The share of variable rate foreign loans doubles in 4 years
Global lenders reduce share of fixed rate loans in new offerings
Bangladesh’s share of floating-rate foreign loans has doubled in four years, with development partners more willing to offer market-based loans than fixed-rate loans, citing the country’s overall economic progress, including the increase in per capita income.
In FY 2021-22, market-based loans accounted for just over 23% of Bangladesh’s total external debt portfolio, which was 11.6% in FY 2018, according to data. latest data from the Economic Relations Division (ERD).
These floating rate loans, determined on LIBOR (London Interbank Offered Rate), SOFR (Secure Overnight Funding Rate) and Euribor (Euro Interbank Offered Rate), will continue to rise in the coming years. come, DRE officials told The Business Standard, analyzing loan proposals from development partners.
More market-based loans mean higher interest payments in years to come, they said.
With market-based interest rates now much higher than they were a year ago and showing 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 many fixed-rate loans as possible until the global financial market stabilizes.
LIBOR, a globally accepted benchmark interest rate that indicates borrowing costs between banks, has now climbed to more than 3.5% in the space of a year, from less than 1%, while SOFR now stands at over 2.5% with no possibility of falling in the next few days.
Bangladesh’s outstanding external debt stood at $56.66 billion at the end of the last fiscal year.
To shed some light on how an external loan becomes costly due to floating interest rates, consider for example a $140 million loan proposal from the World Bank for the Jamuna River Economic Corridor Development Program. The Washington-based multilateral lender offered Bangladesh the loan at SOFR plus 1.09% along with commitment and other fees.
Thus, the overall interest for the loan amount will be more than 4%.
But the interest rate will not exceed 2% for the same loan amount if it can be negotiated at the World Bank’s fixed or concessional rate, ERD officials said, explaining the difference between the two.
In the case of loans to Bangladesh, development partners have imposed floating interest rate caps, which will no longer be available for World Bank and Asian Infrastructure Investment Bank loans. The Asian Development Bank (AfDB) is also expected to follow suit.
Zahid Hussain, former Senior Economist at the World Bank’s Dhaka office, said, “LIBOR and SOFR are likely to rise until 2024 due to the current global situation. So we should try to get fixed rate loans from the regular IDA of the World Bank. window for the next two years.”
In addition, the government must also take loans from the AfDB at a rate of 2%, he said, adding, “We can opt for variable rate loans when the situation returns to normal.”
In the meantime, fixed-rate loans under the World Bank’s IDA20 – a concessional financing program for the period 2022-25 – will decline while the rate of market-based loans will increase, sources say. of the ERD.
The multilateral lender has announced that it will provide Bangladesh with 2.45 SDRs (Special Drawing Rights), equivalent to $3.2 billion under its IDA20, in the form of flexible loans under the principal from IDA, compared to $3.35 billion under IDA19. Thus, the World Bank’s fixed rate loan will not increase over the next three years.
About 13.8% of the IDA19 loan was market-based. Although the ratio is not yet known for the current IDA20, DRE officials assume that market-based lending will more than double over the next three years.
For market-based loans, the World Bank and the Asian Infrastructure Investment Bank had so far kept their interest rate spreads capped for Bangladesh. The cap is now removed, leaving interest rates open to market volatility.
Meanwhile, the AfDB’s announced loan pipeline 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 interest of 2%.
On the other hand, 76.39% of the $3.22 billion loan proposals for 2024 are market-based and 23.6% at flexible interest rates.
ERD officials said that at one point the interest rate was above the 2% set by the ADB. But as the volume of loans increased,
The AfDB has moved to market-based lending. But market-based lending was not a problem until now, as 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 in Bangladesh at fixed rates.
Former secretary Arastoo Khan, who has a long experience of working with the ERD, the finance division and the planning commission, told TBS: “There is no problem if the projects are implemented with fixed-rate loans, such as those from the IDA of the World Bank. But floating-rate loans will increase the risk of servicing our debt.”
As lending rates rise globally, authorities should be more careful when accepting projects financed by foreign loans in this situation, he said.
Previously, foreign loans were taken after many calculations, but now smaller projects are also implemented with foreign loans, the former finance bureaucrat said.
Dr. Ahsan H Mansur, executive director of the Bangladesh Policy Research Institute, said that at this time efforts should be made to increase the share of fixed rate loans by negotiating with development partners.
“We need to borrow at floating rates as per the terms set by the development partners. In such cases, such projects should be undertaken which will bring economic benefits.”
He has spoken out against launching projects like the Padma rail link, where there is no certainty of guaranteed returns on investment.
LIBOR or SOFR rates will rise for a few more days. If global inflation goes down, interest rates will also go down. The fall in LIBOR or SOFR rates will be as sharp as in the case of their rise, he concluded.