The International Monetary Fund (IMF) and Bangladesh have long maintained a cordial and cooperative relationship, with the two sides cooperating to promote the stability and growth of the nation’s economy. In order to stabilize the market and restore people’s trust, the government has requested a loan from the IMF in the face of a dollar shortage that has hampered imports of oil and other products, as well as instability in the global market as a result of the conflict in Ukraine since February 2022.
An IMF loan often sparks heated debate in the receiving nation, particularly over the terms. Bangladesh is no different. Many people are concerned about whether these circumstances will be destructive to the nation. Furthermore, the IMF’s key demands will cause the Bangladesh Bank to withdraw nearly $8 billion from the reserve fund, and another restriction would prevent subsidiaries from investing in energy.
These circumstances have propelled Bangladesh into a new era of economic coordination while also demonstrating the breadth of the Bangladeshi economy. Bangladesh’s developing run has proved the Bangladeshi economy’s ability to function smoothly without subsidies while maintaining reserves. In other words, the government of Bangladesh has resolved to take preventative action and seek for solutions to overcome economic difficulties before the entire economy starts to crumble, as opposed to waiting for a crisis to occur first and then taking action.
Recent IMF Support
Bangladesh’s request for SDR 2.5 billion (about $3.3 billion) under the Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements was accepted today by the IMF Executive Board. This decision allows for the immediate payment of SDR 352.35 million (about $476 million). In addition, the IMF Executive Board granted SDR 1 billion (about $1.4 billion) for the newly established Resilience and Sustainability Facility (RSF). Bangladesh has become the first Asian nation to get admission to the RSF.
The 42-month initiative will aid in the preservation of macroeconomic stability, the protection of the vulnerable, and the promotion of inclusive and green development. The reforms will concentrate on providing budgetary room to allow for increased social and developmental investment, improving the banking sector, updating policy frameworks, and increasing climate resilience.
What is the IMF’s aim for funding to Bangladesh?
Bangladesh is on a potentially positive long-term economic trajectory, which has been aided by a strong recovery from the pandemic. However, a few variables have created doubt. These include the macroeconomic consequences of the Russia-Ukraine war, long-standing structural and governance challenges, and climate change vulnerabilities. The money to be distributed, together with the changes, is intended to contribute to addressing this triple problem. The government has reacted to recent economic issues, such as rising global prices for crucial import commodities and a reduction in foreign currency reserves, with a series of policies aimed at reducing demand, particularly import demand. While this helps to reduce the erosion of foreign currency reserves, it comes with some reformation.
Furthermore, the loan is critical for near-term economic measures aimed at restoring macroeconomic stability, loosening financing limits to avoid disruptive adjustment, and replenishing foreign exchange reserves. The ECF/EFF program is anticipated to aid speed long-overdue macroeconomic reforms, including as revenue mobilization, public sector management, and monetary and financial system modernization, in order to build the groundwork for the authorities’ ambitions to achieve upper middle-income status by 2031. The RSF’s reform initiatives will supplement ECF/EFF changes by assisting governments in addressing climate change concerns and generating extra funding.
Uncovering the fact
About the IMF assistance, the term “conditions” does not refer to a deep economic reform or a massive change in the economy; rather, these conditions are basically the future working plan or suggested economic reforms for better economic conditions in a future developed Bangladesh. Besides, PM Sheikh Hasina also highlighted the issue and said, “The IMF provides loans to a country only when it has the capacity to repay the loan…We will not accept an IMF loan with any conditions.” The IMF focuses on some broad areas where Bangladesh has rather shown optimistic marks.
Maintain macroeconomic stability
The condition exposes the core of the measurement as a whole. Despite global economic instability, Bangladesh has already attained microeconomic stability. As a result, the IMF loan will help the microeconomic structure by providing a floor on tax revenue, primary balance, and net foreign reserves, as well as ensuring an efficient level of social expenditure and capital investment over the following four years. So, the criteria here is merely to maintain existing stability, and Bangladesh must therefore maintain current pace with IMF support.
