JICA loan interest rate rises, government concerned

The interest rate on loans from the Japan International Cooperation Agency (JICA), once considered one of the cheapest sources of financing for Bangladesh, has risen to 3.05 percent. The agency has sole control at every stage, including the appointment of contractors. The Bangladesh government can neither stop the ongoing projects midway nor continue the loans without concern. A few days ago, revised proposals for two metro rail projects were approved with JICA loans. However, many ministers, state ministers and secretaries expressed concerns and opposed taking these loans.

They advised the government to consider alternatives to JICA loans or temporarily suspend the two projects. However, the proposals were eventually approved under the direction of Prime Minister Tarique Rahman due to concerns that relations with Japan could come under strain.

The government has now decided to exercise greater caution and conduct detailed reviews before taking any future loans from JICA. Such information emerged from the minutes of a recent meeting of the Executive Committee of the National Economic Council (ECNEC).

Economic Relations Division (ERD) Secretary Shahriar Kader Siddiqui told Agamir Somoy, “Although JICA previously provided cheap loans, its interest rates are now increasing and its conditions are becoming stricter. In this regard, the agency reviews its loans twice a year. We will take loans from wherever we can get lower interest rates and easier conditions. That is normal. It is not necessary that we have to take loans from only one agency.”

A review found that JICA’s initial loans carried an interest rate of 0.1 percent. This rate remained in effect from 2015. It was then 0.7 percent until 2022. The interest rate increased at different times. Until 14 April, it stood at 2.35 percent. The latest increase took effect on 15 April. As a result, the current interest rate has reached 3.05 percent.

In addition, the interest rate on loans for consultancy services has been gradually increased from 0.75 percent to 1 percent. Several other conditions have also been added. However, the repayment period and grace period remain unchanged.

On the matter, ERD Secretary Shahriar Kader Siddiqui said, “We have been against this interest rate increase from the beginning. We wrote to JICA repeatedly, but it did not help.”

The latest ECNEC meeting was held on 16 September. According to the minutes, the meeting approved one new metro rail project and revised proposals for two projects. JICA loans came under criticism at the meeting.

The MRT Line 1 project will cost Tk 1 lakh 14 thousand 94 crore 89 lakh. Of this amount, Tk 83 thousand 842 crore 62 lakh will come from a JICA loan and Tk 30 thousand 552 crore from government funds. The project’s originally approved cost was Tk 52 thousand 561 crore 43 lakh. The cost has now more than doubled in the first revision. After extensive negotiations, JICA reduced the amount somewhat from its initial proposal but said it could not implement the project for less than that amount.

The cost of implementing the MRT Line 5 Northern Route has been set at Tk 89 thousand 848 crore 36 lakh. Of this amount, Tk 67 thousand 518 crore 24 lakh will come from a JICA loan and Tk 22 thousand 330 crore 11 lakh from government funds. Its originally approved cost was Tk 41 thousand 238 crore 54 lakh. The cost has more than doubled in the first revision. Considerable pressure was also applied in this case. However, JICA made it clear that the project could not be implemented for less than that amount.

An analysis of the minutes of the ECNEC meeting shows that several officials objected to approving the revised proposal for the MRT Line 5 Northern Route project. The revised project’s cost is 117.87 percent higher than the original estimated cost.

At the meeting, Finance Division Secretary Dr Md Khairuzzaman Majumder said, “Taking loans from JICA is becoming increasingly expensive. Therefore, alternative sources of loans must be explored. In addition, the conditions attached to Japanese loans are such that no other country can participate in the tender. The interest rate needs to be locked during negotiations. Then even if the interest rate increases, the previous rate will remain in effect. For example, under the 2019 agreement for this project, the interest rate was supposed to remain below 1 percent. But because the rate was not locked, we now have to pay additional interest.”

Industries, Textiles and Jute and Commerce Minister Khandaker Abdul Muktadir also expressed concern over the increase in JICA’s interest rate. He said, “The loan was taken in Japanese yen, whose value has increased by only 2 percent. The project cost has increased so much due to the increase in the exchange rate that the matter needs to be reviewed further. We also need to explore whether there are any good options other than Japan for financing.”

