Soft loans drying up even before LDC exit – 43% of foreign lending now market-based
Expert says impact of LDC graduation on external loans would be minimal
Highlights:
- Bangladesh's foreign loans increasingly shift to market-based high-interest rates
- Concessional loans shrinking, not directly tied to LDC graduation
- SOFR-linked loans now costly, reclassified as non-concessional
- Yen-denominated borrowing grows but carries rising currency risks
- World Bank, ADB concessional windows shrinking, repayment terms shortening
- Japan, China raising loan rates; concessional terms less available
Bangladesh's access to concessional foreign loans has been shrinking even before its graduation from Least Developed Country (LDC) status, with nearly half of last fiscal year's borrowings now based on market rates.
Officials and analysts believe this shift indicates that the impact of LDC graduation on concessional financing will be limited as the decline in soft loans has been seen for years now.
Keep updated, follow The Business Standard's Google news channel
They noted that concessional lending by institutions such as the World Bank (WB), the Asian Development Bank (ADB), and bilateral lenders like Japan and China is not directly tied to LDC status.
According to data from the Economic Relations Division (ERD), market-based loans with floating interest rates surged sharply – to 42.7% in the fiscal 2024-25 from 28.2% of the year before.
ERD officials said loans pegged to the Secured Overnight Financing Rate (SOFR) have become significantly more expensive, losing their concessional character as global interest rates rise.
Many such loans now carry grant elements of less than 25%, reclassifying them as non-concessional. Meanwhile, fixed-rate concessional loans are also declining, while interest rates on soft loans are gradually increasing and repayment periods are shortening.
Officials expect market-based interest rates to rise further, potentially accounting for 50-60% of total foreign borrowings next year.
However, SOFR has shown a declining trend, offering ERD officials some relief for future deals. It was below 1% before the Ukraine war, soared to 5.3% before falling to 3.78% on 3 October.
On 17 September, Planning Adviser Wahiduddin Mahmud said concessional loans were becoming harder to obtain and would diminish further after LDC graduation.
"Now is the last opportunity to secure soft loans on easy terms," he said.
Zahid Hussain, former lead economist at the World Bank's Dhaka office, said the impact of LDC graduation would be minimal as Bangladesh receives negligible amounts of foreign assistance linked to its LDC status.
"Even after graduation, such loans will not stop entirely as countries that have recently graduated have continued to access these facilities for three to five years," he added.
The economist further noted that most project loans would remain unaffected as multilateral institutions like the WB and the ADB do not link their lending terms to LDC status.
"While access to soft loans from the International Development Association (IDA) will gradually decline, Bangladesh will still qualify for non-concessional and blended instruments," he said. "As our economy grows, concessional loans will naturally fall. That's unavoidable."
Market-based borrowing rising
According to ERD data, Bangladesh secured $7.94 billion in foreign loans from development partners in FY25, of which $3.38 billion was market-based. In the previous fiscal year, 28.2% of borrowings were market-based, up from 25.9% the year before.
ERD officials said concessional lending has been steadily declining as Bangladesh's per capita income and other economic indicators rise. Consequently, the government is paying 4-5 percentage points more in interest on market-based loans, increasing repayment pressure.
Loans tied to SOFR and the Euro Interbank Offered Rate (EURIBOR) are market-based, while the government has also taken yen-denominated loans at the Tokyo Overnight Average Rate (TONA).
Although EURIBOR and TONA remain relatively low, officials warned of rising exchange rate and currency conversion risks, particularly with yen-dollar fluctuations.
Concessional fixed-rate loans, such as the ADB's 2% loans, are also shrinking. Last fiscal year, only 20% of ADB's $2 billion lending to Bangladesh was concessional, with $1.6 billion at market rates.
The AIIB provides only market-based loans; last year, Bangladesh borrowed $560 million from AIIB for a budget support programme and a project loan.
Bangladesh also secured fixed concessional loans from the World Bank, alongside non-concessional credits under the Scale-Up Window (SUW), totalling $670 million. Additional concessional loans came from the Islamic Development Bank (IsDB) and the OPEC Fund.
Japan remains a key provider of concessional loans to Bangladesh. In 2022, its loans carried interest below 1%. This fiscal year, the first loan in November was 1.7%, now 2%, aligning with other partners
SOFR-linked loans turn hard
ERD officials said SOFR-linked loans are now classified as hard or non-concessional, with effective interest rates of 6-7% after fees. High SOFR rates have pushed even floating-rate development and budget support loans into this category.
Under lending rules, loans with a grant element below 25% are non-concessional. Last fiscal year, the government approved a $500 million loan under the "Stabilising and Reforming the Banking Sector Programme (Subprogramme-1)".
On 6 May 2025, the SOFR rate was 4.32%, giving the loan a grant element of just 1.88%, classifying it as non-concessional. It carries a three-year grace period and a 12-year repayment term, with an overall interest of about 5% including fees.
In the previous fiscal year, Bangladesh borrowed $241.3 million from the Islamic Development Bank for the "Construction of Five Climate-Resilient Bridges in Mymensingh Division" at a market rate. The total markup was 5.86%, with a grant element of 10%, also classifying it as non-concessional.
Yen loans come with new risks
To avoid high interest on SOFR-based dollar loans, the government increasingly borrowed in Japanese yen last fiscal year, raising yen-dollar exchange and conversion risks.
ERD officials said yen-denominated borrowing for budget support and development projects has grown, as TONA-based rates remain lower than SOFR.
For example, the WB-funded Chattogram Water Supply Improvement Project was financed in yen to reduce interest costs. A Finance Division report noted low TONA and RMB-based Shibor rates have encouraged such loans.
However, officials warned against borrowing in yen, RMB, or other currencies without strong justification. Last year, Bangladesh borrowed $600 million from ADB for budget support, converting part into yen to buy dollars, initially reducing available funds by $13 million.
With TONA rates rising and the yen potentially appreciating against the dollar, effective interest and repayment risks are increasing. ERD cautioned that in countries like Bangladesh, where foreign currency reserves in multiple currencies are limited, this trend is particularly risky.
WB, ADB soft windows shrink
Under IDA-21, concessional core IDA loans from the World Bank have declined. Bangladesh's preliminary allocation is SDR 2,184 million, SDR 268.7 million less than the final IDA-20 allocation.
ERD officials said the drop reflects a shift from floating- to fixed-rate loans, cutting allocations by 15%. Previously, floating-rate loans carried interest above 4%, while core IDA loans were generally fixed.
For the first time, part of Bangladesh's core IDA allocation must be taken at market-based rates, though not exceeding 5%. Repayment terms have also shortened from 30 to 25 years.
Last fiscal year, Bangladesh received an ADB budget support loan under the "Climate Resilient Inclusive Development Program – Subprogram 2" at 2% fixed interest, compared with only 20% of ADB loans at this rate the previous year.
Japan, China hiking rates
Japan remains a key provider of concessional loans to Bangladesh. In 2022, its loans carried interest below 1%. This fiscal year, the first loan in November was 1.7%, now 2%, aligning with other partners.
In June, under the Joydepur-Ishwardi Dual Gauge Line project, Bangladesh received $656.16 million at 2% for construction, with advisory loans at 0.65%.
Meanwhile, Bangladesh has not secured Chinese loans in the past two years due to disagreements over currency and rates. China prefers RMB at market rates, proposing 3%-3.5% interest instead of the earlier 2%.
