Recent aggressive external borrowing to make ends meet hikes Bangladesh's debt burden further as cumulative interest rates have even surpassed 6.0 per cent, the highest in years, insiders said.
The government recently signed in four budgetary-support credits, two of which are based on floating rates that come close to interest on commercial loans at this moment, they said Saturday.
The maturity of both the loans is lower than their usual ones, according to the sources.
In June, the government borrowed US$800 million in budgetary-support credits from the Asian Development Bank (ADB) and the Asian Infrastructure Investment Bank (AIIB) which are both floating-interest-rate-based (SOFR-based).
Besides, the government has also borrowed $225 million worth of budget support from Japan also at a higher rate than its previous offer rate.
The ADB will charge Secured Overnight Financing Rate (SOFR)- plus-0.60-percent interest for its $400-million budget support signed last month.
The ADB budget support will carry an interest rate of SOFR rate-plus- 0.5 per cent, along with a commitment fee of 0.1 per cent. The repayment period for this loan is 15 years, with a grace period of three years.
The $400-million budget support from the AIIB is even costlier than the ADB funds as the China-based lender will charge SOFR-plus 1.5-percent rate.
On the other hand, the interest on the AIIB loan will be charged at SOFR rate-plus a variable spread of 1.4-1.5 per cent. The commitment fee for this loan will be 0.25 per cent, along with a front-end fee of 0.25 per cent.
The repayment period for the AIIB loan is 26 years, with a grace period of three years.
And Japan will charge 1.6 per cent on its $225-million budget support, signed also in June, in a drive for funds to finance budget deficit as well as recharge the country's depleting foreign-exchange reserves.
The interest rate on this loan is 1.6 per cent and the front-end fee (at a time) is 0.1 per cent. The repayment period, spans 30 years, inclusive of a 10-year grace period.
On May 2, Bangladesh also signed in $500 million worth of budget support from the World Bank (WB) which is also harder in terms and conditions.
Out of the $500 million worth of WB loan, $176 million will be concessional (regular IDA loan) and $324 million short-term-maturity loan.
The regular IDA loan is to be repaid in 30 years with a grace period of five years with a service charge of 0.75 per cent per annum, and interest at the rate of 1.25 per cent shall be paid on the withdrawn amount of this loan.
Besides, a maximum annual commitment fee of 0.50 per cent is payable on the unwithdrawn financing balance. However, the commitment fee has been waived by the World Bank for Bangladesh for a long time, including the current financial year.
On the other hand, the short- maturity loan has to be repaid in 12 years with a grace period of six years.
"No service charge and interest on the WB loan will be applicable to the withdrawn amount of this loan," says one finance official.
The SOFR is an influential interest rate that banks use to determine the pricing of derivatives and loans denominated in US dollar.
On July 14, the SOFR rate on the international money market was 5.06827 per cent for 30-day average, 5.03451 per cent for 90-day average and 4.84398 per cent for 180-day average.
"We have already cautioned the government about the higher rates of interest on the non-concessional loans. But since the budget deficit was huge in amount, the government is forced to borrow the hard loans," says a senior Ministry of Finance (MoF) official.
He thinks it is advisable not to take these types of floating rate-based foreign loans at this moment of global volatility. The loans will extend the debt burden of the state to the foreign lenders, the MoF official added.
When asked, a senior Economic Relations Division (ERD) official said the "grant element" of the above-mentioned loans is less than 25 per cent, meaning costly borrowing for the government.
According to the International Monetary Fund (IMF)'s Debt Limit Policy, the degree of concessionality of a loan is measured by its "grant element."
The grant element is defined as the difference between the loan's nominal value (face value) and the sum of the discounted future debt-service payments to be made by the borrower (present value), expressed as a percentage of the loan's face value.
Meanwhile, the Bangladesh government has also gone for aggressive borrowing of project aid (foreign loan) from some foreign lenders, including the ADB, AIIB, Islamic Development Bank, World Bank, Frence lender AFD, and German lender GIZ.
Another senior Economic Relations Division (ERD) official said since the SOFR rate is much higher in recent months, the government should go for less external borrowing of the non-concessional loans.
"The government should go for only borrowing the concessional loans or supporting its budget execution as well as for the development works."
Executive Director of the Policy Research Institute (PRI) Dr Ahsan H Mansur says if the government does not take much ambitious and less- important projects like Rooppur nuclear power plant, Padma Rail Link, Dohazari-Ghundum railway, then the country need not borrow such kind of costly foreign loans.
"The government should be cautious in public spending. It should cut the budget size for reducing the huge deficit and increase the local revenue earnings," he told the FE.
Until March 2023, Bangladesh's foreign debt had risen to $82.85 billion, according to ERD's provisional data.
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