Bangladesh opts for yuan loans for cost savings

Infographics: TBS

The Bangladesh Bank has given its consent to proceed with Chinese loan offers in its own currency, the yuan, as a cost-saving alternative to dollar-denominated financing.

The decision follows the finance ministry's request for the central bank's assessment of the pros and cons of Chinese loans in yuan versus the traditional US dollar, according to sources of the finance ministry.

In August this year, the Export-Import (Exim) Bank of China proposed to finance Preferential Buyer's Credit-funded projects in its own currency. The proposal emerged in response to the volatile exchange rate of the US dollar, which had depleted the foreign exchange reserves of many countries.

The Chinese government typically extends two types of loans: Preferential Buyer's Credit (PBC) in US dollars and Government Concessional Loan (GCL) in its own currency. In light of the scarcity and high costs associated with the dollar in the global market, China's Exim Bank recommended that Bangladesh consider taking PBC loans in yuan.

A senior official at the central bank pointed out that the US Federal Reserve has been raising interest rates to combat inflation. He said if Bangladesh takes loans from China in dollars, the interest rate would be nearly 6%.

In contrast, yuan-denominated loans would cost only 2.5%, offering a significant interest rate advantage, he added.

One Chinese Yuan equals USD 0.14 on 25 October 2023 rate. In other words, $1 is equal to 7.30 Chinese Yuan.

Also, the Bangladesh Bank clarified that Chinese loans do not impact the country's foreign exchange reserves as these are typically used to purchase goods from China, and the import payments are made directly by the lending bank to the supplier's bank in China. The central bank official explained that opting to repay in yuan instead of dollars could result in an exchange gain, further enhancing the financial benefits of this decision.

What experts say 

MA Razzaque, research director at the Policy Research Institute, told The Business Standard that Bangladesh typically repays loans in US dollars. However, since the interest rate on yuan-denominated Chinese loans is lower, the country could save money by purchasing yuan from its reserves and using it to repay the loans. This would also reduce the depletion of its reserves.

"When importing goods, we should compare prices with those of other countries. If the price from China is lower or equal, then it is beneficial for us," the economist said. "We must use Chinese loans in a way that increases our export earnings. If we spend these loans on infrastructure, the output from those projects may be low, which will put pressure on our loan repayments."

When asked whether borrowing in yuan would have any geopolitical implications, he replied, "If China's loans are used to finance exports, I don't see any geopolitical problems. However, if these loans are used to fund projects that increase China's influence, geopolitical concerns may arise."

MA Razzaque said the central bank has carefully reviewed the overall feasibility of Chinese debt, adding, "If we clearly discuss the terms and conditions with all stakeholders before taking yuan loans from China for future projects, there will be no geopolitical implications."  

Finance ministry's views on yuan loans 

The finance ministry's review found that, under China's loan rules, Preferential Buyer's Credit loans can be used to purchase 65% of construction materials and 40% of electronics materials from outside China, but the outward import bills must be paid in yuan. This requires Bangladesh to convert US dollars into yuan, which introduces currency conversion risk and could increase the actual cost of the project.

It also noted that Bangladesh's export income from China is $1 billion, while its import expenditure is around $16 billion. This trade is conducted in US dollars, which limits the opportunities for Bangladesh to obtain yuan.

What central bank says in its reply to finance ministry 

The Bangladesh Bank wrote to the finance ministry that due to the US Federal Reserve's high policy rate, global interest rates on US dollar loans have increased significantly. The country's foreign exchange market faces several challenges in terms of US dollar demand and supply. Currently, taking loans from China in yuan instead of the dollar would result in lower interest rates, exchange gains, and the need to purchase yuan with dollars. In that case, China's debt could be accepted in yuan.

The Bangladesh Bank has expressed its preference for yuan-denominated loans, citing China's central bank's ongoing policy of reducing interest rates as a part of its expansionary monetary strategy aimed at stimulating GDP growth. As an example, last August, the one-year loan prime rate saw a 10-basis-point reduction to 3.45%. Consequently, the yuan is anticipated to weaken against the US dollar.

When asked if Bangladesh is inclined towards yuan-denominated loans, Mezbaul Haque, spokesperson for the central bank, declined to comment, stating, "I am not informed about this matter."

The central bank said since 2016, the yuan has been included in the International Monetary Fund's Special Drawing Rights (SDR) basket. It also said Bangladesh has paid a total of 3.66 billion yuan from 2018-2023 against the yuan loan received from China. As a result, there will be no problem with repaying debt in yuan in the future.

Chinese loan status in Bangladesh 

Bangladesh has received 17 billion yuan (equivalent to $2.5 billion) in yuan loans, of which 3.2 billion yuan has been repaid in principal and interest, according to data from the finance ministry.

Bangladesh currently has 10 projects in the pipeline with Chinese financing. Of these, Bangladesh has already agreed to receive 9.49 billion yuan (equivalent to $1.32 billion) in yuan for six projects. China has now proposed to provide $2.87 billion (equivalent to 20.65 billion yuan) in yuan for the remaining four projects. If Bangladesh accepts these loans in yuan, its total debt in the Chinese currency will amount to 45.84 billion yuan.