Cost of World Bank loans is likely to see a big jump if Bangladesh accepts a new proposal from the multilateral lender made considering the latest hike in the country’s per-capita income.
The WB has recently proposed raising its interest rate to 2 percent from the present IDA rate of 0.75 percent, citing that Bangladesh has lost its eligibility to enjoy low-cost loans as a lower middle-income country.
WB Country Director Qimiao Fan has recently written a letter to Finance Minister AMA Muhith with regard to this, sources at Economic Relations Division (ERD) said.
Besides, it has been proposed as well to cut loan repayment period from 38 years to 30 years and grace period from six years to five years from the next 2018-19 fiscal year.
In his letter, Qimiao Fan told Muhith that because of Bangladesh’s improved economic performance its GNI per capita exceeded the IDA operational threshold for two consecutive years in FY 17and FY 18.
Now, the country will be classified as an ‘IDA gap’ country by the lending agency from next year instead of ‘IDA-only’ status while getting loan from the WB’s soft loan window -International Development Association (IDA).
“In the event that Bangladesh’s GNI per capita exceeds the operational threshold for the 3rd consecutive year, the country will be classified as an ‘IDA gap’ country starting in FY19 and will be subjected to IDA lending on blend terms,” Fan wrote to Muhith.
Bangladesh is entering ‘IDA gap’ status since its per capita GNI crossed the $1,165-mark to $1,190 in the last fiscal year against the IDA operational cut-off of $1,185 and is on course to repeating it this year.
IDA, the concessionary arm of WB Group, which hands out loans and grants to the world’s poorest developing countries that have a per capital GNI less than $ 1,165.
In 2015, Bangladesh graduated to the lower middle-income status with a per capita income of $1,190, as per the WB criteria.
The ‘IDA-only’ cut-off in 2015 was more than $1,200 and so Bangladesh was still eligible for loans at concessionary interest rates.
As Bangladesh could manage to stay above the cut-off of $1,165 for two consecutive years, credits become expensive: the rate of interest on WB loans will jump from 1.25 percent to 2.62 percent in USD, while it will be 2 percent in SDR (Special Drawing Rights) from 0.75 percent.
Accordingly, Bangladesh can choose to request a creditworthiness assessment for IBRD lending anytime.
If assessed as creditworthy, it would be classified as an IDA or IBRD blend country.
Once classified as either ‘gap’ or ‘blend’, Bangladesh will be subjected to IDA lending on ‘blend’ terms.
If classified as creditworthy for IBRD, Bangladesh will then gain access to IBRD resources and a wider menu of WB group financial products.
The bank further said Bangladesh’s eventual transition to ‘gap’ and potential ‘blend’ status is recognition that the country has achieved an important milestone in development.
The other countries in South Asia have followed similar transition paths, such as India and Sri Lanka, who are IDA Graduates and Pakistan, which is an IDA blend country.
According to the Bangladesh Bureau of Statistics, the per capita income was $1,465 in fiscal 2015-16 and $1,602 in the last fiscal year. As per the WB’s own estimation, however, it was $1,330 and $1,480 respectively.
The service charge on IDA loans is 0.75 percent. Besides, there is a 0.25 percent front-end fee and 0.25 percent commitment charge. The repayment period is 38 years, including a grace period of six years.
Economic analysts, however, fear that the government will feel the pinch in repaying of WB loans alongside seeing a large hike in the cost of projects to be implemented with the lender’s funds, once the new interest rate is put in place.
They also suggested that the WB should be more flexible for Bangladesh for the time being, as the country is passing through a transitional period.