The International Monetary Fund (IMF) has mandated that Bangladesh keep its foreign reserves at $24.4 billion by June 2023 as a condition of its $4.3 billion loan agreement. Although some economists and specialists are skeptical about how Bangladesh will achieve this target, a recent projection by the Ministry of Finance suggests that it is entirely feasible. How could this be accomplished? Writes Mohammad Rafiul Hassan
THE IMF CONDITION
Bangladesh proactively applied for a loan from the International Monetary Fund (IMF) to stabilize its economy due to dwindling forex reserves and committed to implementing reforms in certain areas. The loan, according to the IMF, “will help maintain macroeconomic stability and prevent disruptive adjustments to protect the vulnerable.” Therefore, even though the country’s economy may have been somewhat unstable, it should not be classified as unhealthy since Bangladesh has taken proactive steps to avoid any potential economic crisis by seeking the IMF loan. The IMF has approved a $4.7 billion loan for Bangladesh, which will be disbursed from three accounts: $3.3 billion under the Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements, and $1.4 billion under the new Resilience and Sustainability Facility (RSF), with an average interest rate of 2.2 percent.
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As part of its loan deal of $4.3 billion, the International Monetary Fund has established six targets for the first quarter of 2023 to assess the government’s commitment to meeting the program objectives. One of these targets is for Bangladesh to maintain a minimum foreign reserve of $24.4 billion by June 2023. According to a source, Bangladesh has thus far met five of the six targets established by the IMF for the first quarter of 2023.
Bangladesh implemented a series of financial sector and policy reforms before and after receiving the first tranche of $476.2 million in February, as recommended by the International Monetary Fund. These reforms included raising the prices of power and gas and reducing subsidies. Additionally, the country has maintained its commitment to reform even after receiving the initial round of funds.
Although some economists have expressed concerns that the government may not be able to meet the minimum net international reserves (NIR) requirement, Bangladesh Bank Governor Abdur Rouf Talukder remains optimistic. During the IMF-World Bank spring meetings earlier this month in Washington DC, he informed reporters that the IMF is satisfied with the country’s progress in implementing the programme, and no issues have arisen thus far. He also expressed hope that all the conditions for June would be met.
PROJECTED FOREX RESERVE
Bangladesh’s economy is currently gaining momentum and showing signs of improvement, driven by increasing export earnings and remittances. Bangladesh Bank has projected that foreign exchange reserves will rise by at least $4 billion in the next five and a half months. The central bank has set a target of 7.5% growth in export income by next June, which could see exports reaching close to $53 billion in the current financial year. Remittance inflow is also expected to rise by 4% in June.
According to data from Bangladesh Bank (BB), import payments in the first eight months of FY23 have decreased by 10.27% to $48.79 billion, compared to $54.37 billion in the same period of the previous year. This decrease in import expenditure has helped ease the pressure on foreign exchange reserves, which is expected to continue, giving BB Governor Abdur Rauf Talukdar hope for the country’s economy. The finance ministry’s projections, presented at the meeting of the fiscal co-ordination council last month, also estimate that the country will see a 9% decline in imports, a 10% growth in exports, and a 4% increase in remittance inflows, leading to higher reserves. In the first six months of the current fiscal year, the country has recorded $27 billion in export earnings, which is an 11% increase from the same period in the previous fiscal year.
Some economists though deem the forecasts to be too good to be true. “This is unrealistic,” said Zahid Hussain, a former lead economist of the World Bank’s Dhaka office. However, Chief Economist of Bangladesh Bank, Habibur Rahman, has stated that several indicators of the economy are showing improvement. He expects the reserves to increase to $36.5 billion in June, due to the reduction in import costs and the growth in export earnings.
Additionally, the World Bank’s latest forecast for the economy of Bangladesh has placed it at the top of the list of countries with a strong economy in South Asia, excluding India.
WHY WILL RESERVE INCREASE?
In March, Bangladesh saw a seven-month high in inward remittance flow as expatriate Bangladeshis sent around $2.02 billion to their loved ones in preparation for Eid-ul-Fitr. The continuation of the 2.5 percent cash incentive for remittance through official channels, lower costs for sending remittances, and an increase in fresh migrant workers are expected to ensure positive remittance growth. This has led to Bangladesh’s foreign exchange reserves hovering around $31 billion, remaining at $31.14 billion on March 30 and $31.16 billion on April 12.
Compared to February’s $1.56 billion, last month’s remittance receipts were almost 29.3 percent higher, and 8.5 percent higher than the $1.85 billion recorded in March of the previous year. Officials have stated that these remittance inflows will be beneficial for both the central bank and the government in managing the macroeconomic situation. Furthermore, with increased export income and upcoming Eid-ul-Adha remittances, the pressure on Bangladesh’s foreign exchange reserves will gradually decrease.
Additionally, ready-made garment exporters reported that despite the Ukraine-Russia conflict affecting traditional buyers, the country’s garment items were exported to 17 new destinations in the past six months, with at least $4,000 million worth of apparel exported. Garment factory owners also stated that they are receiving orders from non-traditional markets like India, Japan, and Australia.
Moreover, Bangladesh is expected to receive substantial budget support from development partners, such as the Asian Development Bank (ADB). Following the first installment of a $476.27 million IMF loan, Bangladesh will receive approximately $2 billion in budgetary support for the current fiscal year under a co-funding effort led by the ADB by next June. The ADB will contribute to this budget support project, with the first installment of $1.05 billion arriving in April and another $1 billion in June. This will help alleviate the increasing demand for foreign reserves, resulting in an improvement in the foreign currency reserves and current account deficit situation.