Japan, Bangladesh's largest bilateral lender, is set to provide $1.59 billion in loans this fiscal year but the interest rate will be increased and repayment period reduced in light of the country's graduation to the lower middle-income bracket.

An agreement was signed last week between the Japan International Cooperation Agency (Jica) and Economic Relations Division to provide 178.223 billion yen (about $1.59 billion) for six projects. Japan provided 173 billion yen in loans to Bangladesh last fiscal year.

The interest rate on the new loan would be 0.70 percent and the repayment period would be 30 years with a grace period of 10 years.

Previously, the interest rate was 0.01 percent and the repayment period 40 years with a grace period 10 years.

The interest rate on Japanese loans is still lower than the World Bank and the Asian Development Bank's loans.

Bangladesh has graduated to the lower middle-income bracket according to the World Bank's classification: its per capita income reached $1,080 in 2014, which is higher than the lower middle-income threshold of $1,046.

In fiscal 2016-17, Bangladesh's per capita income crossed the $1,600 mark.

“That's why the rate of interest has been increased slightly,” said a finance ministry official, adding that Bangladesh was not singled out. Japan follows the same policy worldwide.

Japan has been providing more than $1.5 billion as development assistance each year for the past couple of years.

As of now, it has already made commitments to finance a number of large infrastructure projects in Bangladesh.

In a statement JICA said it will continue to support efforts in Bangladesh to address challenges to overcome social vulnerability and further economic growth such that the country can achieve the middle-income status by 2021.

Bangladesh has continued to grow at an average pace of 6 percent per annum due to the development of sewing and other garment-related industries, it said.

However, compared with its rapid economic growth and urbanisation, the infrastructure in Bangladesh, including the transport network and the power supply, is still at an early stage.

“As such, the formulation of a business environment has emerged as an urgent issue.”

Also, Bangladesh is vulnerable to natural disasters such as cyclones and floods and there is a critical need to take measures against them, the statement added.

The six projects are: Hazrat Shahjalal International Airport expansion (77 billion yen); Kanchpur, Meghna and Gumti 2nd bridges construction and existing bridges rehabilitation (53 billion yen); Dhaka Mass Rapid Transit development (5.593 billion yen); Matarbari ultra super-critical coal-fired power plant (11 billion yen); Dhaka underground substation construction (20 billion yen); and  small-scale water resources development (12 billion yen).