New Delhi, Nov 4 (NationPress) Bangladesh's approach to securing loans in Japanese yen to mitigate high dollar-based interest rates has started to unravel due to currency volatility and escalating interest rates in Japan. For instance, the nation has incurred a loss of $13 million due to exchange rate differences on a recent $600 million budget support loan from the Asian Development Bank, which was entirely denominated in yen, according to a report from Bangladesh’s Business Standard newspaper.

Last year, the government also acquired a $300 million loan for the Bangladesh Second Recovery & Resilience Development Policy in yen. Furthermore, a $400 million loan for the Climate Resilient Inclusive Development Programme from the Asian Infrastructure Investment Bank (AIIB) was also in yen, along with a $100 million segment of a World Bank budget support loan for the Resilient Urban and Territorial Development Project which was taken in yen, the report highlights.

Despite the allure of low interest rates in Japan, the associated risks are escalating. The yen has strengthened by nearly 7 percent against the US dollar in a single month, with Japan's interest rates on the rise. This situation is likely to inflate the actual cost of repaying yen-denominated loans, particularly for a nation like Bangladesh, which predominantly holds dollar-based reserves, as noted in the report.

Nowhere is this risk more apparent than in the World Bank-financed Chattogram Water Supply Improvement Project. The $280 million loan was divided between dollars and yen, with half—21.3 billion yen or $140 million—acquired in yen to protect against dollar interest rate increases. The remainder is in dollars.

As repayments approach, the Chattogram Water and Sewerage Authority (Wasa) is confronting an annual debt service obligation exceeding $23 million for six years—approximately 300 crore takas annually. Officials express concerns that this could significantly strain Wasa's financial resources, particularly since the project does not generate commercial income, as the report indicates.

Chattogram Wasa Managing Director Muhammad Anwar Pasha stated that decisions regarding foreign loans are made at the policy level by the Local Government Division, Finance Division, and the Economic Relations Division (ERD), adding that any measures to alleviate repayment pressure would necessitate government intervention.

In the same Executive Committee of the National Economic Council (Ecnec) meeting that authorized the Chattogram project on April 20, another significant yen loan was approved—a $650 million World Bank loan for the Bay Terminal Marine Infrastructure Development Project, of which $400 million will be acquired in yen to sidestep high market-based interest on the dollar-denominated segment.

The yen-denominated debt is rising swiftly. ERD data reveals that as of June 30, 2024, Bangladesh's yen loan portfolio amounted to nearly $12 billion—increasing from $7.52 billion just four years prior, the report states.

However, officials from the Finance Division are issuing warnings. What was once considered a strategic safeguard now carries increasing hazards. Fluctuations in the exchange rate between the yen and the dollar have rendered Bangladesh vulnerable to new risks, especially in the absence of a formal policy regulating the utilization of market-based or non-dollar loans, the report concludes.