Smart move. Bangladesh turns to loans in yen to ease repayment pressure

Highlights

• The govt to receive $700m in loans in yen from WB 
• Of the amount, $300m in budget support and $400m for a project
• Interest rate in dollars now costs approximately 7%
• But loans in yen would cost around 2% interest
• Yen experiences less fluctuation compared to dollar
• Loans in yen will reduce pressure of repayment

In a move to manage risks associated with rising interest rates and a volatile US dollar, the government has decided to take some loans from the development partners in Japanese yen instead of dollars.

The yen loans are being taken particularly for scale-up window loans from the World Bank at market-based interest rates, according to officials at the Economic Relations Division (ERD).

Budget support of $300 million and an amount equivalent to $400 million for a project are being taken from the World Bank in the Japanese currency, they said.

After disbursement, the Japanese currency will be used to buy dollars, said the officials. Despite some temporary losses, this will reduce the pressure of interest and principal repayment on implementation loans, they said. The ERD, the Finance Division, and the Bangladesh Bank jointly made the decision.

The ERD officials said if loans are taken in yen instead of dollars, the overall interest rate would be much lower.

This will provide some relief from the current pressure the government faces in paying interest, they said. Besides, since the Japanese currency experiences less fluctuation compared to the dollar, there will be reduced risk in repaying the principal amount of the loan in the future, they said.

Zahid Hossain, a former lead economist of the World Bank office in Dhaka, told TBS, "The interest rate on the yen-denominated loan is likely to be lower since it is based on the Tokyo Overnight Average Rate (TONA) which tends to be significantly lower than SOFR (Secured Overnight Financing Rate) or LIBOR (London Interbank Offer Rate). The risk of valuation loss due to exchange rate fluctuations is not that different from borrowing in SDR (Special Drawing Rights) or USD." 

He went on to say, "Using the scale-up window allows Bangladesh to top up the core IDA (International Development Association) financing. Of course, the money from the SUW (scale-up window) is more expensive. But if we fully use up the core IDA, this is the next best option."

The ERD officials said a proposal for a $500-million budget support loan will be presented at a World Bank's board meeting to be held on 21 June. Of the amount, an amount equivalent to $300 million will be taken in yen, they said.

The interest rate for this loan will be TONA plus a variable spread, which is determined by the World Bank every three months, said the officials. The repayment period will be 35 years, including a 4-year grace period, and a front-end fee of 0.25% will be charged, they said. Additionally, a commitment fee of 0.25% will be applied to undisbursed funds, said the officials.

According to the ERD officials, the government is taking the remaining $200 million loan from the World Bank's scale-up window-shorter maturity. The repayment period for the loan will be 12 years, including a 6-year grace period.

Interest on yen loan way cheaper

The ERD officials said if loans are taken in dollars, the overall interest rate would be approximately 7%. On the other hand, loans taken in Japanese currency would require Bangladesh to pay a much lower interest rate (around 2%), they said.

If $300 million is taken in dollars, it will be based on the SOFR. Variable spread will be added to this. 

Since the Ukraine-Russia war, the SOFR has increased significantly. Even two years ago, the SOFR was less than 1%. Due to the rise in the SOFR, Bangladesh is facing pressure to repay its debts.

Data released by the Economic Relations Division shows that the government spent nearly $1.15 billion (equivalent to Tk12,626 crore) on interest payments in the first 10 months up to April of the current year, surpassing the annual allocation of Tk12,376 crore. The allocation was increased to Tk15,800 in the revised budget later.

According to the budget document released by the Ministry of Finance, it has been allocated Tk20,500 crore for the repayment of foreign loans in the upcoming fiscal year. The increase in interest payments is mainly due to the rise in the SORF rate in the international market, putting pressure on interest payments.

During his recent budget speech, Finance Minister Abul Hassan Mahmood Ali said, "Secured Overnight Financing Rate (SOFR) which is used as one of the reference rates around the world was only 0.5% in January 2022. To manage the inflationary situation arising from the Ukraine-Russia war, most of the developed countries including the USA increased their interest rates. As a result, the 6-month average of SOFR increased and stood at 5.4% in May 2024. For the same reason, the other developed nations including those in Europe enhanced the interest rate which affected the reference rate of EURIBOR, TONA, etc."

Project loans to be received in yen

According to the ERD officials, the World Bank has recently increased the amount of loan for the construction of the container terminal in Chittagong. The World Bank announced that it will provide a loan of $650 million for the project, whereas previously it was planned to provide a loan of $350 million.

Out of the $650 million loan, the government has decided to borrow an equivalent of $400 million in Japanese currency. The interest rate for the loan will be based on the Tokyo overnight average rate plus a variable rate.

Besides, a loan equivalent to $150 million will be obtained in SDR, for which no interest will be charged. Furthermore, a loan equivalent to $100 million will be taken in SDR as well, and the interest rate for the loan will be 0.75%.

The decision was made during a high-level meeting at the ministry on 29 May regarding the container terminal project.

According to the minutes of the meeting, a representative from the Bangladesh Bank informed the discussants that they analysed one loan from the Asian Infrastructure Investment Bank (AIIB), where they found that the loan in the yen is more concessional than any other currency right now. 

"Now the TONA reference rate is 0.077% and the variable spread is 0.73%. Considering the other options and current situation this blending is a good option," she said.

AIIB loans in yen too

Apart from the World Bank, the government is also considering borrowing in other currencies instead of dollars for projects financed by the Asian Infrastructure Investment Bank (AIIB), said the ERD officials.

Due to the higher market-based interest rates, the government is not planning to take any loans from the AIIB for any project in the current fiscal year, they said. However, the officials said, they are considering taking a $400 million budget support loan from the lender. 

The said borrowing in currencies other than dollars for development projects as well is under consideration.