In a pivotal development poised to offer a lifeline to Bangladesh’s struggling economy, the International Monetary Fund (IMF) is set to inject a substantial $1.15 billion into the nation’s dwindling foreign exchange reserves. This injection of funds, scheduled for the climactic final week of June, promises a much-needed reprieve for Bangladesh, grappling with the weight of economic instability.
You can also read: Government May Move on Black Money Whitening Scheme
The impending proposal for the third tranche of the IMF loan, slated for presentation at the executive board meeting in Washington, carries with it the hopes and aspirations of a nation in dire need. As officials at the Bangladesh Bank eagerly anticipate the board’s verdict on June 24 or 25, Finance Minister Abul Hassan Mahmood Ali has boldly declared that the awaited installment will grace the nation’s coffers by June’s end, a statement echoing with anticipation and relief.
IMF Forecasts 5.4% GDP Growth
The Finance Minister’s reassurance comes hot on the heels of a pivotal meeting with IMF Executive Director Krishnamurthy Venkata Subramanian, underscoring the gravity of the imminent financial infusion. Since the IMF approved the $4.7 billion loan in January of the preceding year, Bangladesh has already received over $1 billion across two installments, laying the groundwork for this climactic moment of fiscal salvation.
IMF Loan Overview:
- Loan Approval: $4.7 billion
- Disbursement: Over $1 billion received
- Next Phase: $1.15 billion disbursement.
Guiding this momentous transaction is an IMF team, led by the adept Chris Papageorgiou, whose recent completion of the program’s second review marks a critical step towards securing the third tranche. With a staff-level agreement in place regarding the necessary policy adjustments, the stage is set for the long-awaited disbursement, contingent upon the fulfillment of December 2023’s stipulations.
Meanwhile, Bangladesh has shown resilience by implementing significant reforms to address macroeconomic imbalances. These include realigning exchange rates and fully liberalizing retail interest rates, steering the economy toward stability and growth.
Economic Growth Projections:
- GDP Growth:
- FY24: 5.4%.
- FY25: 6.6%.
- Inflation:
- FY24: 9.4%.
- FY25: 7.2%.
Third Installment Disbursement on Horizon
Despite difficulties meeting forex reserve targets under the IMF loan program, recent adjustments indicate progress. The IMF has revised reserve targets downward following Bangladesh’s appeals, addressing concerns over the third installment disbursement.
Chris Papageorgiou of the IMF emphasized the role of policy actions in stabilizing the economy. GDP growth is expected to moderate to 5.4% in FY24 due to import compression and policy tightening but rebound to 6.6% in FY25 as conditions improve. Inflation, projected at 9.4% in FY24, is expected to drop to 7.2% in FY25 with tighter policies and lower global food and commodity prices.
Acknowledging Bangladesh’s low tax-to-GDP ratio, the IMF stresses the importance of sustainable revenue generation to support social welfare and development initiatives. The statement emphasizes tangible tax policy and administrative measures to augment tax revenues by 0.5% of GDP in the FY25 budget. Furthermore, a medium- and long-term revenue strategy, accompanied by an implementation framework, is recommended to guide future reforms. Reducing subsidies, improving expenditure efficiency, and managing fiscal risks are highlighted as essential measures to allocate additional resources to social safety nets and growth-enhancing investments.
Steps to Achieve Upper Middle-Income Country Status by 2031:
- Diversification of Trade.
- Attracting Foreign Direct Investment.
- Improving Investment Climate.
- Enhancing Governance.
The IMF underscores the criticality of maintaining reform momentum to align with Bangladesh’s aspirations of attaining upper middle-income country status by 2031. Diversification of trade, attracting foreign direct investment, improving the investment climate, and enhancing governance are identified as pivotal steps in achieving this ambitious goal. This comprehensive approach reflects the IMF’s commitment to supporting Bangladesh’s economic development and resilience on its path to sustainable growth and prosperity.
The IMF emphasizes bolstering resilience to climate change through institutional strengthening and efficient spending to mobilize climate finance. It advocates for climate-responsive fiscal reforms and investments in green infrastructure to manage risks effectively and enhance financial sector resilience.
IMF’s Solution to Bangladesh’s Reserve Depletion
Chris Papageorgiou attributes reserve decline to post-pandemic depletion driven by external shocks and rising commodity prices, expressing optimism that pressure will ease with a new flexible exchange rate regime.
Addressing inflation concerns, IMF officials acknowledge the potential impacts of policies but stress mitigating adverse effects on vulnerable populations. Bangladesh Bank’s transitional measures are lauded for flexibility in navigating economic challenges.
Despite revising down GDP projection to 5.4% for the current fiscal year due to global conditions, collaborative efforts with Bangladeshi authorities are emphasized. Regarding money laundering and tax evasion, IMF highlights cooperation with the Bangladesh Financial Intelligence Unit and the National Board of Revenue to combat these issues.
In 2022, Bangladesh sought assistance from the international lender as its foreign exchange reserves plummeted to critical lows amidst escalating import bills, triggering a sharp devaluation of the taka and an unprecedented surge in inflation, disproportionately impacting the impoverished and disrupting the nation’s economic trajectory.
Initially, the government was tasked with maintaining a minimum Net International Reserves (NIR) of $26.81 billion by December 2023. However, given the lack of significant improvement in reserve levels, this target was later revised downward to $17.78 billion. In spite of adjustments, Bangladesh failed to meet the revised target by $58 million. Similarly, the NIR target of $23.74 billion for June of the same year remained unmet, with reserves standing at $19.56 billion.
IMF Mission Assesses Bangladesh’s Progress, Majority of Targets Met
Assurances from central bankers suggest a comparatively lower reserve shortfall this time around. NIR, defined as reserve assets minus reserve liabilities, encompasses all foreign exchange liabilities to both residents and non-residents, including IMF credit and derivative-related commitments.
Despite challenges, officials from the finance ministry and the Bangladesh Bank (BB) assert that, apart from reserve-related criteria, all other loan conditions have been fulfilled. The ongoing IMF mission aims to assess the government’s performance against December 2023 targets, with five out of six quantitative targets for the third tranche already met.
Loan Condition Fulfillment:
- Five out of Six Quantitative Targets for the Third Tranche Met.
- Fulfillment of Structural Conditions.
- Compliance with IMF Recommendations.
Tax revenue targets, set at Tk143,640 crore for December, have been exceeded, with Tk1,62,164 crore collected in the first half of the fiscal year.
Meeting another target, reserve money, set at Tk400,400 crore for December, reached Tk372,715 crore. Moreover, social spending and capital investment, exceeding Tk50,000 crore as of December, align with loan conditions.
Reserve Money and Investment:
- Reserve Money Target: Tk 400,400 crore.
- Actual Reserve Money: Tk 372,715 crore.
- Social Spending and Capital Investment: Tk 50,000 crore+.
Structural conditions accompanying the loan’s third tranche have been fulfilled, including the adoption of a periodic formula-based price adjustment mechanism for petroleum products and legislative amendments aligning with IMF recommendations. Quarterly GDP data publication by the Bangladesh Bureau of Statistics and the implementation of banking and finance legislation further demonstrate compliance with IMF structural conditions.
Structural Condition Fulfillment:
- Adoption of Price Adjustment Mechanism for Petroleum Products.
- Legislative Amendments.
- GDP Data Publication by Bangladesh Bureau of Statistics.
- Implementation of Banking and Finance Legislation.
