Dhaka, Beijing seek to resolve deadlock over dollar loan terms at JEC talks
A deadlock persists over China’s proposal to shift development loans from fixed-rate dollars to market rates or yuan
Highlights:
- Bangladesh, China deadlocked over dollar vs. yuan loan terms
- China wants higher interest, yuan-based loans replacing dollars
- Bangladesh seeks lower rates, longer repayment for yuan loans
- No new Chinese loans signed in two fiscal years
- Bangladesh Bank supports switching to yuan to cut costs
- Finance Division warns of currency conversion and exchange risks
Bangladesh and China aim to resolve the complications surrounding China's dollar-based loans at the upcoming Joint Economic Commission (JEC) meeting scheduled for 1 June in Dhaka.
For the past two years, there has been a deadlock between the two sides over China's proposal to shift its development loans from fixed-rate dollar-based terms to either market-based dollar interest rates or loans in yuan (RMB).
China is more inclined to offer loans in its own currency, and has also proposed raising the interest rate from 2% to 3% or 3.5%. According to officials from the Economic Relations Division (ERD), this disagreement is one of the main reasons no new development loan agreements have been signed with China over the past two fiscal years.
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China typically provides two types of loans: Preferential Buyer's Credit (PBC) in US dollars and Government Concessional Loans (GCL) in its own currency.
In late 2023, China's Exim Bank proposed changes to PBC loans, arguing that it was purchasing dollars at high market prices and then offering them to Bangladesh at low interest, causing financial loss on their end.
Bangladesh, however, is willing to accept PBC loans in yuan instead of dollars. In doing so, it has set conditions– lowering the interest rate and extending the repayment period. Without these terms, Bangladesh says it cannot take PBC loans from China.
A senior ERD official explained that accepting dollar-based market interest loans would mean rates above 6%, as the current Secured Overnight Financing Rate (SOFR) is 4.2%, not including additional fees.
While repaying loans in RMB could bring pressure, it's manageable given the relative stability of the yuan over the past decade. Thus, Bangladesh prefers to take loans in yuan, with an interest rate capped at 1% and the repayment period extended from 15 years to 30 years.
According to ERD data, standard dollar-based PBC loans typically carried a 2% interest rate. However, for two projects signed in 2019 and 2020, totalling $1.71 billion, the interest rate was set at 3%. Both GCL and PBC loans come with a 5-year grace period and a 15-year repayment term. China has agreed to extend the repayment period for GCL loans, but not for PBC loans.
What BB, Finance Division say about USD vs RMB
In October 2023, ERD sought Bangladesh Bank's opinion on China's proposal. The central bank supported shifting PBC loans from dollar-based rates to yuan. In a letter to ERD, Bangladesh Bank argued that due to high US Federal Reserve policy rates, global interest rates on dollar-denominated loans have risen significantly.
Moreover, Bangladesh's foreign exchange market faces challenges in maintaining dollar liquidity. Taking loans in yuan could help reduce interest costs and offer currency conversion gains when exchanging dollars for yuan. Hence, the central bank endorsed yuan-based loans from China.
Meanwhile, a document from the Finance Division in March noted that due to the lower reference rates of Japan's TONA and China's SHIBOR (RMB-based), borrowing in rate-based loans is becoming more popular. However, considering currency exchange and conversion risks—especially between yen/USD and RMB/USD— it discouraged borrowing in any currency other than USD unless there is a strong reason.
Senior ERD officials informed that discussions around not borrowing based on TONA or SHIBOR rates have been ongoing. In the past two years, institutions like the Asian Development Bank and World Bank have provided budget and project support loans in yen to avoid high dollar interest rates—but Bangladesh has not taken RMB loans, which is why no new Chinese development loan agreements have been signed during this period.
As of the last fiscal year ending 30 June 2024, Bangladesh has received loans totalling 17.499 billion RMB and $7.253 billion from China.
