The International Monetary Fund (IMF) has granted Bangladesh a $4.7 billion loan with strict conditions for implementing sweeping reform programs to improve the country’s financial sector and fiscal management. Although Bangladesh fell short in meeting some of the necessary reforms, the country received the first instalment on January 30th this year, which will provide some cushion to the depleting foreign exchange reserve and the balance of payment deficit.
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However, for Bangladesh to receive the rest of the instalments within the next 42 months, the government must continue to stay on the path of reforms. The question now is whether the reform pledges made to the IMF will be effective this time, and to what extent Bangladesh has taken steps to initiate the necessary reforms. It remains to be seen if the government will follow through on its commitments to improve the financial sector and fiscal management.
Nevertheless, the IMF loan provides a crucial opportunity for Bangladesh to address its economic challenges and implement the necessary reforms to improve its long-term financial health.
2nd tranche loan discussion: IMF team to come Dhaka this week
According to sources within the Ministry of Finance, a team from the International Monetary Fund (IMF) is scheduled to arrive in Dhaka on April 25 to discuss the progress made in the use of the first tranche of its $4.7 billion loan program for Bangladesh, as well as the release of the second instalment. The team will hold meetings with officials from the Finance Division, Financial Institutions Division, Economic Relations Division (ERD), Bangladesh Bank, and National Board of Revenue (NBR) during their visit from April 25 to May 2, as reported by UNB.
The team, led by IMF Asia and Pacific Division Head Rahul Anand, will comprise three to four members, according to sources within the Ministry of Finance who spoke on condition of anonymity Bangladesh has received the initial instalment of $476.2 million from the International Monetary Fund (IMF) out of the total approved loan amount of $4.7 billion on January 30th. The visit is expected to focus on the progress made by Bangladesh in meeting the conditions attached to the loan, including the implementation of necessary reforms in the financial sector and fiscal management.
The loan obtained from the International Monetary Fund (IMF) is said to be paid in seven instalments over a period of three and a half years until 2026, with six instalments remaining. According to a senior ministry official, the IMF typically reviews compliance with loan conditions before disbursing each tranche. An IMF team is expected to visit in September to assess the fulfilment of loan conditions before releasing the second tranche.
In addition, it is customary for an IMF mission to come to Dhaka before each budget announcement to discuss budget assistance, and now that the loan program is in place, discussions will also focus on meeting loan conditions, according to sources.
Sources report that it is customary for an IMF mission to visit Dhaka prior to each budget announcement to discuss budget assistance. With the loan program in place, discussions will also cover the fulfilment of loan conditions in addition to budget assistance.
Reform roadmap given by IMF authority
As part of the IMF credit program’s reform roadmap, Bangladesh was obligated to implement various reforms between FY2023 and FY2026. The government was expected to introduce tax revenue measures in the FY2024 national budget that would generate an additional 0.5% of the country’s GDP, equivalent to $2.0 billion. This would have increased the tax revenue target for the upcoming budget by Tk2.0 trillion compared to the current fiscal year.
However, there were concerns about whether the revenue board could achieve such a vast tax target within a year, but it was believed to be feasible if the target was set for the medium term. The government was also required to present the Bank Companies (Amendment) Act and the Finance Companies Act to Parliament by September 2023. However, amending the Bank Company Act was expected to be challenging, as private bank sponsors were likely to resist certain amendments. Additionally, the government may have been unwilling to relinquish control over state-owned banks.
In FY23, the adoption of a market-based exchange rate and the introduction of a periodic formula-based price-adjustment mechanism for petroleum products are two important conditions that has an enormous impact on the market and the cost of living. Some strings were targeted to improve the performance of particular sectors and institutions. Historically, the performance of previous governments in implementing reforms has left little room for optimism regarding future reforms.
Reforms, in most cases, are painful. The act of passing the pain on to all concerned took work, especially with privileged and powerful sections. As a result, a relatively weaker section of the population bore the main brunt, although reforms were supposed to benefit all. Considering all these, Bangladesh has successfully met several reform roadmaps given by IMF, where the country is looking forward to having its second tranche of loan from IMF, relying on these.
Reforms need to be more structure to sustain growth
Bangladesh needs to accelerate structural and trade reforms, along with export diversification to maintain growth momentum amidst challenges. FY23 will see a slowdown in real GDP growth to 5.2 percent due to rising inflation, tighter financial conditions, disruptive import restrictions, and global economic uncertainty.
However, growth is predicted to pick up to 6.2 percent in FY24. Abdoulaye Seck, who serves as the Country Director for Bangladesh and Bhutan at the World Bank, has pointed out several factors that have hampered Bangladesh’s post-pandemic recovery, such as Russia’s invasion of Ukraine, elevated commodity prices, rising interest rates, and slowing global growth. Inflationary pressure has been exacerbated by rising commodity prices, leading to a balance-of-payments deficit that reached $7.2 billion in the first half of FY23. To restore external balance, a shift towards a single market-based exchange rate is suggested.
Accelerating structural and trade reforms, along with export diversification, can help Bangladesh navigate current challenges and sustain growth momentum, according to the Bangladesh Development Update April 2023. Growth is expected to increase over the medium term as external conditions improve and reforms gain momentum, with GDP growth projected to slow to 5.2 percent in FY23 before recovering to 6.2 percent in FY24.
Abdoulaye Seck also highlighted that global uncertainty and factors like elevated commodity prices and rising interest rates have disrupted Bangladesh’s post-pandemic recovery. The World Bank is prepared to support reforms to accelerate growth and enhance resilience.
Higher commodity prices have resulted in inflationary pressure, leading to an increase in the balance-of-payments deficit, which reached $7.2 billion in the first half of FY23. A multiple exchange rate system discourages exports and remittance inflows, contributing to the balance of payments pressure. Moving towards a single market-based exchange rate can restore external balance. Moreover, export diversification is crucial to achieving Bangladesh’s goal of becoming an upper-middle-income country by 2031, and reducing both tariff and non-tariff barriers can help strengthen regional integration.