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

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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 the news reporter, “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.

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China’s economy grew less than expected in second quarter: official data

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China’s economy grew 4.7 percent year-on-year in the second quarter of 2024, official data showed Monday, less than analysts had expected.

“By quarter, the GDP for the first quarter increased by 5.3 percent year on year and for the second quarter 4.7 percent,” Beijing’s National Bureau of Statistics (NBS) said in a statement.

The figures were much lower than the 5.1 percent predicted by analysts polled by Bloomberg.

Retail sales — a key gauge of consumption — also slowed to just two percent in June, the NBS said, down from 3.7 percent in May.

The world’s second-largest economy is grappling with a real estate debt crisis, weakening consumption, an ageing population and trade tensions with Western rivals.

Top officials are meeting in Beijing on Monday for a key plenum, with all eyes on how they might kickstart lacklustre growth.

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Concerns Mount Over Revenue Loss as South Asia’s Largest Land Port Curtails Operations

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Bangladeshi officials are grappling with fears of revenue loss as the largest land port in South Asia, situated along the India-Bangladesh border, has ceased operations for 10 hours each day since July 11.

The Petrapole Land Port in India, crucial for trade between the two nations, has been shutting down from 6 PM to 8 AM daily, without providing any explanation for the closure, according to officials from the Benapole Land Authority in Bangladesh. This unexpected halt has left Bangladeshi authorities and traders in a state of uncertainty, as there is no indication of when the operations might resume to normalcy.

Industry insiders warn that this disruption could lead to a significant revenue shortfall at Benapole port due to decreased imports, adversely affecting Bangladeshi importers with delayed product deliveries.

Rezaul Karim, Director of Traffic at Benapole Land Port Authority, emphasized that while Benapole has been maintaining 24-hour operations, Petrapole’s recent restrictions are hindering cargo truck movements after evening.

“We have inquired with the Petrapole port authority about the reasons for halting trade services after evening. They responded that the matter is under discussion with relevant authorities,” Karim said.

Sultan Mahmud Bipul, Secretary of Benapole C&F Agent Association International Checkpost Affairs, highlighted the fiscal implications of this disruption. “Benapole port has set a revenue target of Tk6,705 crore from imported goods for the fiscal year 2024-25. If the 24-hour import facility remains discontinued, it will severely impact our revenue targets,” he noted.

Ziaur Rahman, General Secretary of Benapole Landport Importers and Exporters Association, pointed out the severe impact on trade, particularly with perishable goods. “Traders dealing with perishable food products are incurring the biggest losses due to this halt. The inability of goods trucks to enter after evening will widen the trade deficit,” Rahman remarked.

As the situation unfolds, the Benapole Land Port Authority and associated trade bodies continue to seek clarity and resolution from their Indian counterparts to mitigate the economic repercussions of this operational disruption.

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DCCI Urge Streamlined Tax Mechanisms for Enhanced Compliance, Reduced Costs

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The Dhaka Chamber of Commerce and Industry (DCCI) has called on the government to simplify tax procedures to foster better comprehension, ease compliance, and minimize time, effort, and expenses.

“Corporate tax calculations should adhere to accounting standards, and compliant businesses should occasionally receive incentives,” stated Ashraf Ahmed, DCCI President, during a workshop on “Customs, VAT, and Income Tax Management” held at the DCCI office in the capital, according to a press release issued today.

The workshop was organized by DCCI to inform professionals from its member organizations about recent amendments in relevant laws as outlined in the 2024-25 budget.

Prominent Speakers and Insights
The event featured key presentations by Md Zakir Hossain, Commissioner of Customs, Excise, and VAT Commissionerate, Dhaka East; Snehasish Barua, FCA, Adviser to the DCCI Standing Committee on Customs, VAT, and NBR-related issues; and MBM Lutful Hadi, FCA, Vice-president of ICAB.

Ashraf Ahmed emphasized that automation would diminish discretionary measures and curb leakages. He asserted that compliant businesses encounter fewer hassles, adding that a transparent and accountable revenue system would expand the tax base while reducing complications.

Ahmed further highlighted the positive aspects of the VAT Act, Income Tax Act, and Customs Act, urging their practical application.

VAT Act Amendments and Revenue Goals
Md Zakir Hossain clarified that no major changes were introduced in the new VAT Act, but two procedural adjustments were made for the NBR. He acknowledged that to meet increased revenue collection targets, pressure on all taxpayers, including VAT-paying companies, would rise slightly. He encouraged businesses to familiarize themselves with the VAT Act to benefit from existing rebate facilities.

Snehasish Barua noted that the NBR’s revenue collection target for the current fiscal year is Tk4.8 lakh crore, a 17 percent increase from the previous year. He advocated for reducing import duties to stimulate industrialization and economic growth, stressing the need for a sustainable revenue system in light of the country’s economic conditions.

MBM Lutful Hadi urged the government to properly implement the new Customs Act, designed to lower business costs. He underscored the importance of ensuring a sustainable revenue framework.

Workshop Participation and Key Takeaways
Approximately 90 representatives from DCCI member organizations attended the workshop, gaining a clear understanding of the new rules and procedures to aid their respective entities in lawful calculations.

DCCI Vice-president Md. Junaed Ibna Ali, Directors Kamrul Hasan Tuhin, and M. Mosharraf Hossain were also present during the event.

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