If loans taken in yuan, yen, it would be cheaper than dollar, ERD finds
An ERD analysis makes the case for borrowing in yen and yuan over dollars, but not everyone is convinced
Highlights:
- ERD proposes a currency basket strategy to reduce exchange rate risks
- A $399 million AIIB loan could cost $694 million in dollars but only $492 million in yen
- Borrowing in yen or yuan could lower repayment costs by up to 50%, ERD says
- Dollar loans carry interest above 5%, compared to around 1.5%–1.7% for yen loans
- Bangladesh took its first multi-currency loan last fiscal year in dollars, euros, and yuan
Bangladesh could save over $200 million in repayments on a single $399 million loan by borrowing in yen instead of US dollars, and the government has the analysis to prove it.
A recent policy brief by the Economic Relations Division (ERD) found that borrowing in Japanese yen or Chinese renminbi, instead of only US dollars, from the Asian Infrastructure Investment Bank (AIIB) could cut total loan repayment costs by 40% to 50%.
Keep updated, follow The Business Standard's Google news channel
The finding is prompting the government to expand its use of multi-currency borrowing from both the AIIB and the China-led New Development Bank (NDB).
However, some officials within the ERD warn that, as the yen already accounts for a significant share of Bangladesh's external debt stock, further exposure could heighten risks, suggesting the euro as a more suitable option for diversification. Economists also caution that Bangladesh's limited earnings in non-dollar currencies may constrain such a shift.
But the numbers make a compelling case.
For a $399 million equivalent budget support loan under the AIIB's Climate Resilient Inclusive Development Programme, signed in June 2024, total repayment would reach about $694 million if denominated in dollars.
If the loan was taken in Japanese yen, that figure drops to $492 million, implying savings of around $202 million. Borrowing in Chinese yuan would cost roughly $562 million – still $132 million less than the dollar option.
The interest rate gap explains much of this difference. Dollar-denominated loans currently carry the highest cost, with the benchmark Secured Overnight Financing Rate (SOFR) above 5%. Yen loans, by contrast, are significantly cheaper at around 1.5% to 1.7%, reflecting Japan's long-running accommodative monetary policy, while yuan loans stand at about 2.5%.
Bangladesh's first multi-currency loan
The government has already taken a first step. In the last fiscal year, it secured a $160 million loan for the South Chittagong and Kaliakoir transmission infrastructure project, the first time Bangladesh used three currencies in a single loan agreement.
The financing was split across US dollars ($109.78 million), euros (€29.42 million), and renminbi (RMB 132.49 million).
Now the government is going further. Under the NDB's Expanded Dhaka City Water Supply Resilience project, a $320 million loan is being structured across USD, euros, and renminbi – with implementing agencies retaining flexibility to decide the currency mix before each disbursement.
The AIIB also offers a feature that makes currency strategy more manageable: borrowers can convert the currency or interest rate of their loan up to four times during the loan's life, with single-request limits of $500 million for interest rate conversions and $300 million for currency conversions, subject to fees.
More than two years ago, the Bangladesh Bank took a step most central banks in the region had been reluctant to make – formally permitting the yuan for international trade settlements, loans, and foreign currency financing to reduce dollar dependence and ease the strain on reserves.
The case for a currency basket
The ERD's policy brief recommends that Bangladesh adopt a "currency basket" approach, spreading borrowings across dollars, yen, and yuan rather than concentrating in any single currency.
Aligned with recommendations from the IMF and Goldman Sachs, this strategy would serve as a natural hedge: when one currency appreciates, losses may be offset by movements in others.
ERD officials say the approach is also a response to two converging pressures – rising interest rates on dollar loans and the need to reduce the dollar's outsized dominance in Bangladesh's foreign exchange reserves.
Zahid Hussain, former lead economist at the World Bank's Dhaka office, broadly supports the principle. "Diversified denomination acts as a form of natural hedging," he said. "If a large loan is split across dollars, euros, and yen, a rise in one currency's value can be partially offset by movements in the others, so the entire debt stock doesn't come under pressure at once."
But he urges caution on implementation. "The currency in which you borrow should ideally match the currency in which you earn," he said.
Bangladesh's export earnings are predominantly in dollars, with some in euros, while inflows in yen and renminbi remain limited. Borrowing in currencies where Bangladesh earns little means repayment will require buying those currencies on the open market, potentially eroding any savings and adding new risks, he said.
Dissenting voices within ERD
Not all ERD officials are persuaded. Some argue that the dollar remains the world's dominant reserve currency and that concentrating debt diversification in the yen carries its own dangers.
Japan's currency has been volatile – the yen has weakened steadily against the dollar over three decades, from 96.61 per dollar in 1995 to 155.92 in late 2025 – but any sharp reversal in Japanese monetary policy could cause the yen to spike, dramatically increasing repayment burdens.
Yen-denominated debt already accounts for 19.6% of Bangladesh's total debt stock, placing it third in the currency basket. Expanding yen exposure further, these officials warn, could amplify rather than reduce risk. Their recommendation: if diversification is the goal, the euro deserves more emphasis than the yen.
M Masrur Reaz, chairman and CEO of Policy Exchange Bangladesh, echoes the concern.
"Multi-currency borrowing can work, but only if you have sufficient cash flow in the relevant currency to repay it," he said. "If you don't, you'll end up buying that currency to repay the loan anyway, which wipes out the benefit and may increase costs and risks further."
He called for careful assessment of earnings capacity, reserve adequacy, and transaction costs before expanding the strategy.
The ERD itself acknowledges the complexity. Its brief recommends building greater internal capacity for currency sensitivity analysis and scenario modelling, a signal that the strategy, however promising on paper, requires more sophisticated management than Bangladesh currently has in place.
What the analysis means
At its core, Bangladesh's push for multi-currency borrowing reflects a broader rethink of debt management in a world where the dollar's cost has surged, and its dominance in global finance is no longer taken for granted. The potential savings are real and significant. So are the risks of getting it wrong.
As Zahid Hussain puts it: "This is not a bad strategy, provided the management capacity is there to execute it well.
