Dhaka will sign two agreements with Beijing to borrow $2.37 billion for two power projects during Prime Minister Sheikh Hasina’s four-day China visit from July 1, finance ministry officials said yesterday.
Of the loan amount, $1.4 billion will be for expanding and strengthening the power supply network under Dhaka Power Distribution Company (DPDC).
The rest $970.02 million will be spent for strengthening the power grid network under the Power Grid Company of Bangladesh (PGCB).
Both the loans will be non-concessional and will carry a repayment period of 20 years with a grace period of five years.
The PM recently gave her consent to taking $1.02 billion of the $1.4 billion loan for the DPDC project at 3 percent interest. China will provide the rest $381.16 million at 2 percent interest.
The interest rate on the loan for the PGCB project will be 2 percent.
Officials at the Economic Relations Division (ERD) said that in the past, the country never took any non-concessional loans at an interest rate of above 2.5 percent from bilateral and multilateral development partners.
Bangladesh will have to pay an additional interest of $104.66 million during its repayment period because of the high interest rate of 3 percent, they mentioned.
The Exim Bank of China will provide $1.02 billion of the $1.4 billion loan for the DPDC project as preferential buyer’s credit (PBC).
According to a summary of the loan proposal submitted to the PM, the government has 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 no matter whether the loan is disbursed or not.
This is a normal practice in case of Chinese loans, said ERD officials.
In 2017, Bangladesh sought $5.03 billion from the Exim Bank of China for the Padma Bridge Rail Link project and the two power projects under the DPDC and PGCB, an ERD official told The Daily Star, seeking anonymity.
China agreed to provide funds for the Padma Rail Link project at 2 percent interest. But it said the rate would be 4.5 percent for the two power projects as the funds would have to be mobilised from the market, the official mentioned.
Later, the interest rate for the PBC portion of the loan for the DPDC project was set at 3 percent, and the ERD agreed to the rate, the official added.
Former secretary Arastoo Khan, who served the ERD for around a decade, said Chinese loans are always non-concessional, and they do not like to take risk while doing business.
He further said the World Bank, the Asian Development Bank (ADB) and Japan International Cooperation Agency (JICA) offer concessional loans and their interest rates are very low.
According to him, PBC always bears high interest but the interest rate never goes above 2.5 percent.
Arastoo said the lenders have increased the interest rates as Bangladesh has become a lower middle-income country. Now, it has to take non-concessional loans.
Another former secretary, Mohammad-Asif-uz-Zaman, who also served the ERD, said loans with such a high interest rate can create a slight risk for the government in future.
ERD officials said following Bangladesh’s graduation to a lower middle-income country, major development partners started readjusting their terms and conditions by either raising the interest rate or by shortening the maturity and grace period.
The WB has already increased its interest rate to 2 percent from the previous 0.75 percent (in addition to 0.25 percent commitment fee and 0.25 percent front-end fee) while JICA raised its interest rate to 1 percent from 0.014 percent.
Similar interest rates have been imposed by the ADB, the second largest multi-lateral development partner of Bangladesh.
Seeking anonymity, a finance ministry official said Bangladesh wanted to borrow funds for the two power projects at 2 percent interest like it did in case of five other China-funded projects, deals on which were signed in October 2016.
The interest rate on the loans for the five projects was 2 percent for both grant and PBC portions, added the official.