Multilateral lenders mull higher cost loans

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

Different development partners of Bangladesh -- from the World Bank (WB), Asian Development Bank (ADB) to JICA and AIIB -- have also started mulling revisions to the terms of loans given to the country. 

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

The ADB may also follow suit.

Pear Mohammad, additional secretary and wing chief, ERD, said, the ADB was set to change the terms of the loans and also reduce the amount of flexible debts, while increasing the Secured Overnight Financing Rate (SOFR) loans.

He said that according to calculations, flexible loans for Bangladesh will come down once it graduates from LDC, but ADB wants to do that before the graduation.

A flexible loan permits the increase or decrease of the amount borrowed, or to vary the repayments.

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

Against this backdrop, experts have emphasised on getting flexible loans for projects that will reap quick economic benefits. The lack of preparation, however, has meant that Bangladesh has been unable to get such loans for a number of projects.

Zahid Hussain, former lead economist at the World Bank's Dhaka office, said the loans that are now available on easy terms will not last forever.

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

Bangladesh can also look towards becoming an IDA-blend country, which refers to those countries which are IDA eligible based on per capita income levels and also creditworthy for some IBRD borrowing.

India, for instance, is an IDA-blend country.

Hussain, however, warned that if Bangladesh can't create good projects and raise flexible loans, then it will miss out on sustainable debt financing.

An ERD official, on the condition of anonymity, said that the per capita national income of Bangladesh was now more than $2,000. The WB wants to recognise Bangladesh as an IDA-blend and has already presented this issue during several meetings. It has also asked Bangladesh to apply for it as per the rules.

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

As a blend country, Bangladesh will have to take high-interest market based or SOFR based loans. The interest rate, including different charges, on such loans can range from 3% to 4%.

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

At present, Bangladesh pays an interest of 1.25% for IDA loans. Besides, the service charge on these loans is 0.75%. The loan has to be repaid within 30 years with a grace period of five years.

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

Before July 2015, as a low-income country, Bangladesh would get loans from the WB at 0.75% interest. The loans would have to be repaid in 36-years, with a grace period of six years.

Other loans to be affected as well

As a low-income country, Bangladesh could also borrow from Japan at the lowest interest rate of 0.01%, with a 40-year repayment period and 10-year concession.

Despite rising interest rates on Japanese debt, the rate is still below 1%. The repayment period, however, has decreased by 10 years, meaning the loans have to be repaid within 30 years. 

The current belief is that when the WB's interest rates rise, so will the rates on loans from the Japan International Cooperation Agency (JICA).

Meanwhile, the ADB is also yet to make any changes to the terms of the loans given to Bangladesh.

The ADB is currently giving Bangladesh loans at a 2% interest rate or a rate based on the London Interbank Offered Rate (LIBOR) -- a globally accepted key benchmark interest rate that indicates borrowing costs between banks.

These loans need to be repaid in 25 years and come with a five-year grace period.

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

Use the opportunity wisely

The ERD officials said Bangladesh was missing out on more than $1 billion in flexible loans from the World Bank's IDA-19 package due to lack of preparation.

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

Besides, all the arrangements for the loan process of five projects have been completed. 

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

As such, a total of $3.3 billion in loan commitments is likely to be secured from the IDA-19 funds. 

Experts, however, say that if Bangladesh was prepared, they would have been able to borrow even more.

The lender's IDA-19 loan package expires on June 30. 

The WB usually lends in three-year packages, but due to the pandemic, the IDA-19 period was shortened by one year to increase the flow of debt among IDA countries. 

In other words, the target was to distribute $82 billion in the first three years among the 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.

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

Under IDA-18, Bangladesh received $4.5 billion flexible loans. Bangladesh was also able to realise almost the entire commitment in the first two years due to the preparation of the loan process for the project.

Meanwhile, the IDA-20 has 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 lower than the market rate, with a 25-year repayment period and a 5-year grace period. 

"If we can't take the loan facility on such easy terms, then it will be a big loss for us. At the same time, if you can't use the loan that is approved in the pipeline, it will have to be repaid. Therefore, we need to be careful about both the preparation of the projects and its efficient implementation before the loan agreement," he said.

He further said that the aim should be to get more IDA loans than before.

"As many countries cannot use loans, those are refinanced by the World Bank. If we can use 100% of the money allocated for us, then we can borrow from the unused money of other countries, which we could do during IDA-18."

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

"If our goal is to deliver on the $4 billion pledge, we need to be prepared for $8 billion. We have to take projects that can be economically viable, unlike those undertaken by Sri Lanka," he said.