Bangladesh seeks lower JICA loan rates as borrowing costs climb

Bangladesh has formally requested Japan to reduce the interest rate on loans provided by the Japan International Cooperation Agency (JICA), arguing that rising borrowing costs could add pressure to the country's macroeconomic stability.

Finance and Planning Adviser Amir Khasru Mahmud Chowdhury recently sent a letter to JICA President Akihiko Tanaka proposing a reduction of at least one percentage point from the current interest rate, according to officials at the Economic Relations Division (ERD).

The request comes as JICA has raised the interest rate on its new loans from 2.35% to 3.05%, effective from April through September this year.

The interest rate for consultancy services under JICA-financed projects has also increased from 0.85% to 1%, while the 30-year repayment period and 10-year grace period remain unchanged.

Officials said Bangladesh is preparing for direct negotiations with Japan on the issue, with the finance adviser expected to visit the country in the coming months, sources told Daily Waadaa.

The matter is likely to feature prominently during JICA President Tanaka's visit to Dhaka on Wednesday, where he is scheduled to meet senior government policymakers and inspect several Japanese-funded development projects.

ERD officials said Bangladesh expects Japan to consider lowering the rate, noting that the country will continue to enjoy Least Developed Country (LDC) benefits for another three years despite graduating to lower-middle-income status. 

Officials also pointed to Bangladesh's position as one of JICA's largest development partners and an important market for Japanese businesses.

JICA currently places Bangladesh and Myanmar in the same lending category, although Bangladesh receives significantly larger volumes of Japanese development financing.

The cost of JICA loans has risen steadily in recent years. Bangladesh borrowed from the agency at just 0.1% interest until 2015 while it was classified as an LDC. The rate increased to 0.7% after the country attained lower-middle-income status in 2022, rose to 1.6% in 2023, 2.35% in 2024 and now stands at 3.05%.

Officials said the increase has made JICA financing more expensive than some multilateral development loans.

The World Bank currently lends to Bangladesh at around 1.75%, while financing from the Asian Development Bank (ADB) and the Islamic Development Bank (IsDB) generally ranges between 2% and 4.5%, depending on the lending window.

They warned that if JICA's interest rates continue to rise, its loans could lose their concessional status. Under international standards, loans with a grant element below 35% are considered non-concessional, making them less favorable for developing economies.

JICA is Bangladesh's largest bilateral development partner, committing around $1.3 billion in loans annually and typically disbursing between $600 million and $700 million.

However, the pace of disbursement has slowed in recent months. Between July and April of the current fiscal year, JICA disbursed $422.4 million, while no new loan commitments were signed during the period, according to ERD officials.