IMF approves $4.7 billion loan for Bangladesh, calls for ambitious reforms

Highlights-

• IMF approved Bangladesh's request for $3.3 billion under ECF and EFF arrangements, with immediate disbursement of $476 million.
• Bangladesh is the first Asian country to access the newly created Resilience and Sustainability Facility (RSF).
• IMF approved $1.4 billion for Bangladesh under RSF.
• The 42-month programme aims to preserve macroeconomic stability, protect vulnerable populations and promote inclusive and green growth.
• Reforms will focus on fiscal space, financial sector, policy frameworks, and building climate resilience.
• Fiscal reforms to strengthen the management of public finance, investment, and debt will improve spending efficiency, governance, and transparency.

The embattled foreign reserves of Bangladesh is finally set for some respite after the International Monetary Fund (IMF) late on Monday approved a loan of $4.7 billion for the country.

Calling for ambitious reforms to achieve more resilient, inclusive, and sustainable growth, the money-lender hoped that those would focus on creating fiscal space to enable greater social and developmental spending; strengthen the financial sector; modernise policy frameworks; and build climate resilience. 

The loans are to be given in tranches over a "42-month programme to help preserve macroeconomic stability, protect the vulnerable, and foster inclusive and green growth," a press release said. 

Bangladesh will get about $3.3 billion under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) and about $1.4 billion under the Resilience and Sustainability Facility (RSF), an IMF press release on early Tuesday said.

Besides, there will be an immediate disbursement of about $476 million as the first of the seven instalments over 42 months. 

The remaining amount will be in six equal instalments of $704 million each.

Confirming the matter to The Business Standard, Bangladesh's Finance Minister AHM Mustafa Kamal said, "We are certainly grateful to the IMF for this loan. Special thanks and appreciation to the team that visited Bangladesh on this loan, including IMF Deputy Managing Director [DMD] Antoinette Monceau Sayeh and Head of Mission Rahul Anand. 

The finance minister further said, "Many doubted that the IMF might not give us this loan. They thought the fundamental areas of our macroeconomy were weak, so the IMF would refrain from lending. This loan approval also proves that the fundamental areas of our macroeconomy are standing on a solid foundation and are better than many other countries."

IMF DMD Antoinette Monceau Sayeh said, "While confronting challenges resulting from the global headwinds, the authorities [Bangladesh] need to accelerate their ambitious reform agenda to achieve a more resilient, inclusive, and sustainable growth. In this regard, substantial investment in human capital and infrastructure will be needed to achieve Bangladesh's aspiration to reach upper-middle income status by 2031 and meet the Sustainable Development Goals [SDGs]."

Opening the floodgate

The sum of the loan may seem paltry at first glance, but according to experts, there's more to it than that which meets the eye.

In the last fiscal year, the Bangladesh Bank alone supplied more than $4.5 billion to the market to prop up the exchange rate. At the same time, import bills were averaging around $6 billion a month. 

On paper, the $4.7 billion could realistically meet import bills for around 15 days only. 

But the fresh injection is set to boost reserves, which fell to $32.29 billion on 26 January due to a high import payment obligation against a low dollar supply.

In August 2021, the reserves stood at a record $48.6 bn.

The loan will also bring in much-needed dollars, alleviating the currency crunch which has led to a halt in opening Letters of Credit (LCs). 

Another reason, identified as a key, behind the loan is it will mean IMF's seal of approval going forward.

Keep reading-

• Bangladesh becomes first Asian country to receive loan from IMF's 'Resilience and Sustainability Fund'
• Bangladesh needs to accelerate its ambitious reform agenda for sustainable growth: IMF

For creditors, an IMF loan would be a sign of a country's credit worthiness. In a period of collapsing economies, this worthiness could be the difference between bankruptcy and survival.  

This fact has also been emphasised by the finance minister.

"We are using the IMF. If the IMF, after duly completing the audit of the books and accounts of the country, says Bangladesh is doing fine, nobody else will say no to us," AHM Mustafa Kamal said in a briefing soon after meeting a visiting IMF mission in November. 

The IMF's greenlight can help Bangladesh secure more than $1 billion in loans from other development partners as well.

At the same time, there remains a lot of work to be done.

An era of reforms

According to IMF DMD Antoinette Monceau Sayeh, the ECF/EFF arrangement will protect macroeconomic stability and rebuild buffers while helping to advance the authorities' reform agenda.

