Days of cheap foreign loans to end soon

Bangladesh, as an LDC country, has been availing foreign loans at an interest rate of 1.1 per cent. There is no scope to avail this facility after graduation from the LDC group, which is expected to put extra pressure on debt management here

Euro, Hong Kong dollar, US dollar, Japanese yen, British pound and Chinese 100-yuan banknotes are seen in a picture illustration
Reuters file photo

At a time when the government sought a $4.5 billion fund in loans from the International Monetary Fund (IMF), the finance ministry has said that the privilege of foreign loans at low interest rate is going to end anytime soon as Bangladesh is set to graduate from the group of least developed countries (LDC).

Bangladesh, as an LDC country, has been availing foreign loans at an interest rate of 1.1 per cent. There is no scope to avail this facility after graduation from the LDC group, which is expected to put extra pressure on debt management here.

The ministry’s finance division came up with the statement in its medium-term debt management strategy (MTDMS) in July. The strategy has been prepared for three fiscal years from FY22 to FY24.

The authorities had formulated the first MTDMS for three years in the fiscal year 2013-14 as per the IMF recommendations. No new strategies were formulated in the following few years.

The IMF staff mission, during its Dhaka trip last month, asked the finance division about the strategy. The latest MTDMS has been formulated taking a cue from the IMF query.

The strategy also recommended that the bond market will be the best source of funds in the future and it can be an alternative to the local loans taken by the government

In the national budget for FY23, the government has allocated Tk 170 billion to repay foreign loans while Tk 72 billion to pay their interests. Another Tk 74 billion was kept to pay regular fees of various international oragnisations and in share capital.

Bangladesh is scheduled to graduate from the LDC group in 2026. In the post-LDC era, the existing 30-year debt repayment period will also halve. The MTDMS said Bangladesh is still receiving bilateral and multilateral loans at flexible interest rates. This privilege will shrink after exiting the LDC group.

The average interest rate for the foreign loans is 1.1 per cent while it is 6.2 per cent for the domestic loans. The national budget for Fy23 allocated Tk 803 billion to pay loan interests where Tk 731 billion is alone for domestic loan interests.

Currently, some 63 per cent of government loans are taken from domestic sources and the remaining 37 per cent from foreign sources. According to the MTDMS, government borrowing from domestic sources is increasing year-on-year. It should be reduced.

The strategy also recommended that the bond market will be the best source of funds in the future and it can be an alternative to the local loans taken by the government.

If the bond market is strong, there will be no need to take frequent loans. Bonds will be traded in the same way the shares are traded in the secondary market on the stock exchanges. According to the finance division sources, it is scheduled to be launched from next month.

Among the loans received from the development partners, the World Bank Group's International Development Association (IDA) provides 38 per cent while 25 per cent from Asian Development Bank (ADB), 17 per cent from Japan, 7 per cent from China, and 6 per cent is taken from Russia. India, Asian Infrastructure Investment Bank (AIIB), Islamic Development Bank (IDB), and South Korea share 1 per cent each.

On the bilateral front, Japan offers loans at the most flexible interest rate. It is followed by Russia, China, India and Korea. Of the amount borrowed from domestic sources, 46 per cent was taken from the market and 54 per cent from savings certificates and provident funds.

According to the MTDMS, the government is trying to borrow less from savings bonds and the efforts have been successful to some extent.

The ratio of foreign loans was 27 per cent 15 years ago and it is now reduced to 14 per cent. At the same time, borrowing from domestic sources has increased from 14 per cent to 24 per cent.

* The report has been rewritten in English by Misbahul Haque