Japan finances for Bangladesh gets costlier

Once-most-concessional loan is going to be costlier as Japan has proposed to raise its interest rate by 30-percentage points to 3.05 per cent for lending to Bangladesh, officials in Dhaka say.

Currently, Japanese lender Japan International Cooperation Agency (JICA) charges 2.35 per cent for its loans against different development projects in Bangladesh.

Even three years ago, the interest rate for the Japanese loan was less than 1.0 per cent, the officials said Monday.

"Japan has proposed the new rate of 3.05 per cent for the next loans, to be effective from April this year," a senior Economic Relations Division (ERD) official told the FE.

Not only the rate for the infrastructure-related project loans is going to be increased, the rate for the consultancy credit is also going to be boosted to 1.0 per cent from the current rate of nearly 0.85 per cent, according to the ERD officials.

The lending rate will be effective for six months up to September 2026, as the JICA changes its lending terms and conditions for Bangladesh half-yearly, says the official.

Considering the global economic situation over the Russia-Ukraine war in the post-COVID era, the rate for Bangladesh is likely to go up, he says.

The JICA is also willing to provide another loan for the 2nd phase of the Upazila Governance Development Project at the newly proposed rate of 3.05 per cent although it lent for the 1st phase at only 0.01-percent rate a decade ago, another official points out.

"We are not willing to borrow such costly loan for the projects which have less impact or lower returns in the economy," he adds in his reaction over the rate hike.

Bangladesh currently is repaying loans from the World Bank at 1.75-percent interest, that from the ADB at 2.0 to 4.5 per cent and IDB 2.0-4.0 per cent.

Japan is the single-largest bilateral development partner of Bangladesh-a position it has held consistently since 2012.

Since its independence in 1971, Japan has provided Bangladesh with approximately $33.62 billion in cumulative Official Development Assistance (ODA) commitments.

"Although the loan-maturity period and grace period would be same like the current ones in the next 6-month cycle, the interest rate would be charged at higher rate," he adds.

The Japanese agency also charges 0.02 per cent front-end fee for almost all of its loans to Bangladesh, the officials say.

Bangladesh needs to repay the Japanese loans in 30 years where it will get 10 years as the grace period for the repayment.

Meanwhile, as a least-developed country with low income, Bangladesh had enjoyed Japanese loans with only 0.1-percent interest until 2015.

Historical rates for similar packages have climbed significantly, from 0.7 per cent in 2022 to 1.6 per cent in 2023, and later toward the 2.26-percent to 2.35-percent range for specific infrastructure projects.

After the country progressed to the lower-middle-income level, Japan gradually increased the rate. On some occasions, it lowered the rate as well.

Another ERD official says the division has been trying to make JICA keep the interest rate as low as possible, at least below 3.0 per cent, since Japan placed the proposal recently.

The new rate may become effective for the next borrowing as Bangladesh is expecting a budgetary support from JICA within June this year, says an additional secretary at the ERD.

Amid the recent impact of the Gulf crisis, the newly elected BNP government has sought US$500 million worth of budget support from Japan.