The first review of the program is scheduled for the Fall of 2023, during which the IMF staff team will evaluate the program’s quantitative targets and the extent of reform implementation. IMF Director for the Asia and Pacific Department (APD), Krishna Srinivasan, confirmed that Bangladesh is currently making strides in line with the IMF recommendations. This positive endorsement indicates that the country is on the right track in implementing the prescribed measures to bolster its economic outlook and drive sustainable growth.
What has been said by the IMF Director?
Krishna, in an interview, highlighted several steps taken by Bangladesh to achieve program objectives. These measures include rationalising subsidies, ensuring the cost recovery of energy prices, transitioning towards a unified market-determined exchange rate, and bolstering the monetary policy framework. Additionally, efforts are being made to enhance external resilience through increased exchange rate flexibility and a stronger forex reserve management framework.
However, Krishna also emphasised the need for a more efficient financial sector in Bangladesh to improve credit allocation to the most productive economic sectors. He pointed out that efficient financial resource allocation, combined with an effective banking sector, would accelerate economic recovery and restore robust growth momentum. Addressing financial sector vulnerabilities, particularly non-performing loans (NPLs) in state-owned commercial banks (SOCBs), and increasing private sector credit allocation remain high priorities.
Strengthening corporate governance of banks, with a focus on the role of independent directors, is also crucial in Krishna’s view. He recommended that classification and provisioning requirements should align with Basel standards, including the treatment of rescheduled and non-performing loans.
Bangladesh is currently making strides in line with the IMF recommendations. This positive endorsement indicates that the country is on the right track in implementing the prescribed measures to bolster its economic outlook and drive sustainable growth.
Krishna Srinivasan, IMF Director for the Asia and Pacific Department (APD)
Krishna further emphasised that the Bangladesh Bank should strictly enforce the current prudential framework. He also stressed the need to address legal features that allow delayed loan repayment, while instituting legal measures to support stronger enforcement of creditor rights and debtor incentives to repay.
Moreover, Krishna advised that developing the bond markets should be a priority to meet the growing financing needs of the country. He suggested further reforms to the National Savings Certificates system and the development of a secondary market for government securities as important steps in this direction.
Upsurge in GDP growth get noticed
Recently, the Asian Development Bank (ADB) has reported that Bangladesh’s current gross domestic product (GDP) growth rate for fiscal year 2023 is higher than previously forecasted. The ADB maintained its growth projection for the country at 6.5 percent for fiscal year 2024.
The economic recovery in Bangladesh has been supported by strong domestic demand and declining fuel and food prices, as stated in the Asian Development Outlook (ADO) released in July 2023.
The ADB attributed Bangladesh’s higher estimate of 6.0 percent GDP growth for FY2023 to robust net exports and supportive government policies. Importantly, imports fell more sharply than expected, while export growth declined at a slower rate than anticipated. The manufacturing sector also played a significant role in contributing to the country’s economic growth, with firms of all sizes leveraging supportive government policies.
The impact of floods, cyclones, and droughts on crop losses in Bangladesh was partly offset by various measures, including subsidies and incentives. Meanwhile, the services sector in the country experienced growth, particularly in warehouse and support activities, as well as health and social services.
On the demand side, both public consumption and investment grew more than expected, further fueling the economic recovery in Bangladesh.
The ADB’s report also provided an overview of economic growth in developing Asia and the Pacific, maintaining the growth projection for the region at 4.8 percent for the current fiscal year. The growth forecast for the region in the upcoming year has been slightly adjusted downward to 4.7 percent. This revision comes after the previous estimate of 4.8 percent made in April.
Additionally, the ADB expects that inflation in the region will decline further in the coming days, approaching pre-pandemic levels, largely due to a global decrease in fuel and food prices. The forecast for inflation in 2023 has been lowered to 3.6 percent from the earlier estimate of 4.2 percent in April, while the inflation outlook for 2024 is raised to 3.4 percent from a previous estimate of 3.3 percent.
ADB Chief Economist Albert Park commented on the region’s recovery from the pandemic, noting that Asia and the Pacific are making steady progress. Domestic demand and service activity are driving growth, and many economies are benefiting from a strong recovery in tourism.
For the South Asia region, the report projects growth at 5.5 percent in 2023 and 6.1 percent in 2024, taking into account various developments in the area.
Flashback to the IMF loan to Bangladesh
The loan agreement, inked last November, span over 42 months and encompasses several key structural reforms aimed at preserving macroeconomic stability and supporting robust, inclusive, and environmentally conscious growth while safeguarding the vulnerable segments of the population.
The IMF loan package, amounting to a substantial $4.7 billion, was said to be disbursed in instalments. At an attractive interest rate of approximately 2.2 percent, Bangladesh stands to benefit from favourable borrowing conditions to address its economic challenges effectively. However, the loan’s repayment terms necessitate a strategic approach. Of the total loan amount, $1.3 billion can be repaid over a 20-year period, providing a grace period of ten years. The remaining sum must be settled within a ten-year timeframe, with a grace period of 3.5 years for a portion and 5.5 years for another portion.
The loan agreement comes hand in hand with a comprehensive set of time-bound conditions that Bangladesh has committed to fulfil. These conditions aim to address longstanding obstacles and embark on crucial reforms. Some of the key stipulations include raising the tax-GDP ratio, implementing the VAT law, establishing an asset management company to manage non-performing loans, reducing the banking sector’s default loans to within 10 percent, and elevating the capital adequacy ratio to meet the BASEL 3 requirement of 12.5 percent.
Furthermore, the agreement also entails periodic adjustments to fuel prices, implementation of climate-related proposals outlined in the budget and international conferences, and measures to increase remittance receipts through formal channels. In addition, the government will boost social spending and enhance targeted social safety net programs. Other focus areas encompass increased exchange rate flexibility, the development of capital and bond markets, expansion and diversification of exports, and the modernisation of the monetary policy framework, along with reporting on net foreign reserves.
This ambitious loan program signifies a crucial step towards economic transformation for Bangladesh, providing the nation with financial resources to pursue its development goals. However, the successful realisation of these objectives hinges on the government’s commitment to meeting the stringent reform requirements set forth by the IMF.
