Bangladesh to Pay 2% Interest on Japanese Loan for the First Time as Rates Rise

For the first time, Bangladesh will incur a 2% interest rate on a Japanese loan, specifically for the Joydebpur-Ishwardi dual gauge rail line construction project. This marks an unprecedented increase, as Japan has never before charged such a high interest rate on its loans to Bangladesh.

According to a press release from the Economic Relations Division (ERD), the loan agreement, signed on June 27, secures $630 million in financing from Japan.

Traditionally, Japanese loans have been highly sought after for their low-interest financing. However, ERD officials note that these loans are progressively becoming more expensive. In addition to the construction loan, the interest rate on the consultancy component for the same project has also climbed to 0.65%.

Data from the ERD reveals a clear upward trend in Japanese interest rates. The first loan taken by Bangladesh in the current financial year (FY26), in November, was at 1.7% interest. Since then, rates have gradually increased to 1.85%, 1.95%, and now 2%. This brings Japan's lending rates closer to those offered by other development partners. In contrast, interest rates on Japanese loans were consistently under 1% in 2022.

Ichiguchi Tomohide, Chief Representative of JICA Bangladesh, explained, "Interest rates are revised globally every six months based on procurement costs and inflation trends." He added, "While rates have increased, JICA continues to offer favourable terms for Bangladesh as a Least Developed Country."

The ERD further clarified that Japan reviews its interest rates every April and October, considering the borrowing country's Gross National Income (GNI) and Japan's domestic economic conditions. While the recent trend is upward, there have been periods of rate reductions, such as the October 2023 loan for the Matarbari Ultra Super Critical Coal-Fired Power Project at 1.6%, and the December loan for the Hazrat Shahjalal Airport expansion at 1.3%.

Despite the recent uptick, experts maintain that Japanese loans remain a highly attractive option due to their exceptionally generous terms and conditions. Former World Bank economist Zahid Hussain commented, "Even at 2%, Japanese loans remain cheaper than many alternatives due to favourable terms and conditions."

The ERD highlights that Japan's loans offer a 10-year grace period and a 30-year repayment term, which are unmatched by other development lenders. For comparison, concessional loans from the World Bank, effective from July 1, carry a 1.5% interest rate plus a 0.75% service charge, with a shorter maturity structure of 25 years and only a 5-year grace period. Similarly, the Asian Development Bank (ADB) offers concessional loans at 2%, while China's Government Concessional Loans (GCL) are similarly priced but come with a significantly shorter repayment term of 15 years and a 5-year grace period.

Notably, consultancy loans from Japan have also become more expensive. In the current financial year, rates for such loans have increased to 0.40%, 0.55%, and 0.65%, a notable rise from the 0.1%–0.2% seen in FY2023-24. Japanese-funded projects also typically mandate the use of Japanese consultants.

ERD officials indicated that Japanese project loans are often disbursed in multiple tranches, with interest rates tending to rise over time. A clear example is the seventh tranche of the Matarbari power project, disbursed in March, which carried a 1.95% interest rate, a considerable jump from the 0.65% for the fifth tranche signed in November 2021.

To date, Japan has committed $33.62 billion in loans and grants to Bangladesh, supporting critical infrastructure across various sectors including communications, energy, agriculture, education, health, water and sanitation, rural development, environmental protection, and human resource development. The ERD also noted the historical precedent of some Japanese loans being forgiven, further underscoring their unique nature.