Using flexible loans properly crucial as repayment obligations rise

Interest rates in the international market have risen since the Covid pandemic, increasing our interest repayment obligations.

As global interest rates surged, many of our contracts tied to the international market – initially based on the London Interbank Offered Rate, and later switched to the Secured Overnight Financing Rate (SOFR) – have seen significant increases over the past five years. 

However, there is hope that interest rates may decrease in the future. Following a 15-basis-point cut by the central reserve, the SOFR rate has dropped from 5.33% to around 4.85% or 4.84%.

Currently, interest rates are starting to fall. Global inflation is also decreasing, and analyses from the World Economic Outlook suggest that the European Central Bank, the Bank of England, and the Federal Reserve Bank may lower rates.

The key questions are how much and how quickly they will cut rates – whether through quarterly reductions or a one-time cut of 60 or 100 basis points. Lower rates would benefit our loans by improving net financing.

However, principal repayments are expected to rise in the future, especially after 2026 and 2027, when the grace periods for many projects end.

The most significant increase will be from the Rooppur Nuclear Power Project, which will add $500 million to annual loan repayments. This means while interest repayments may decrease, principal repayments will increase.

To improve net financing, it is crucial to use the flexible loan amounts we qualify for in a timely manner. We cannot let these flexible loans sit unused. Currently, there are $45 billion in concessional loans waiting to be used. If we can utilise these loans in time, we won't need to rely on new, expensive loans.

As our situation improves, our concessional loans will decrease, and this is beyond our control. However, we must ensure that we use the flexible loans we receive properly.

If we fail to use the upcoming concessional loans correctly, it could lead to more problems. We have wasted cheap loans in the past, and with fewer inexpensive loans available now, wasting them again will put more pressure on our balance of payments and strain the budget.

We will struggle to generate revenue for debt servicing, and we won't see growth in exports. Therefore, any future foreign loans should be used for projects that will increase our foreign currency earnings and boost government revenue.

Zahid Hussain is a former lead economist of World Bank Dhaka office