Bangladesh is set to resume borrowing highest-interest Japanese loans after failing to convince the financier to offer more concessional terms in what officials say a shift in government approach to overseas borrowing.
Analysts say borrowing at steeply raised 3.5-percent interest is destined to bloat repayment obligations as huge sums of funds will be taken for Japanese-funded metro-rail projects, apart from two immediate loans for two development projects.
The government prepares to sign two loan agreements for the Upazila Governance and Development Project and the Investment Climate Improvement Project shortly under the revised lending terms, according to officials at the Economic Relations Division (ERD).
The move comes after prolonged negotiations during which Bangladesh sought to persuade Japan to retain more favourable lending conditions amid growing concerns over the country’s external debt-servicing burden.
Japan International Cooperation Agency (JICA) has raised its lending interest to 3.50 per cent for the six-month lending cycle that began in October 2026, up from 3.05 per cent in the previous cycle, ERD officials said.
At the bilateral summit in Tokyo between Bangladesh Prime Minister Tarique Rahman and Japanese Prime Minister Takaichi Sanae last month, Japan officially committed to extending a 15.88-billion-yen loan (approximately US$100.8 million) for the Investment Climate Improvement Project and a 30.68-billion-yen ($194.7 million) loan for the Upazila Governance and Development Project.
The agreements for the two loans would be signed shortly.
The higher interest rate will increase the cost of Japanese development financing for Bangladesh, particularly as the country is preparing to take fresh loans for development projects while facing mounting repayment obligations against previously contracted foreign loans, officials said.
The decision is significant because Bangladesh has traditionally relied on Japanese official development assistance (ODA) as one of its major sources of relatively low-cost, long-term foreign financing.
Apart from the two upcoming projects, the government will also have to borrow a huge amount of funds from Japan for the ongoing MRT-5 Northern Route and MRT-1 projects in Dhaka, which are among the major infrastructure initiatives supported by Japanese financing.
The higher lending rate is expected to put additional pressure on the government’s project-financing costs and future debt-servicing obligations.
Bangladesh has been increasingly concerned about the rising cost of external borrowing as repayments of both principal and interest have grown significantly in recent years.
The government is also facing pressure to manage foreign-exchange reserves and maintain fiscal space for development spending.
Japan has long been one of Bangladesh’s largest bilateral development partners, providing financial assistance for major infrastructure, transport, energy and economic-development projects.
Its loans have traditionally been attractive because of their relatively long repayment periods and concessional interest rates. However, the latest lending terms indicate that Bangladesh may have to adjust to more expensive Japanese financing for some of its upcoming development projects.
JICA changes the lending rate for its ODA every six months. The current cycle will span from October 2026 to March 2027.
“We have nothing to do but for borrowing the loan at higher rate as Japan will not reduce their rate for Bangladesh only,” said a senior ERD official.
Earlier, Bangladesh had paused in borrowing from Japan as its interest rate on development finance was steeply hiked and Dhaka’s request for reconsidering the tightened terms went unheeded, officials say.
Prime Minister Tariqure Rahman recently visited Japan where he requested the counterpart to make the ODA loan concessional.
Bangladesh used to enjoy an interest rate as low as 1.0 per cent in borrowing from the JICA until a few years ago.
In response to the steeper borrowing costs, Bangladesh refrained from signing any new loan packages with the lender in the last borrowing cycle between April 2026 and September 2026, they have said.
The rate rise marks a drastic shift from historical agreements. Even as recently as 2022, Japanese ODA carried highly concessional rates below 1.0 per cent.
Even three years ago, the interest rate for the Japanese loan was less than 1.0 per cent, the officials point out.
The Japanese development financier also charges a 0.02-percent front-end fee for almost all the loans extended to Bangladesh, officials have said.
Bangladesh needs to repay the loans taken from Japan in 30 years wherein it will get 10 years as grace period for the payback.
As a least-developed country (LDC) with low income, Bangladesh had enjoyed Japanese loans with only 0.1-percent interest until 2015.
Analysts note that at 3.5 per cent, Japanese funding has lost its long-held competitive advantage, now tracking higher than foundational lending rates from multilateral institutions like the World Bank and the Asian Development Bank, and even from China.
Bangladesh currently is repaying loans from the World Bank at 1.75-percent interest, that from the ADB at 2.0 to 4.5 per cent, China at 2.0 per cent and IDB 2.0-4.0 per cent.
Japan is the single-largest bilateral development partner of Bangladesh-a position it has held consistently since 2012.
Since Bangladesh’s independence in 1971, Japan has provided the country with approximately $33.62 billion in cumulative official development assistance, or ODA.
Source: https://thefinancialexpress.com.bd/economy/government-accepts-high-interest-bearing-japanese-loans
