Beijing is demanding 3 percent interest rate for a $1.4 billion loan for a power project in Bangladesh, a 50 percent increase in the lending rate from its previous projects.
Bangladesh had wanted to borrow the fund at 2 percent interest for the “Expansion and strengthening of power system network under Dhaka Power Distribution Company (DPDC) area project” like it did in case of five other China-funded projects signed since October 2016.
The World Bank started to charge 2 percent rate of interest, including 0.75 percent for service, and 1.25 percent interest for the credit from July 1, 2018 as the global lender considered Bangladesh as lower middle income country.
However, the loan interest rate for International Development Agency (IDA)—a soft loan wing of the World Bank—was only 0.75 percent.
Like World Bank, the Asian Development Bank also started charging 2 percent interest for credit from last year.
The issue was discussed at a meeting of the standing committee on non-concessional loan (SCNCL) chaired by Finance Minister AHM Mustafa Kamal on March 19. The committee decided to seek the prime minister's approval whether Bangladesh will go for the loan at 3 percent interest rate or not, as the increase from 2 percent to 3 percent is a major change, according to the summary of the meeting.
Bangladesh has signed loan agreement for five China-funded projects at 2 percent interest rate, both for grant portion and preferential buyers' credit (PBC) portion.
In August 2017, the Exim Bank of China wrote to the Economic Relations Division (ERD) to send a loan application for the DPDC project, amounting to $1,402.83 million.
Of the sum, China showed interest to lend $381.16 million in government concessional term at 2 percent interest rate and the rest $1,021.77 million at 3 percent interest rate.
Both loans carry a repayment period of 20 years with five years grace period.
The preliminary agreement signed by Bangladesh and China in 2016 does not articulate clearly the loan conditions and only says that the terms would be set on a case-to-case basis. The interest rate both for concessional loans and PBC for the five projects was set at 2 percent.
In 2017, Bangladesh asked for $5.03 billion from the Exim Bank of China for the Padma Bridge Rail Link project and one project of DPDC and one project for Power Grid Company of Bangladesh (PGCB).
China agreed to lend fund for the Padma Rail Link project at 2 percent, but said the rate would be 4.5 percent for the two projects, since the funds have to be mobilised from the market.
Later, the interest rate for the PBC portion of two projects was set at 3 percent and the ERD agreed to the rate. The power division also applied to the Exim Bank of China for a loan at the same rate.
The loan negotiation committee of the ERD had proposed the Exim Bank to cut the interest rate to 2 percent from the proposed 3 percent during negotiation on the draft loan agreement.
But the bank informed that the rate of the PBC was fixed by the Chinese government and Bangladesh would have to apply anew for its reconsideration.
In that case, China would re-evaluate the project which would take time and may create uncertainty about the fate of the project. So, PBC could be taken at 3 percent interest rate considering the importance of the project, according to the minutes of the March 19 meeting.
The government will have to pay 0.25 percent in commitment fee and 0.25 percent in management fee. The management fee will have to be paid within 30 days of loan effectiveness whether a loan is disbursed or not. ERD officials said this is a normal practice of Chinese loans.