After Metro’s soaring costs, Japanese loan rates also set to rise

The project was originally approved by the Executive Committee of the National Economic Council (Ecnec) on 15 October 2019 at an estimated cost of Tk52,561.43 crore.

Revised proposals for Dhaka’s MRT Line-1 and MRT Line-5 Northern reveal that Bangladesh faces not only sharp project cost overruns, but also significantly higher interest rates on its Japanese loans.

Estimates indicate that interest rates on Jica financing for the two mega-projects could rise from their original concessional rate of 0.6% to 3.5% or more.

Minutes from Project Evaluation Committee (PEC) meetings held at the Planning Commission on 30 August highlight that whilst Bangladesh secured an initial loan agreement with Japan for Tk13,625.77 crore in 2019 at 0.6% to 0.9%, no terms were locked in for the remaining balance.

For MRT Line-1 (Airport-Kamalapur), the Economic Relations Division (ERD) notes that Japanese financing has now expanded to Tk85,535.55 crore. However, this additional capital must be secured at current market terms. Jica loan rates reached 3.06% recently and are projected to hit 3.50% in October. Because Japan reviews its lending rates semi-annually, further increases are possible when rates are reset next April.

MRT Line-5 Northern (Hemayetpur-Bhatara) faces identical hurdles. Out of Tk29,119 crore in approved Japanese financing, only Tk13,500 crore was formally signed at the lower 0.6% rate. Japan has agreed in principle to provide an additional Tk39,814.18 crore, but this tranche will carry higher borrowing costs.

Speaking on condition of anonymity, a senior ERD official confirmed that Jica has agreed to provide the extra funding, but negotiations over loan structures – including fixed, floating, and variable options – remain ongoing.

“There is still no certainty that the interest rate will come down. The possibility of a reduction is very low,” the official stated, adding that securing a fixed-rate agreement to hedge against future hikes would be challenging.

ERD officials said Jica loan rates were below 1% even in 2022. They rose to around 2% in 2025 and exceeded 3% in 2026. In June this year, the interest rate on a $314 million Japanese loan was 3.05%.

Jica’s Dhaka office noted that loan terms are evaluated based on prevailing global interest rates, economic conditions, lender policies, and project risks at the time of finalising each tranche. Historical Jica rates hovered below 1% in 2022, climbed to around 2% in 2025, and breached 3% earlier this year.

Project costs also surged
The two projects have also experienced major cost increases.

For MRT Line-1, Bangladesh’s first underground metro rail project, the Dhaka Mass Transit Company Limited (DMTCL) has proposed increasing the project cost by 129.82% to Tk1,20,794.13 crore.

The project was originally approved by the Executive Committee of the National Economic Council (Ecnec) on 15 October 2019 at an estimated cost of Tk52,561.43 crore.

The cost of MRT Line-5 Northern, meanwhile, has been proposed to increase by 125.98%, from Tk41,238.54 crore to Tk93,190.96 crore. The original project was approved in 2019. 

Economic viability remains a concern
Zahid Hussain, former lead economist at the World Bank’s Dhaka office, said that although an interest rate of 3.05-3.5% is higher than before, it remains relatively low compared with rates in the international long-term lending market.

For example, the interest rate on 30-year US Treasury bonds is above 5%. 

However, he said the bigger question concerns the projects’ economic justification. Since project costs have more than doubled, the benefit-cost ratio is naturally likely to decline unless the expected benefits increase at a similar rate.

Questions also remain over the projects’ economic and commercial viability. With costs more than doubling, it is important to determine whether the benefit-cost ratio and internal rate of return remain at viable levels.

“The most important concern, however, is the government’s financing capacity. The government will have to provide substantial amounts from its own funds, potentially reaching several tens of thousands of crore taka. “Given the current state of revenue collection, existing expenditure commitments and limitations on domestic borrowing, managing this additional burden could prove difficult,” the economist said.