The Commerce Minister also said at the meeting, “It appears that if loans are taken from Japan, there is very little possibility of reducing the interest rate. Therefore, a policy decision needs to be made that loans will not be taken from Japan and alternative sources will be explored.”

Finance and Planning Adviser Dr Rashed Al Mahmud Titumir also expressed a similar view. At the ECNEC meeting, he said, “This increase in expenditure will put pressure on the ADP in the current fiscal year. Japan is a good friend of ours, so negotiations need to be held at a higher level with them. Until then, the revised proposal for the project can be kept on hold temporarily.” The Finance Adviser also proposed implementing the project under an alternative model.

However, Local Government, Rural Development and Cooperatives Minister Dr Abdul Moin Khan supported making a decision on the matter considering the long-standing relationship with Japan. He said, “As this is an ongoing project, it would not be right to keep it suspended. If the project’s activities are stopped, it could have an adverse impact on relations with Japan. Therefore, caution should be exercised when taking loans in the future.”

Finance and Planning Minister Amir Khosru Mahmud Chowdhury expressed a similar view. He said, “Higher level negotiations with JICA on the interest rate and conditions have already been completed. Apart from our loan agreement with Japan, we have many bilateral economic and political relations. Although the interest rate on the loan is high, the grace period is 10 years and the repayment period is 40 years, which is quite flexible. In addition, the quality of Japanese work is very good. Considering these aspects, it would not be appropriate to cancel the loan agreement.”

At the meeting, Bangladesh Bank Governor Mostaqur Rahman questioned the justification for the increase in project implementation costs. The governor said, “The project cost has increased the most in the revised proposal for the main line, civil works and station construction. What is the justification for the increase in costs in these areas?”

In response, Road Transport and Highways Division Secretary Dr Mohammad Ziaul Haque said, “The scope of work has increased. In addition, the cost has increased due to the exchange rate and increases in the related VAT and income tax. In reality, when a detailed design is prepared at the time of starting the work, many new components need to be added.”

At this point, the Finance Division Secretary said, “The conditions for Japanese loans are such that no other country can participate during the tender process. This also causes project costs to increase.”

Planning State Minister Zunaid Abdur Rahim Saki called for reconsidering the justification for taking JICA loans. He said, “The issue of taking loans from Japan was discussed once in the Cabinet. At that time, the interest rate was set at 0.70 percent and it was argued that no other loan would be available at a lower interest rate. The interest rate is now 3.05 percent. Therefore, the justification for taking this loan needs to be reconsidered.”

ERD Secretary Shahriar Kader Siddiqui told the meeting that the interest rate under the loan agreement had not been finalized. If the loan is taken at a fixed rate, the interest rate will be approximately 3.05 percent. The grant element will be 23.91 percent and a higher amount of interest will have to be paid. On the other hand, if a flexible rate is chosen, the interest rate will be 1.15 to 1.6 percent and the grant element will be 41.36 percent. A somewhat lower amount of interest will also have to be paid. Therefore, a policy decision is also needed on which rate should be used for the loan.

Against this backdrop, State Minister for Railways Habibur Rashid said, “There is no more opportunity for negotiations with JICA. The longer it is delayed now, the more the interest rate will continue to rise. Work orders have already been issued for some tenders. If the loan is canceled now, they will go to court and we will have to pay compensation. Therefore, there is no other alternative at this moment. However, caution must be exercised in the future.”

After the ministers and officials expressed their views, Prime Minister Tarique Rahman, who chaired the meeting, announced the decision. He said, “The cost of the revised project has increased significantly. However, the scope of work has also increased considerably. The possibility of financing through another model or another source is uncertain. Considering other bilateral and political relations with the Japanese government, the revised project proposal was approved.”

Similar comments were made regarding MRT Line 1. Some officials particularly supported temporarily suspending the project. It was later approved as well.