Interest rate discord delays $7.5 billion Chinese loans for Bangladesh

Chinese loans for Bangladesh worth $7.48 billion have not materialised due to the discord because China was not able to cut back interest rates due to IMF stipulations.

Zafar Ahmedbdnews24.com
Published : 5 July 2015, 07:04 AM
Updated : 5 July 2015, 11:24 AM

The Chinese have now offered to cut down from three percent to two percent interest on these long-term loans, and the proposal has been forwarded to the Economics Relations Division in Dhaka.

Bangladesh wants a bargain and to pay no more than 1.5 percent.

Dhaka has already asked Beijing to fund 10 projects worth $9.4 billion. Beijing has chosen nine projects and shown interest to fund them $7.48 billion.

"Though we were assured flexibility in funding the suggested projects, the interest rate on the loans may cross the two percent mark," says Asif-uz-Zaman, additional secretary of ERD's Asia wing

Zaman said Finance Minister AMA Muhith has asked for fixing the interest rate at 1.5 percent.

"The Chinese are yet to respond on his proposal."

One of the nine projects the Chinese have agreed to fund is the 3.5-kilometre tunnel under the Karnaphuli River.

In June, Bangladesh Bridge Authority and China Communication Construction Company (CCCC) signed an agreement to implement the project at the cost of $705 million.

But the agreement did not say how much interest would be charged on the loan.

ERD officials said bargaining over the interest rate may continue for at least another six months, by when the economic agreement may be signed.

ERD's Senior Secretary Mohammad Mejbahuddin told bdnews24.com: "Chinese loans for projects they agree to fund entails purchase of all goods and services from Chinese companies without global tender. That raises issues of transparency on rates. So, Bangladesh has to weigh all issues carefully."

But Mejbahuddin said there are obvious advantages of an agreement with a single entity -- it saves time on procurement and implementation and thus prevent cost and time overruns.

Though China is a crucial partner in Bangladesh's development, no loan agreement has been signed between Beijing and Dhaka since 2013.

The last such agreement was about setting up the Padma-Jashaldia Water Treatment plant.

The International Monetary Fund (IMF) approved a loan of one billion dollars to Bangladesh after two years of negotiation in 2010.

Under that agreement, one of the 19 conditions on which the loan was cleared entailed that all foreign development loan should have a 35 percent grant component.

All subsequent loans from the World Bank, JICA and ADB have maintained 35 percent grant components.

That put paid to Bangladesh's efforts to secure Chinese loans, as they were no longer easy to get if the IMF stipulations were followed.

This is why no loan agreement has been possible with China after 2013.

ERD officials said China agreed to provide $2.57 billion in the $3.37 billion project to set up rail links from Padma Bridge to Mawa and Jazira.

China has also agreed to provide $1.39 billion for the $1.75 billion Dhaka-Ashulia Elevated Expressway project.

They have said they will also fund the $ 752 million Joydebpur-Ishwardi double rail track project and the $ 258 million Joydebpur-Mymensingh broad gauge upgradation.

The other projects China agreed to fund are modernisation of government jute mills ($280 million), the PGCB's power grid network upgradation ($1.32 billion) and modernisation of telecommunication network ($200 million). 

China wants a commercial agreement to implement these projects.