Infrastructure loans to be cheaper: AIIB
Bangladesh's infrastructure borrowing costs will dip this year as lenders vie for a slice of the vast opportunities that the country's fast-growing economy is presenting, said the Asian Infrastructure Investment Bank (AIIB) yesterday.
The proclamation was made in the lender's first publication styled “Bridging Borders: Infrastructure to Connect Asia and Beyond”. The study profiled eight countries in the Asia-Pacific region with great need for infrastructure financing: Bangladesh, India, Pakistan, China, Indonesia, the Philippines, Turkey and Russia.
“In contrast to other countries in the report, a marginal reduction in infrastructure borrowing costs over the next 12 months is expected in Bangladesh due to a more competitive domestic financing environment,” the report said.
Lending spreads are expected to narrow as the financial sector strengthens thanks to more long-term lenders in the market.
“There is growing awareness of Bangladesh's economic potential,” said Jang Ping Thia, principal economist of the AIIB.
At present, loans from the World Bank come with 2 percent interest, India 1 percent, China 2 percent, and the Japan International Cooperation Agency less than 1 percent.
Although infrastructure construction activities will scale up in Bangladesh this year, there are structural challenges in the form of high construction costs, delays and efficiency issues that can put a damper on the intentions.
“High costs pose an ongoing structural challenge to infrastructure development in Bangladesh,” the report said.
The World Bank found that per kilometre cost of road construction in Bangladesh is the highest in the world, which has been supported by the study's findings too.
“Dhaka's construction costs on a per metre basis are higher than the other seven focus countries and are significantly higher on a purchasing power basis.” Furthermore, the significant cost and time overruns for projects reduce cost efficiency, it said. The cost of construction materials is likely to rise in line with the projected depreciation of the taka as well as inflationary pressures due to expansionary policies.
The weakening of the taka against major currencies is due to the trade deficit, resulting from the significant imports needed to support the government's plans for infrastructure development.
The bulk of costs in Bangladesh relate to material costs, and the market for construction materials is less stable due to the country's high dependence on imports of items such as paving materials, aggregates, stones and structural steel.
Although Bangladesh is self-sufficient (or close to it) in cement and billets, it still requires imports of raw materials for these products, according to the study.
“The prices of industrial raw materials globally are projected to remain flat year-on-year but the projected depreciation of the taka is likely to lead to increased costs for construction materials in Bangladesh.”
Subsequently, Thia called for improvement in construction costs and project implementation to further accelerate government activities.
“Bangladesh is a fast-growing economy and its improving economic conditions present a great opportunity to address infrastructure shortfalls,” said Joachim von Amsberg, AIIB's vice-president for policy and strategy.
The country will continue to be a priority market for the China-led multilateral lender in 2019, in what can be viewed as further endorsement of the country's growing stature on the global stage.
The infrastructure-focused lender, which began its journey in 2016, has so far approved three projects amounting to $274 million in Bangladesh's energy sector and is set to approve four more projects involving $640.60 million in transport, energy and water sectors. The projects under review include the Mymensingh-Kewatkhali bridge and the Sylhet-Tamabil road upgradation.
AIIB's interest rate on loans for public sector projects is priced according to consensus among multilateral lenders: the lowest is 0.75 basis points over LIBOR (London Interbank Offered rate) and the maximum is 1.45 basis points for 35-year tenure, Najeeb Haider, its investment operations manager, told The Daily Star in June last year.