Govt goes for $4b hard loans for fuel imports, dev projects

Infographic: TBS

Bangladesh is poised to borrow $4.074 billion in non-concessional foreign loans to finance critical imports of fuel and fertiliser, provide essential budgetary support, and propel key development projects. A significant portion, amounting to $2.75 billion, will be directed towards importing fertiliser, petroleum, and LNG – all under demanding repayment conditions.

The decision was finalised at a meeting of the Standing Committee on Non-Concessional Loans held yesterday (15 May) at the Finance Division, presided over by Finance Adviser Salehuddin Ahmed.

Officials from the Economic Relations Division (ERD) clarified that these "hard loans" are pursued when concessional financing options are either unavailable or deemed impractical based on prior experiences with specific projects or imports.

Furthermore, the prevailing high market interest rates, particularly the Secured Overnight Financing Rate (SOFR), have resulted in loans for even development projects and budgetary assistance now being classified as non-concessional.

They also pointed out that loans obtained for importing petroleum products and LNG from the Middle East-based International Islamic Trade Finance Corporation (ITFC) have consistently been on non-concessional terms.

Attendees at the meeting informed The Business Standard that the finance adviser had urged relevant agencies to enhance monitoring to ensure the timely and efficient execution of projects funded by non-concessional loans.

According to the ERD, loans with a "grant element" below 25% are categorised as non-concessional. This element quantifies a loan's concessionality by measuring the difference between its total cost and the present value of its future repayments, expressed as a percentage of the total cost.

Zahid Hussain, former lead economist at the World Bank's Dhaka office, cautioned that these loans, carrying interest rates around 6%, are undoubtedly expensive.

"Even without labelling them 'expensive', these are essentially commercial-rate loans. The crucial question is whether the economic activities generated by these funds will yield sufficient returns to cover the loan repayments," he stated.

"Failure to generate adequate returns could expose the country to future financial vulnerabilities," he added.

The economist observed that the government primarily relies on the debt-to-GDP ratio as its primary benchmark. "Before approving such loans, a broader range of indicators must be carefully considered."

He referred to the government's existing guideline, which aims to limit annual non-concessional foreign loan repayments to the lower of either 10% of export earnings or 15% of revenue income.

"Indicators such as the debt-to-foreign earnings ratio should also be an integral part of the debt sustainability assessment," he emphasised.

First foreign-funded fertiliser imports

In a notable shift in its external borrowing strategy, Bangladesh is for the first time securing a foreign loan specifically to finance fertiliser imports for the upcoming fiscal year.

The Bangladesh Agricultural Development Corporation will receive a $500 million loan from ITFC, with $200 million confirmed and an additional $300 million contingent, according to ERD officials.

This loan carries a one-year repayment period and an interest rate of SOFR plus 1.80%, along with a 0.2% administrative fee. Based on the SOFR rate of 4.204% as of 9 May 2025, the indicative annual interest rate hovers around 6%.

The high interest rate and short repayment time frame classify this facility as non-concessional.

Petroleum and LNG imports

For FY26, Bangladesh is borrowing $2.25 billion in ITFC loans to facilitate the import of petroleum and LNG.

The Bangladesh Petroleum Corporation will receive $1.65 billion for oil imports, while Petrobangla will receive $600 million for LNG. These loans are repayable within six months of disbursement at an indicative interest rate of 6%, based on SOFR + 1.75%.

Last year, the government secured $2.1 billion from ITFC for the same purpose – $1.6 billion for oil and $500 million for LNG – at comparable rates.

ERD data indicates that ITFC has approved a total of $21.675 billion in loans for Bangladesh between 2009 and FY26.

Hard loan for budgetary support

The government has also approved a $500 million non-concessional loan from the Asian Development Bank (ADB) under the "Proposed Stabilising and Reforming the Banking Sector Programme (Subprogram-1)".

This facility falls under ADB's Ordinary Capital Resources (OCR Regular), which operates on market-based rates and carries a floating interest rate.

ERD analysis indicates that the loan carries a SOFR of 4.32% plus a 0.50% spread, resulting in an effective interest rate of 4.82%. The repayment term is 12 years, including a three-year grace period, and a commitment fee of 0.15% will also be applied.

With a grant element of a mere 1.88% – significantly below the 25% threshold – this loan is classified as non-concessional.

First loan from NDB

Bangladesh is also securing its inaugural loan, amounting to $320 million, from the New Development Bank (NDB), established by BRICS nations. These funds will be allocated to implement the "Expanded Dhaka City Water Supply Resilience Project".

As the NDB operates on market-based rates and the SOFR is currently elevated, this loan also falls under non-concessional terms. Negotiations concluded on 18 April 2024, outlining a repayment period of 30 years and a grace period of 7.5 years. The loan includes a 0.25% front-end fee and a 0.25% commitment fee.

While the loan can be drawn in US dollars, euros, or Chinese RMB, only the RMB-denominated option qualifies as concessional. The USD and euro options have negative or low grant elements (-12.37% and 16.16% respectively), whereas the RMB option has a grant element of 28%. Based on the USD terms, the annual interest rate will be 5.85%.

Two more ADB loans for energy, road projects

The government has also approved two additional non-concessional loans from the ADB.

The first is a $200 million loan for the "Power Transmission Strengthening and Integration of Renewable Energy Project".

This loan has a 25-year tenure, a 5-year grace period, an interest rate of SOFR + 0.60%, a 0.10% maturity premium, and a 0.15% commitment charge. The grant element is -0.22%.

The second is a $204 million loan for the "SASEC Dhaka-Northwest Corridor Road Phase 2-Tranche 4 Project". Based on the SOFR rate of 4.32% as of 21 April 2025, the loan's grant element is 1.25%, classifying it as non-concessional.

Regarding this road project loan, economist Zahid Hussain commented that loans taken for gas imports will undoubtedly contribute to production, as the gas will fuel factories, thereby supporting industrial output and generating employment.

"In such instances, market-based loans are justifiable," he stated. "However, when it comes to road corridor projects, questions linger regarding their actual economic returns and the effectiveness of their contribution to growth."

Budget support from OPEC fund

The SCNCL has also granted approval for a €96.1 million (equivalent to $100 million) budget support loan from the OPEC Fund for International Development under the "Strengthening Economic Management and Governance Programme".

This loan has a maturity period of 18 years, including a three-year grace period. It carries an interest rate of EURIBOR plus 120 basis points. There is no front-end fee, but a commitment charge of 25 basis points will apply.