Emerging economic-powerhouse China transpires as a major concessional development financier to Bangladesh with fixed-term loans that outshine rising floating rate-based lending by some other bilateral and multilateral donors.
Such assessment comes from analysts who Thursday said amid higher SOFR rate for over a year, the Chinese loans were now becoming cheaper than others coming from different multilateral and bilateral donors. They named the World Bank, the ADB, and the AIIB being among the secured overnight financing rate (SOFR)-based lenders.
An FE analysis has found that Beijing lends at 2.0 per cent while many other key development partners charge SOFR-based rate on loans. The SOFR-based interest rates for those loans are now hovering around 7.0 per cent.
The SOFR rate has been maintaining higher trend over the last one year. According to the Federal Reserve Bank of New York, the US central bank, 6-month SOFR rate on November 21 was 5.28839 per cent.
Market-driven floating-interest rates under the SOFR regime had started climbing since mid-March last year (2022) from below 1.0 per cent.
The FE analysis has found the loans from the Asian Infrastructure Investment Bank (AIIB), the Asian Development Bank (ADB), the Islamic Development Bank (IsDB), the European Investment Bank (EIB), and the World Bank Scale-up Facility (SUF) having been provided based on the LIBOR/SOFR rate over the last few years attuned with Bangladesh's higher per-capita-income threshold.
Economic Relations Division (ERD) data show China has confirmed US$7.25 billion worth of foreign aid for 22 ongoing projects between the fiscal year (FY) 2011-12 and FY2023.
The latest loan, committed by China in April this fiscal, was worth $270 million for the development works of Rajshahi WASA, said Anwar Hossain, an Additional Secretary at the ERD.
He mentions a couple of loans in the pipeline awaiting confirmation from China. Among those projects, China is likely to come forward with a $250 million loan for Bangladesh Shipping Corporation (BSC) vessel procurement.
"We'll sit for a bilateral discussion with China shortly. We will request the development partner to extend its financial and technical supports to Bangladesh," the ERD additional secretary told the FE.
Mr Anwar currently rates Chinese loan as one of the better options for the country as it is a fixed-term loan where the interest-rate-fluctuation risk is absent.
A former ERD Secretary, Kazi Shafiqul Azam, says China has emerged as one of important bilateral donors to Bangladesh over the last one decade.
"It has been financing many development projects in Bangladesh over the years. The extended financial support has created a room for Bangladesh to diversify its aid destinations."
He adds: "In the past, we were mostly dependent on the multilateral donors like the World Bank and the ADB. Besides, Japan is our only biggest bilateral aid destination. Now we have another option -China--for getting financial support for our development needs."
The former ERD secretary says the emergence of China as one of the important donors has been complementary for the development of Bangladesh.
According to the ERD data, interest rate on the Chinese loan is 2.0 per cent with a commitment fee of 0.25 per cent. The loan has to be repaid in 20 years with a grace period of 5 years.
ERD officials have said China has bankrolled many big and important projects over the last one decade. Among them, Beijing has confirmed $1.126 billion for financing the ongoing Dhaka-Ashulia Elevated Expressway project, $2.667 billion for Padma Bridge rail-link project, $705 million for Karnaphuli tunnel, $467.84 million for installation of single-point-mooring project, $1.4 billion for the Expansion and Strengthening of Power System Network under DPDC area and $686.57 million for power-grid-network-strengthening project under PGCB.
An official at the Ministry of Finance (MoF) says China had started ramping up its lending to Bangladesh from early 2010s when it signed two loan deals worth $770 million for the setting up of Shahjalal fertiliser factory and expansion of telecoms network.
Of the loan amount, $559 million was for setting up of Shahjalal Fertiliser Factory, which was the single-largest loan in the early 2010s, he adds.
"China's financial support to Bangladesh got a boost further after the visit of Chinese President Xi Jinping in 2016," the MoF official mentions.
About the terms and conditions of Chinese loan, Joint Secretary at the Foreign Accounts and Budget wing of the ERD M Ashrafuzzaman says Chinese loan is comparatively concessional than the floating rate-based loans of different development partners, including ADB, AIIB, and WB.
He notes that floating-term loan is an SOFR-based one which at present varies between 6.0 and 7.0 per cent. "But China charges 2.0-percent fixed rate for its lending and the maturity of the credit is 20 years with a 5.0-year grace period."
The FE analysis has found that China's commitment of loans and grants was recorded at $258.770 million in FY2011-12 which rose to $1.126 billion in FY2022.
Similarly, the aid disbursement by Beijing also swelled to 989.535 million in FY2022 from $112.371 million in FY2012.
The ERD Additional Secretary, Anwar Hossain, said they were expecting enhanced loans and grants from Beijing in the years ahead as Bangladesh has already requested financing more than 20 projects.
Noted economist Dr Zaid Bakht told the FE that China has emerged as one of the key development partners of Bangladesh by financing some big projects, including the Padma Bridge railway link, and Karnaphuli tunnel.
Mr Bakht, Chairman of the state-owned Agrani Bank Ltd, said emergence of China is a good option for Bangladesh in reducing dependence on the western development partners only.
"It is good to see that the cost of the Chinese loan is still lower than others'. But the challenge is at the implementation stage. The public agencies have to be cautious in procurement and quality execution of the China-funded projects," he added.
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