Bangladesh to seek special concessional loans from Japan until 2029

Infograph: TBS

Highlights:

• Bangladesh seeks low-interest Japanese loans until at least 2029
• Jica fixed loan rates surged fivefold, reaching 3.50%
• Government wants interest rate caps and floating-to-fixed loan conversions
• Bangladesh seeks greater Japanese budget support and policy-based financing
• Matarbari power plant faces technical, fuel and transmission challenges
• Bangladesh plans selective Jica projects and broader economic cooperation

Bangladesh will request Japan to introduce a country-specific "transitional concessional window" to provide Bangladesh with low-interest loans at least until 2029, as interest rates on loans under the official development assistance (ODA) programme have risen significantly, officials at the Economic Relations Division (ERD) said.

The request is set to be placed at a meeting between Finance and Planning Minister Amir Khosru Mahmud Chowdhury and Japan International Cooperation Agency (Jica) Senior Vice-President Shohei Hara, expected tomorrow, on the sidelines of the annual meetings of the International Monetary Fund and the World Bank in Thailand.

The finance minister is expected to seek measures to reduce the risks associated with Jica's floating-rate loans and propose an interest rate cap on such loans. He may also seek the option to convert floating-rate loans into fixed-rate loans, if necessary, or introduce other mechanisms for sharing interest rate risks between borrowers and lenders, ERD officials said.

They said the need for special concessions was being felt as the rising cost of Japanese loans had become a major concern during the transitional period ahead of Bangladesh's graduation from the Least Developed Country (LDC) category.

In April 2020, Jica's standard fixed interest rate for loans to eligible LDCs and low-income countries was just 0.7%. Under the agency's new lending terms, effective from 1 October 2026, the standard fixed interest rate has risen to 3.50%, marking a fivefold jump in six years. These loans have a repayment period of 30 years, including a 10-year grace period.

Bangladesh will emphasise at the meeting that Japanese ODA loans should not become comparable in cost to market-based financing and that their flexible and concessional nature remains crucial given the country's current economic situation.

Bangladesh is currently in the process of graduating from the LDC category and has also sought additional time to prepare for the transition.

An ERD senior official said interest rates on Jica loans were revised every six months. Before last October, the interest rate on Japanese loans was 3.05%, but it had since risen to 3.50%. The rate could increase further over the next six months.

Meanwhile, the interest rate on new floating-rate loans from Japan currently stands at 1.80%, although there remains a risk that the rate could rise over the long term, even after the loan agreement is signed. The issue is now under review.

ERD officials said that if the six-month Tokyo Term Risk-Free Rate (TORF) were used as the benchmark, the current six-month reference market rate would be approximately 1.35%. Adding a fixed spread of 0.45 percentage points would bring the total interest rate to around 1.80%.

If TORF rises to 1.50%, the total interest rate in the next cycle would increase to 1.95% – 1.50% plus the 0.45-percentage-point spread.

The government believes that although floating-rate loans may initially appear attractive, they can create considerable uncertainty over future debt-servicing costs, particularly for long-term infrastructure projects.

ERD officials said predictability in future debt-servicing costs was essential for medium-term revenue planning and debt management.

Bangladesh seeks to expand budget support

Bangladesh wants to move Japan's development assistance beyond project-based loans towards a regular, long-term framework for budget support and policy-based financing, ERD officials said.

The government also wants to discuss ways to curb cost overruns and repeated deadline extensions in Jica-funded projects, ensure the proper use of funds and improve transparency in project implementation.

Officials said one of the finance minister's key messages at the meeting would be the need to increase Japan's policy-based financing and direct budget support.

Urgent support on Matarbari power plant

Officials familiar with the matter said the finance minister might raise operational and technical problems at the Matarbari Ultra Super Critical Coal-Fired Power Plant directly with Jica's senior vice-president.

Recent reports have highlighted declining generation and several unresolved technical issues, including problems with the boiler and other systems. There have also been delays in determining technical responsibility and resolving the problems.

The main challenges facing the 1,200MW Matarbari coal-fired power plant include supply chain and fuel shortages caused by delays in coal imports and the dollar shortage, difficulties in opening letters of credit on time, mechanical and technical interruptions in maintaining ultra-supercritical technology, and limitations in transmission infrastructure for supplying electricity to the national grid.

These interconnected problems have frequently prevented the plant from generating electricity at full capacity or maintaining an uninterrupted supply.

Govt to be more selective in Jica projects

With interest rates on Jica loans rising, the government has decided to be more selective when approving future projects. New projects will need to align with the country's current development priorities and the government's electoral pledges.

Bangladesh also wants to develop a "strategic investment portfolio" with Jica instead of relying primarily on project-by-project loans. This would place greater emphasis on a project's contribution to employment, exports, production and private investment rather than simply the volume of financing.

Bangladesh seeks Japanese cooperation in new sectors, including export diversification

Bangladesh wants to expand cooperation with Japan beyond traditional development assistance into several new areas, including export diversification, the bond market, skilled human resources, digital transformation, pharmaceuticals and healthcare industries, ERD officials said. The finance minister will present a package of proposals on these issues at the upcoming meeting with Jica.

Officials said discussions would cover improvements in trade and logistics with Japan, as well as reducing Bangladesh's dependence on a limited range of export products, particularly readymade garments.