The IMF loan also highlights other criteria such as enhanced debt management, more fiscal transparency, stronger cash management, and greater independence for the central bank. As a consequence, at first look, they seem to be challenging situations.
However, as previously stated, these conditions will assist Bangladesh in developing a plan to reduce NSC issuance, implement an interest rate corridor system by July 2023, publish a fiscal risk statement, and expand the use of electronic funds transfer (ETF) to cover 60% of central government transactions by 2025. In other words, these changes will tighten and strengthen Bangladesh’s financial system. As a consequence, Bangladesh will move faster toward its goal of becoming a developed nation.
Make budgetary room for growth-enhancing expenditure
Fiscal flexibility is vital for achieving sustainable economic growth while also continuing the development path. In this regard, the IMF’s condition of modernizing the tax system to allow for priority expenditure, rationalizing subsidies, and strengthening social safety nets is a welcome possibility for the Bangladeshi economy, rather than a burden. Because the subsidies came at the worst possible moment, they averted a financial crisis while simultaneously putting a stop to progressive economic expansion.
Furthermore, using this condition or simply working approach, Bangladesh’s economy finds a road to create a range of tactics, such as implementing tax revenue methods earning an extra 0.5 percent of GDP in the FY2024 budget.
In addition, a compliance risk management unit should be established in the NBR customs and VAT wings, and the implementation of a periodic formula-based pricing and adjustment mechanism for petroleum products should be finalized.
Increasing the financial sector’s capacity to mobilize productive investment
The global economic downturn has shaken the investment environment on both a local and international scale. As a result, the IMF provided several recommendations for this sector, such as developing a time-bound NPL plan to decrease bank balance sheet fragility. In addition, BB’s supervisory function should be strengthened, risk-based supervision implemented, and the legislative and regulatory framework upgraded.
These settings really help Bangladesh complete a risk-based supervisory action plan as well as establish and execute a strategy for the banking industry to adopt IFRS 9 by 2027. As a result, these techniques will ultimately strengthen Bangladesh’s economy while also playing a significant role in a post-developing Bangladesh in 2026.
The Green Climate Fund’s requirement
The most remarkable component of the IMF’s assistance is that it satisfies the Green Climate Fund’s requirements. since, despite being a highly susceptible country, Bangladesh failed to garner enough international support to alleviate the effects of climate change. As a result, help in this area will pave the way for green financing and the incorporation of climate risk analysis into financial sector monitoring. Bangladesh will have a platform to produce a guideline for banks and financial institutions (FIs) on the reporting and disclosure of climate-related risks in accordance with TCFD principles.
Finally, the support will enable Bangladesh to implement an updated green bond financing strategy, namely the green taxonomy, in accordance with the NAP by 2026.
The way ahead
The existing IMF support and its framework of negotiations reflect Bangladesh’s strong economic structure. It has also aided Bangladesh’s future economic direction. Furthermore, the present IMF criteria and Bangladesh’s efforts to meeting the demands will set the stage for a future economic saga in Bangladesh. These techniques, on the other hand, will strengthen economic stability and assure long-term structural transformation. Furthermore, the support and proposals will expand the scope of technical aid with important players while also reducing poverty.
In the economic sector, however, the proposals and support will strengthen budgetary discipline. At the same time, the help will provide society a boost, making it easier for the people to access financing.
To summarize, despite obstacles, Bangladesh has achieved significant progress in recent years and is a nation with enormous potential and promise. Bangladesh is well positioned to continue making progress and realizing its full potential in the next years, thanks to its robust economic growth, poverty reduction, and human development, as well as its rich cultural history, entrepreneurial energy, and resilience. As a result, the latest IMF support will serve as a boost for Bangladesh, easing the mythological journey of the Bangladeshi economy. Bangladesh in its current thriving economic strength can successfully handle negotiations for its national interests in line with its vision 2041.
[Image by Ken Nakagawa/ IMF]
*S. M. Saifee Islam is a Research Analyst at the Center for Bangladesh and Global Affairs (CBGA), Dhaka, Bangladesh. The views and opinions expressed in this article are those of the author.