The scope of availing concessional foreign loans is shrinking for Bangladesh after it became a lower middle income country in the World Bank’s criteria.
The government is now looking at different options for soft loans and grants as the scope is likely to squeeze further after the country’s LDC graduation in 2024, ERD officials said.Most of the key development partners hiked their loan interest rates in the wake of the country’s crossing the lower middle income (LMIC) threshold in July 2015 on basis of gross national income (GNI).
“The volume of concessional loans is on the decline after the country achieved a lower middle income status. A work plan is being prepared for getting soft loans until LDC graduation in 2024,” ERD Secretary Monowar Ahmed said.
In terms of GNI, the World Bank divides countries into four categories for setting lending decision as well as the terms and conditions of its loans. Some other lenders also follow this criteria.
The categories are: lower income country (LIC), lower middle income country (LMIC), upper middle income country (UMIC) and higher income country (HIC).
Prior to becoming an LMIC, Bangladesh received WB’s IDA loan at an interest rate of only 0.75 percent, what the lender calls service charge.
The loan repayment period was 38 years to 40 years and a grace period was six to 10 years.But now, WB charges 1.25 percent extra interest on its regular 0.75 percent IDA service charge, while it cut repayment period for Bangladesh to 30 years, including five years of grace period.
Similarly, Japanese loans were the least costly as their interest rate were only 0.01 percent and the repayment period was 40 percent with a 10-year grace period.
But interest on Japan government’s loan now rose to 0.95 percent and at the same time loan repayment period has been slashed to 30 years with the same grace period.
Another major lender ADB, however, has not made any change to its lending rates after the hike in GNI because its loans usually bear higher rates.
ADB provides loans to Bangladesh at 2 percent interest rates or following market-based LIBOR rates. Its repayment period is 25 years with a five year grace period.
According to the World Bank officials, if any country’s gross national income (GNI) remains higher than $1,165 for two consecutive years, it enters IDA gap country status that prevents it from getting IDA’s concessional loans.
In the next stage, Bangladesh will have to take loans from IBRD, a lending arm of the Washington-based lender. But it will take six more years. By this time, the country will get IDA-19 and IDA-20 loan packages, they added.
The interest rate for IBRD loans will depend on the market, which means the WB will follow market-based LIBOR interest rate for such loans, WB officials said, adding that benefit of these loans will be that there will be no limitation for loans.
For instance, Bangladesh will get a total of 4.5 billion loans in IDA-19 loan package for three years, but the range will increase up to $16 billion to $18 billion in case of IBRD loans.
ERD officials also informed that Bangladesh will lose soft loans further after final LDC graduation after 2024 because some bilateral lenders and climate funds provide loans to only LDCs.
The loans that bear and higher interest rates and have grants element below 35 percent are usually called non-concessional loans by the Economic Relations Division (ERD).
ERD officials said Bangladesh had not taken any non-concessional loans before 2013, adding that non-concessional loans are being taken for some income generating priority infrastructure projects.
The country’s average weighted interest rate on foreign loans now stands at 1.23 percent with an average maturity period of 30.82 years and average grace period 8.01 years, ERD data suggest.
Non-concessional loans usually bear the market-based floating interest rates, but concessional loans usually follow fixed interest rates.
Fixed rate-based debt constitutes 88.33 percent of the country’s total foreign loan, according to ERD.
Some economic analysts raise concern about the rise in non-concessional foreign loans, while ERD officials shrugged off worries saying that in terms of debt sustainability Bangladesh is still is a “comfort zone.”
The total outstanding external debt now stands at $33,520 million with per capita debt reaching $204.85, ERD data suggest.
This level only slightly raised the country’s debt to GDP ratio to 14.3 percent in FY’18 from 13.2 percent two years ago which is much below the threshold level of GDP’s 40 percent, said ERD officials.