Economy
Smart move. Bangladesh turns to loans in yen to ease repayment pressure
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.
The National Board of Revenue (NBR) is preparing to scrutinize government officials suspected of amassing illegal wealth and assets through corrupt practices. This move aligns with the government’s broader goal of creating a corruption-free and fair Bangladesh.
NBR Chairman Md Abdur Rahman Khan, speaking at the inauguration of a recent NBR program, emphasized the importance of this initiative. “We definitely aim to establish a discrimination and corruption-free Bangladesh,” he said, noting that preparations for this effort are already underway. Khan, however, cautioned that the progress of these preparations might not be immediately visible to the public, stating, “You cannot see the move of these preparations from the outside.”
Submission of Wealth Statements by Government Officials
In parallel, Md Mokhles Ur Rahman, Senior Secretary of the Ministry of Public Administration, announced that all government officials and employees must submit their wealth statements by November 30 to their respective ministries and departments. Furthermore, wealth reports will be required annually, with a deadline of December 31 each year.
The submission of these statements is part of a broader government strategy aimed at increasing transparency and accountability. The government has provided a specific format for the wealth declarations, which must be submitted in sealed envelopes to the relevant authorities. Any failure to submit the statement or providing false information will result in legal consequences.
NBR’s Ongoing Preparations
While the NBR chairman did not provide an exact timeline for when actions against corrupt public servants would begin, he reassured the public that the organization is steadily advancing its efforts. “We are putting matters on the right track gradually, placing the right things in the right place,” he remarked, noting that the NBR is currently collecting relevant data on this issue.
Legal Framework and Historical Context
According to the Government Servants (Conduct) Rule, 1979 (amended in 2002), all government servants are required to submit wealth statements when they begin their service and update them every five years. This rule was originally intended to combat corruption and ensure accountability, but it has largely remained limited to paper, with little enforcement. Despite several letters from the ministry over the years, there has been little progress in implementing these regulations.
However, the interim government has recently reinforced these requirements, driven by growing concerns about corruption within the public sector. On August 14, the interim government’s Legal Adviser, Professor Asif Nazrul, announced that all judicial officers and their families must submit both domestic and international asset declarations within 10 working days, following consultations with the Supreme Court.
Widespread Corruption Sparks Action
Allegations of widespread corruption have put the issue of illegal wealth among government employees in the spotlight. This has prompted renewed calls for greater accountability and stricter enforcement of wealth declaration rules to curb corruption within the public sector.
The most pressing challenges facing industries over the past six months have been the scarcity of bank funding and ongoing issues with gas and electricity supply, according to Ashraf Ahmed, President of the Dhaka Chamber of Commerce and Industry (DCCI).
Speaking at a seminar titled “Bi-economic State and Future Outlook of Bangladesh Economy – Private Sector Perspective,” organized by the DCCI on September 28, Ahmed stated, “We are still grappling with gas and electricity shortages. If we cannot address the issues of labour unrest and energy shortages, and fail to keep factories operating continuously for at least four hours a day, it will severely impact exports.”
Ahmed further noted that production in Micro, Small, and Medium Enterprises (MSMEs) is also declining. He warned that if these challenges persist, they would not only affect export levels but also significantly harm employment.
Impact on Non-RMG Sectors and the Importance of Alternative Solutions
The DCCI president emphasized that the crisis extends beyond the ready-made garment (RMG) sector, severely impacting non-RMG sectors as well. “We are already hearing that gas reserves are depleting. However, if the nuclear power plant is connected to the grid by the end of this year, there may be a positive shift. Immediate alternative measures are critical to overcoming this situation,” he added.
Ahmed also highlighted that labour unrest, initially confined to Ashulia, has now spread to other regions, raising concerns about its potential to disrupt industrial stability further.
Threat to Investment and Call for Confidence Restoration
Addressing the broader economic outlook, Ahmed stressed that restoring confidence in resolving the energy and labour crises is vital for maintaining investment levels. He warned that private sector investment growth, which has remained around 24% over the past three to four years, could face setbacks if confidence is not rebuilt.
Financial Reforms and Economic Stability
In his address, Ahmed pointed out that the interim government had proposed several financial reforms aimed at stabilizing the economy. “If these reforms are properly implemented, they will positively influence the economy, although it may take time to see results. Increasing tax revenue is also crucial for improving the government’s capacity to repay international debts, so revenue collection should be prioritized,” he noted.
Ahmed also remarked on Bangladesh Bank’s efforts to curb inflation by raising the policy rate. However, he cautioned that the effects of this measure would take three to six months to materialize. He also highlighted the need for careful handling of reforms in the banking sector, particularly for the 10 to 12 weak banks under scrutiny, to avoid negative consequences for the entire industry.
Recommendations for Industry and MSMEs
In his concluding remarks, the DCCI president recommended that bank loans to the industrial sector and MSMEs should be maintained at a consistent, normal level to ensure the stability and growth of these sectors.
Speakers at a discussion today said all people of the country have the right to seek and receive information from government entities (except those concerning national security) and private authorities to ensure transparency.
The right to access information is an integral part of the right to freedom of thought, conscience, and expression, said the speakers marking International Information Rights Day 2024 at a discussion at the information commission in Dhaka’s Agargaon area.
The speakers said Bangladesh has enacted the Right to Information Act to ensure the free flow of information to establish good governance.
Transparency International Bangladesh (TIB) Executive Director Dr Iftekharuzzaman and Information and Broadcasting Ministry Additional Secretary (secretary in-charge) Md Nazrul Islam spoke the discussion as special guests with Information Commission Director SM Kamrul Islam in the chair.
Directorate of Primary Education Dr Md Abdul Hakim presented the keynote paper while Information Commission Deputy Director Md Salah Uddin gave the welcome address.
They said the act has formed a path for establishing good governance along with ensuring transparency and accountability in the activities of all government and non-government organisations.
The speakers noted that the Information Commission is working relentlessly to bring the benefits of the RTI Act to the doorsteps of the people.
All stakeholders including government entities, and electronic and print media should be involved in creating awareness among people about the RTI, they said.
They also said every government organisation is bound to provide all information that the people have the right to know.