According to Sayeh, the implementation of the domestic revenue mobilisation strategy that relies on both tax policy and revenue administration reforms will allow increasing social, development and climate spending sustainably while fiscal reforms to strengthen the management of public finance, investment, and debt will improve spending efficiency, governance, and transparency. 

In an interview with a national daily, Sayeh had brought attention to revenue mobilisation and the financial sector, specifically Bangladesh's tax-to-GDP ratio -- at around 9 percent of GDP -- making it one of the lowest in the world.

"We think it can be considerably increased by looking at tax exemptions," she had said, calling for modernisation of the tax system and improvements in revenue collection.

Reiterating the call yesterday, Sayeh said, "Reducing financial sector vulnerabilities, strengthening oversight, enhancing governance and the regulatory framework, and developing capital markets will help mobilise financing to support growth objectives." 

In regards to the country's robust economic recovery, the DMD advised structural reforms to create a conducive environment to expand trade and foreign direct investment, deepening the financial sector, developing human capital, and improving governance to enhance the business climate are needed to lift growth potential.

Mentioning Covid-19 pandemic and subsequent Russia-Ukraine war among the multiple shocks that have interrupted the economic performance making macroeconomic management challenging in the country, Sayeh said, "The authorities recognise these challenges and also the need to tackle climate change issues, which expose the economy to large risks that could threaten macroeconomic stability."

With the approval of a $1.4 billion loan under the Resilience and Sustainability Facility (RSF), Bangladesh became the first country in Asia to receive a loan from the fund created for low and middle-income countries that are at risk due to climate change.

IMF said, "The authorities [Bangladesh] recognise that in addition to tackling these immediate challenges, long-standing structural issues and vulnerabilities related to climate change will also need to be addressed to accelerate growth, attract private investment, enhance productivity, and build climate resilience."

"The concurrent RSF arrangement will supplement the resources made available under the ECF/EFF to expand the fiscal space to finance climate investment priorities identified in the authorities' plans, help catalyse additional financing, and build resilience against long-term climate risks," it added.

Earlier, the first country in the world to receive this IMF loan was Barbados, followed by Costa Rica and Rwanda, after the IMF executive board approved the fund on 13 April 2022 and it became effective on 1 May 2022. 

According to finance ministry officials, the Bangladesh government has pledged to reduce corruption in the country as a condition for the loan amid the forex crunch. The ministry has made the commitment in the Memorandum of Economic and Financial Policy signed with the Wasington-based lender.

On Monday, however, Bangladesh ranked as the 12th most corrupt country among the 180 countries scored in the Global Corruption Perception Index 2022 of Transparency International.

Declining one point from the previous year 2021 Bangladesh's score is 25 out of 100 this year, it meant corruption increased during the last year, disclosed Dr Iftekharruzzaman, executive director of Transparency International Bangladesh.

In addition to reducing corruption, there are about 30 conditions in the loan agreement, including dynamic adjustment of fuel prices, bringing down the default loan of state-owned banks to 10%, setting up asset management companies to recover defaulted loans, and leaving the exchange rate to the market, according to the officials.

However, the set of conditions does not incorporate lifting the interest rate cap on bank lending and deposits, they confirmed.

Finance ministry officials further said gas and electricity prices have already been hiked as part of IMF's conditions for reducing subsidies.

The agency stipulated that monetary policy announcements should be made four times a year, while Bangladesh has agreed to three announcements per year. And as part of that, the Bangladesh Bank announced a monetary policy in January this year.

The central bank has promised a market-based exchange rate in the new monetary policy as per the IMF terms. The size of the Export Development Fund (EDF) has also been decided to be reduced by $1 billion.

Apart from this, the IMF has set conditions for separating the allocation of interest on savings certificates and pensions of government employees from the social safety net allocation, which the Finance Division may implement in the next fiscal year.

Finance ministry officials said that the government had no obligation to fulfill any condition before the first installment.

An IMF team led by Rahul Anand visited Dhaka from 26 October to 9 November 2022, to thrash out the details of the programme.

After that the IMF's vice president, Antoinette Monsio Sayeh, visited Bangladesh from 14-18 January and praised the economic development and social progress she witnessed during her visit, saying it has left an impression on the whole world. Sayeh also congratulated Prime Minister Sheikh Hasina on that.