Foreign loan servicing surges 49% in Jul-Dec 2023

Bangladesh repaid $1.56 billion in interest and principal to development partners during July-December of FY24. It was $1.05 billion in the same period previous fiscal year.

The pressure of repaying foreign loans, a key source of financing development projects, is mounting on Bangladesh with rising interest rates and conclusion of loan grace period of several mega projects.

The country’s foreign loan servicing increased by 48.82% in the first six months of the current fiscal year, according to the Economic Relations Department (ERD).

Bangladesh repaid $1.56 billion in interest and principal to development partners during July-December of FY24. It was $1.05 billion in the same period previous fiscal year.

Interest payments alone increased by 133% to $641.66 million during the period, ERD data shows. Actual payouts rose 19% over the same period.

ERD officials said the Secured Overnight Financing Rate (SOFR) rate has increased due to the war situation between Ukraine and Russia. Current SOFR rate is more than 5%. Before the Russia-Ukraine war, the rate was less than 1%.

Besides, the market-based loans of Bangladesh are gradually increasing, they said. Because of this, Bangladesh now has to pay more money in terms of interest.

About 75% of Bangladesh’s loans from the Asian Development Bank (ADB) and all loans from the Asian Infrastructure Investment Bank (AIIB) are market-based. Bangladesh also takes market-based loans on a small scale from the World Bank.

If current interest rates in the international market remain unchanged, Bangladesh will have to pay $1.19 billion in interest by the end of the current fiscal year. 

In FY23, Bangladesh paid $944 million in interest, compared to $469 million in the previous fiscal.

ERD officials said loan servicing pressure will continue because the grace period of several loans for budget support and some mega projects including Karnaphuli Tunnel, Padma Rail Link has ended. 

As a result, the principal of these loans must be paid now, they said.

Mustafa K Mujeri, executive director at the Institute for Inclusive Finance and Development, said focus should be on boosting exports and remittances to address loan servicing challenges which will increase further. 

“It’s crucial to implement a strategic plan now to navigate this situation,” he suggested. 

Loan commitment rises 

According to the ERD, foreign loan commitments increased by 296.65% to $6.98 billion in the first 6 months of current fiscal. Commitments from development partners totaled $1.76 billion during the same period last fiscal.

The highest commitments in the period were from the ADB at $2.46 billion, followed by $2.02 billion from Japan, and $1.41 billion from the World Bank.

ERD officials noted that the preparation for loan processes was, with successful agreements reached with development partners for projects since the start of the financial year. 

Loan disbursement drops

The disbursement of committed foreign loans declined by 7.49% year-on-year in July-December, attributed to the sluggish implementation of projects despite increased commitments. 

Development partners released $4.06 billion during this period, compared to $3.78 billion in the previous fiscal’s July-December timeframe. 

ADB led disbursements with $1.11 billion, followed by the World Bank at $892.23 million, Japan at $812 million. Besides, Russia released $544.10 million, and China at $361.71 million.

Committee to speed up foreign aided projects

A proposal for a high-level committee headed by the principal secretary to the prime minister to speed up the implementation of the foreign funded projects is likely to be placed at a Planning Commission meeting today. Prime Minister Sheikh Hasian will chair the meeting. 

The last Planning Commission meeting was held on 21 January 2015.

Meanwhile, one of the the agenda of the meeting is to remove the mismatch between the projection of the 8th Five Year Plan and the allocation of the Annual Development Program (ADP).

Besides, at the meeting, a new committee to select new projects may be decided. The 9th Five Year Plan formulation and directions to manage the current economic situation may also be discussed at the meeting.