapidly ballooning fuel demands.
Currently, the ancient refinery processes roughly 1.5 million tonnes of crude annually, fulfilling a meagre 20 per cent of local petroleum demand. The remaining 80 per cent must be imported as pre-refined fuel at a massive premium.
The Unit-2 (ERL-2) expansion project will construct an entirely new, highly sophisticated processing wing next to the existing facility.
By tripling the plant's total processing limits to 4.5 million tonnes per year, the expansion will enable Bangladesh to import cheaper raw crude oil and refine it domestically.
This shift will significantly reduce the country's dependence on expensive, pre-refined foreign petroleum.
Additionally, the new plant is architected to yield clean, Euro-5-standard diesel and gasoline, mitigating growing domestic environmental concerns regarding fuel quality.
The total capital expenditure was initially estimated by the Executive Committee of the National Economic Council (ECNEC) at Tk 354.65 billion.
Independent energy experts and ERD officials agree that the commercial survival of this loan hinges entirely on swift, corruption-free project execution.
Because the interest rate floats with the SOFR benchmark, any construction delay beyond the targeted November 2030 completion time will exponentially escalate the state's debt-servicing liabilities.
Conversely, if ERL-2 goes operational on schedule, massive foreign-exchange savings achieved by cutting refined-fuel imports will easily offset the aggressive borrowing terms.
The government will act as the primary procurement agent under the IsDB model, taking full ownership of contract negotiations, risk compliance, and project-management oversight.
With the official go-ahead now granted by the non-concessional committee, the ERD is poised to conclude final signatures with IsDB delegates to pave the way for construction mobilisation in Chittagong.
"Since the loan is endorsed by the government's standing committee on non-concessional loans, we will now go for signing contract with the IsDB in a bid to confirm the disbursement for the procurement of the refinery-upgradation works," says the ERD official.
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