Rising metro loan interest rates force Bangladesh to rethink funding

Bangladesh is rethinking how it will fund three major metro rail projects in Dhaka as rising project costs coincide with sharp increases in foreign loan interest rates.

Officials at the Economic Relations Division (ERD) are reviewing loan options with Japan and South Korea to prevent long-term debt from spiralling out of control.

ERD officials are also holding urgent talks with Japan International Cooperation Agency (Jica) as any delay in signing tranche agreements will lock in even higher borrowing rates for Dhaka’s transit network.

Amid this situation, a Bangladeshi delegation led by the finance minister will travel to South Korea in the first week of November to negotiate final loan terms for the MRT 5 Southern line.

Japanese loan rates jump fivefold
Initial loan agreements signed with Jica in 2019 carried fixed interest rates between 0.6% and 0.9%. However, because major infrastructure projects are financed in separate instalments, new tranches follow current market terms.

Currently, fixed interest rates on Jica loans have surged to 3.05% and are set to rise further to 3.55% in October. The rate hike directly impacts MRT Line-1 (Airport-Kamalapur) and MRT Line-5 Northern (Hemayetpur-Bhatara).

Cost has also overrun significantly. Original combined budgets for these two lines were at Tk93,799 crore. Revised estimates submitted by the Dhaka Mass Rapid Transit Company Limited (DMTCL) recently show total costs more than doubling to around Tk2,04,000 crore. Out of this, Japan’s expected loan component accounts for over Tk1,53,000 crore across both lines.

To reduce immediate financial pressure, ERD officials are considering variable-rate loans tied to the Tokyo Term Risk-Free Rate (TORF). Using a 6-month TORF base (around 1.35%) plus a 0.45% margin, the initial interest rate would be roughly 1.80%.

If calculated using a 3-month TORF base (around 0.75%) plus 0.45%, it would start at 1.20%. However, officials warn that variable rates carry severe risks if global benchmark rates continue to rise over the 30-year repayment timeline.

South Korea scales back soft loan concessions
Bangladesh is facing a similar challenge on the planned Gabtoli-Dasherkandi MRT Line-5 Southern project. The project relies on $1.35 billion in foreign financing from South Korea alongside $2.36 billion from the Asian Development Bank.

According to the ERD, South Korea originally planned to fund the project through its highly concessional Economic Development Cooperation Fund (EDCF), which charges near-zero interest rates between 0.01% and 0.05% with a 40-year repayment term. Pointing to global economic shifts, South Korean officials have now indicated that these terms must be renegotiated.

ERD officials said they are considering a loan from Korea under its Economic Development Promotion Facility, where interest rates start at 1% or higher.