Japanese loans get costlier

Bangladesh is set to face higher borrowing costs, as Japan – the largest bilateral development partner of the country – has proposed a second increase in lending rates within a little over a year. 

The new proposal by the Japan International Cooperation Agency (Jica) suggests an interest rate of 1.6%, marking a 40 basis points hike from the previous raise implemented in March. This translates to a total increase of 90 basis points in Jica loan interest rates over the past year, starting from the 0.70% rate at the beginning of the last Japanese fiscal year (April 2022 to March 2023).

Officials of the Economic Relations Division (ERD) confirmed that Japan presented the new interest rate hike proposal in April this year and the new rate will be effective from the 44th loan package of Jica.

However, discussions are ongoing to potentially reduce the proposed interest rate, as stated by AKM Shahabuddin, Additional Secretary of the ERD. He also mentioned that Jica has proposed similar interest rate increases for all countries it lends to. 

Additionally, Shahabuddin noted that Japan reviews and adjusts interest rates twice a year. Nonetheless, there is a possibility of a decrease in the interest rate during the October review and, therefore, if the loan agreement is signed after October, Bangladesh may be able to secure borrowing at a lower interest rate.

While the exact loan amount in the 44th loan package from Jica to Bangladesh has not been confirmed, ERD officials anticipate an increase compared to the previous package. 

In the 43rd loan package during the last financial year, Japan provided Bangladesh with $2.67 billion in two phases. This included $1.4 billion contracts for two projects in June 2022 at an interest rate of 0.70%, and a $1.27 billion loan agreement signed in March of the same year at a 1.2% interest rate for three additional projects. 

During this period, the interest rate on the loan changed, but other fees such as 0.01% for consultancy services, a Front-End Fee of 0.2% (one-time), and a repayment period of 30 years with a 10-year grace period remained unchanged.

Previously, when Bangladesh was classified as a low-income country, Jica provided loans at a 0.01% interest rate. However, after Bangladesh's graduation to a lower middle-income country in 2015, Jica and other development aid agencies increased the interest rates on loans.

According to sources within the ERD, Bangladesh has signed loan agreements with Japan totaling more than $25 billion since gaining independence in 1971.

According to ERD sources, Jica has preliminarily selected three projects to provide loans under its 44th loan package. However, the final list of projects will depend on government approval. 

The projects in consideration are the Matarbari Ultra Super Critical Coal-Fired Power Project, Chattogram Sewerage System Development, and Hazrat Shahjalal International Airport Expansion Project.

ERD officials mentioned that while two projects on the list have previously received loans at very low-interest rates, this time they will have to secure loans with slightly higher interest rates.

Matarbari Ultra Super Critical Coal-Fired Power Project

The government has signed a loan agreement of 437,754 million Japanese yen in six tranches with Jica for this project. Out of this, 375,769 million yen has already been released, accounting for 85.84% of the total loan agreement. 

According to ERD sources, an agreement may be inked this time for the seventh tranche of the loan for the project. 

Under the project, a 1200MW ultra-supercritical coal-fired power plant and associated infrastructures are being constructed to meet the power demand of the country. 

The project is being implemented by the Coal Power Generation Company Bangladesh Limited, the Power Grid Company of Bangladesh, and the Roads and Highways Department. 

The estimated expenditure for the Coal Power Generation Company segment is Tk51,854.88 crore, with Jica lending Tk43,921 crore. As of now, 76% of the work has been completed, with the target for project implementation completion set for 2026.

Chattogram Sewerage System Development 

The Chattogram Sewerage System Development project is focused on financing the development of the sewerage systems at Kalurghat and Baklia in Chattogram city, based on the Chattogram City Sanitation Master Plan prepared in 2017. 

Jica will provide a loan for engineering services in the first phase of this project. A fact-finding mission from Jica visited Bangladesh on 13-17 March this year to further explore this project, ERD officials told TBS.

Hazrat Shajalal International Airport Expansion Project

For this project, the total expenditure is estimated at Tk21,399 crore, with Jica lending Tk16,141 crore. So far, loan agreements totaling 156,825 million yen in two tranches have been signed for this project. The aid partner has already released 109,776 million yen or 70% of the loan. The ERD expects the remaining amount to be released by September.

A fact-finding mission from Jica visited Bangladesh on 4-13 December last to assess the need for a third tranche loan agreement for this project under the 44th loan package of Jica.

$310 million in budget support

ERD officials said that in view of the government's demand, Jica has assured Bangladesh of $310 million in budget support in addition to the project loans. 

Jica intends to provide this assistance from the 44th ODA loan package, and a loan deal is anticipated to be finalised by June 2023.