The dilemma over MIC status

Shamsul Huq Zahid | Published: November 02, 2015 00:00:00 | Updated: November 30, 2024 06:01:00

Borrowing from traditional major lenders, it seems, would soon become a case of Hobson's choice for Bangladesh under the changed circumstances.
The providers of large volume of soft loans, of late, have started changing the stance on terms of lending to Bangladesh. They are trying to make the terms of their lending relatively hard on the plea that the country has reached the lower middle-income country (MIC) status.
Two leading multilateral lending institutions, the World Bank (WB) and the Asian Development Bank (ADB) have already made their intention clear about hardening the terms of their future loans to Bangladesh.
The largest bilateral source of foreign assistance, Japan, has proposed to raise the rate of interest of some of its future loans to 7.0 per cent, Finance Minister AMA Muhith told reporters after his meeting with the Kyle Peters, senior vice-president of the WB, in Dhaka last week.
The loans received from Japan so far have been the cheapest. The lender has been charging a nominal 0.1 per cent interest with a repayment period of 50 years.
The loans from the International Development Assistance (IDA), the soft-lending arm of the WB, carry a service charge of 0.75 per cent, with a repayment period of 38 years.
The soft assistance extended by the Asian Development Fund (ADF) of the ADB does also carry lower rate of interest. Bangladesh is receiving a blend of loans-from ADF and OCR (ordinary capital resources). In the case of ADF loan the rate of interest is 2.0 per cent and repayment period is 25 years with a grace period of five years. The interest of OCR loans is fixed on the basis of quasi-market rate. Â
The finance minister told newsmen that he had raised serious objection to the proposal made by Japan as the timing for a change in loan terms, according to him, was not proper.
Mr. Muhith may also have to cajole donors like WB and ADB not to harden their respective loan terms.
However, the fact remains that the finance minister was well aware of the possible developments following the country reaching the lower MIC status. Â
He knew that donors would be unwilling to extend loans to Bangladesh on easy terms once the latter graduates to a lower MIC or MIC status.
It is, indeed, a dilemma for a resource-strapped country like Bangladesh. The low-income or least developed country (LDC) status is viewed more as a stigma and the policymakers were justifiably eager to rid the country of that.Â Â
There is no denying that the elevation of the status brightens the image of the country internationally. However, for obvious reasons, the government of the day has been trying to take political mileage out of it. And the ruling party men have been beating the drum along the same line.
However, the tradition of sharing the glory of success with the predecessors is almost unknown in this part of the world despite the fact that all governments--- there have been, of course, variations in the level of contributions--- have contributed to the growth of economy and consequent rise in per capita income.
But the policymakers should have reasons to be worried about the terms and conditions of future development aid flow. The propensity among the large donors to increase rates of interest of the loans does have all the potential to mar the sense of elation being observed among a section of policymakers.
If a country like Japan wants to raise the rate of interest to 7.0 per cent from almost no-interest on loans given by it to Bangladesh, it is truly a very ominous sign. In fact, the rate is more than that of commercial borrowing.
However, Japan is unlikely to raise the rate to such a high level, finally. But the proposal itself is likely to create discomfort among the policymakers.
The lending terms on the part of the WB is likely to change. But it may not be that harsh given the fact that Bangladesh is yet far from reaching the MIC status.
The terms of lending is not an unimportant issue for Bangladesh since its debt burden, which until now remains at a manageable level, is going to bulge in the near future.
For a good number of cost-intensive large projects, the country is on the way of borrowing from both hard and soft sources. The repayment of the Russian loans taken against the Roopur Nuclear power project alone side by side the scheduled servicing of other official foreign debts might create pressure on the reserve.
However, the situation with foreign debt repayment continues to be comfortable. According to the central bank data, Bangladesh until June 30 2013 had a foreign debt of over $23 billion, most part of which had come as project assistance. The amount is equivalent to little more than 18 per cent of the GDP. The annual debt-service requirement equals to around 4.0 per cent of the total export revenue income of the country.
The situation may not be as comfortable in the future. Caution needs to be exercised in taking loans and it would be better to avoid hard-term ones.
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