Bangladesh's share of foreign loans at floating rates has doubled in four years as development partners are more inclined to offer market-based loans than fixed-rate ones citing the country's overall economic progress including the rise in per capita income.
In the fiscal 2021-22, market-based loans stood at a little over 23% of Bangladesh's total external debt portfolio, which was 11.6% in FY18, according to the latest data of the Economic Relations Division (ERD).
Such floating rate loans, determined on LIBOR (London interbank offered rate), SOFR (Secured Overnight Financing Rate), and Euribor (Euro Interbank Offered Rate), will continue to go up in years to come, ERD officials told The Business Standard, analysing the loan proposals by development partners.
More market-based loans mean higher interest payments in coming years, they said.
Since market-based interest rates are much higher now than they were a year ago and show no sign of falling soon, economists say Bangladesh needs to be strategic in borrowing from foreign sources; it should avoid market-based loans now and try to get as much fixed-rate loans as it can until the global financial market stabilises.
LIBOR, a globally accepted key benchmark interest rate that indicates borrowing costs between banks, has now shot up to over 3.5% only in the span of a year from less than 1%, while the SOFR now stands at more than 2.5% with no possibility of falling in the coming days.
Bangladesh's outstanding external debt amounted to $56.66 billion at the end of the last fiscal year.
To shed light on how an external loan gets costly because of floating interest rates, take for instance a $140 million loan proposal of the World Bank for Jamuna River Economic Corridor Development Programme. The Washington-based multilateral lender has offered Bangladesh the loan at SOFR plus 1.09% along with commitment and other fees.
Thus, the overall interest for the loan amount will stand above 4%.
But the interest rate will not be more than 2% for the same amount of loan if it can be negotiated at the World Bank's fixed or concessional rate, ERD officials said, explaining the difference between the two.
Zahid Hussain, former lead economist of the World Bank's Dhaka office, said, "LIBOR and SOFR are likely to go up till 2024 because of the current global situation. So, we should try to get fixed-rate loans from the World Bank's regular IDA window for the next two years."
Besides, the government also needs to take out loans from the ADB at a 2% rate, he said, adding, "We can go for floating rate loans when the situation becomes normal."
In the meantime, fixed rate lending under the World Bank's IDA20 – a concessional financing package for 2022-25 period – will drop while the rate of market-based loans will rise, according to ERD sources.
The multilateral lender has announced that it will provide Bangladesh with 2.45 SDR (Special Drawing Rights), equivalent to $3.2 billion under its IDA20, in flexible loans under the core IDA window, down from $3.35 billion under IDA19. As such, the World Bank's fixed-rate loan is not going to increase in the next three years.
About 13.8% of the IDA19 loan was market-based. Though the ratio has not yet been known for the current IDA20, ERD officials assume that the market-based loans will more than double in the next three years.
Meanwhile, the lending pipeline announced by the ADB for Bangladesh shows that there are $3.164 billion in loan proposals for 2023, of which 64.57% are market-based loans and 35.42% are at a fixed 2% interest.
On the other hand, 76.39% of the $3.22 billion in loan proposals for 2024 are market-based and 23.6% at flexible interest rates.
ERD officials said at one point the interest rate was higher than the 2% fixed by the ADB. But as the volume of loans increased, the
ADB shifted to market-based lending. But market-based loans were not a problem until now, because the LIBOR rate was low.
The Asian Infrastructure Investment Bank has been lending to Bangladesh at market-based interest rates since its inception in 2016.
This multinational development aid agency does not offer loans to Bangladesh at fixed rates.
Former secretary Arastoo Khan, who has long experience working with the ERD, the Finance Division, and the Planning Commission, told TBS, "There is no problem if projects are implemented with fixed-rate loans, such as those under the IDA of the World Bank. But floating rate loans will increase our debt servicing risk."
Since lending rates are rising globally, the authorities should be more careful in taking up foreign loan-aided projects in this situation, he felt.
Previously, foreign loans were taken after a lot of calculations but now less important projects are also being implemented with foreign loans, the former finance bureaucrat mentioned.
Dr Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said at this moment, efforts should be made to increase the share of fixed rate loans by negotiating with development partners.
"We have to take out some loans at floating rates according to the conditions set by the development partners. In those cases, such projects should be taken up that will yield economic benefits."
He opined against initiating projects like the Padma rail link, where there is no certainty of guaranteed returns on investment.
LIBOR or SOFR rates will increase for some more days. If global inflation falls, interest rates will also fall. The fall in LIBOR or SOFR rates will be as abrupt as in the case of their rise, he concluded.