Multilateral lenders consider higher cost loans

Low-cost foreign loans will be a thing of the past for Bangladesh as it enters the realm of rising national per capita income and growing economic development.

Bangladesh’s various development partners – from the World Bank (WB), Asian Development Bank (AfDB) to JICA and AIIB – have also started considering revisions to the terms of loans to the country.

The World Bank has already started discussions with the Economic Relations Division (ERD) in this regard, sources said.

The AfDB could also follow suit.

Pear Mohammad, Additional Secretary and Head of Wing, ERD, said the AfDB is set to change the terms of the loans and also reduce the amount of flexible debts, while increasing loans at the overnight secured rate. the day (SOFR).

He said according to calculations, flexible loans for Bangladesh will decrease once he graduates from PMA, but AfDB wants to do it before graduation.

A flexible loan allows you to increase or decrease the amount borrowed, or vary the repayments.

SOFR, on the other hand, secures the overnight funding rate based on US Treasury repurchases between banks.

In this context, experts have emphasized obtaining flexible loans for projects that will generate rapid economic benefits. However, lack of preparation has prevented Bangladesh from obtaining such loans for a number of projects.

Zahid Hussain, a former senior economist at the World Bank’s office in Dhaka, said loans now available on concessional terms will not last forever.

Once Bangladesh graduates from the International Bank for Reconstruction and Development (IBRD), it will no longer have easy access to loans from the International Development Association, which are interest-free, he said.

Bangladesh can also consider becoming an IDA blend country i.e. the countries eligible for IDA based on per capita income levels and also creditworthy for some IBRD borrowings.

India, for example, is an IDA blend country.

Hussain, however, warned that if Bangladesh cannot create good projects and raise flexible loans, then it will lack sustainable debt financing.

An ERD official, speaking on condition of anonymity, said Bangladesh’s national per capita income was now over $2,000. The World Bank wants to recognize Bangladesh as an IDA blend and has already presented this issue in several meetings. He also called on Bangladesh to apply in accordance with the rules.

The World Bank will then prepare an assessment report and by the end of 2027, Bangladesh will become an IDA blend country. Then IDA will reduce the amount of flexible loans.

As a blend country, Bangladesh will have to take out market-based or SOFR-based high-interest loans. The interest rate, including various fees, on these loans can vary from 3% to 4%.

The rates, however, depend on market conditions and the term of the loan. These loans must be repaid in 25 to 30 years with a grace period of 4 to 5 years.

Currently, Bangladesh pays 1.25% interest for IDA loans. Also, the service charge on these loans is 0.75%. The loan must be repaid within 30 years with a grace period of five years.

Currently, 64 middle-income countries are members of IBRD, receiving loans at higher interest rates than IDA countries.

Before July 2015, as a low-income country, Bangladesh got loans from the World Bank at 0.75% interest. The loans are expected to be repaid in 36 years, with a six-year grace period.

Other loans will also be affected

As a low-income country, Bangladesh could also borrow from Japan at the lowest interest rate of 0.1%, with a repayment period of 40 years and a concession of 10 years.

Despite the rise in interest rates on Japanese debt, the rate is still below 1%. The repayment period, however, has decreased by 10 years, which means that loans must be repaid within 30 years.

The current belief is that when World Bank interest rates rise, Japanese International Cooperation Agency (JICA) loan rates will also rise.

Meanwhile, the AfDB has yet to make any changes to the terms of the loans granted to Bangladesh.

The AfDB currently lends to Bangladesh at an interest rate of 2% or at a rate based on the London Interbank Offered Rate (LIBOR) – a globally accepted benchmark interest rate that indicates borrowing costs between banks.

These loans must be repaid in 25 years and have a grace period of five years.

The ERD, however, tries to keep the loans flexible at the current interest rate.

Use the opportunity wisely

DRE officials said Bangladesh is missing more than $1 billion in flexible loans from the World Bank’s IDA-19 program due to a lack of preparedness.

Bangladesh had set a target of $4.2 billion in lending from the fund. Over the past two years, $2.1 billion has been pledged or loan agreement reached for 11 projects.

In addition, all arrangements for the loan process for five projects have been completed.

A $1.2 billion loan agreement is also expected to be concluded with the World Bank for these projects by next June.

As such, a total of $3.3 billion in loan commitments is expected to be guaranteed by IDA-19 funds.

Experts, however, say if Bangladesh were ready, they could have borrowed even more.

The lender’s IDA-19 loan program expires on June 30.

The World Bank typically lends for three years, but due to the pandemic, the IDA-19 period has been shortened by one year to increase the flow of debt between IDA countries.

In other words, the goal was to distribute $82 billion in the first three years among countries that have access to IDA.

Now, the same amount of money will be distributed in two years.

Initially, the IDA-19 package will run from July 2020 to June 2023.

Previously, Bangladesh had received more loans than the target level due to good preparation before IDA-18 (July 2017-June 2020).

Under IDA-17, Bangladesh received $4.5 billion in flexible loans. Bangladesh was also able to achieve almost all of the commitment in the first two years due to the preparation of the loan process for the project.

Meanwhile, the IDA-20 announced a $93 billion package for the next three years (July 1, 2022 – June 30, 2025).

Zahid Hossain said the interest rate on IDA loans was below market rate, with a repayment period of 25 years and a grace period of 5 years.

“If we cannot accept the loan facility on such easy terms, it will be a big loss for us. At the same time, if you cannot use the loan that is approved in the pipeline, it will have to be therefore, we need to pay attention to both the preparation of projects and their effective implementation before the loan agreement,” he said.

He added that the goal should be to get more IDA loans than before.

“Since many countries cannot use the loans, these are refinanced by the World Bank. If we can use 100% of the money allocated to us, we can borrow from the unused money of other countries, what we could do during IDA-16.”

Kazi Shofiqul Azam, former secretary of the ERD, said loans on easy terms like those provided by the World Bank or JICA are not available anywhere else.

“If our goal is to meet the commitment of $4 billion, we must be ready for $8 billion. We must take projects that can be economically viable, unlike those undertaken by Sri Lanka,” he said. -he declares.

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