Bangladesh Bank's measures failed to control inflation: IMF

The International Monetary Fund (IMF) has said the Bangladesh Bank's monetary policy has failed to control inflation, pointing to the central bank's failure to fix the exchange rate based on the actual market situation and to set a sufficiently high lending rate to reduce money supply.

To review the terms and conditions of the $4.7 billion loan given to Bangladesh, a delegation of the IMF held a meeting with the central bank officials on Wednesday (4 October).

An executive director of the central bank, who was present in the meeting, told The Business Standard that the IMF delegation, headed by the IMF mission chief in Bangladesh Rahul Anand, showed which of the measures taken by the central bank have been effective and which have been ineffective.

"IMF officials said the dollar and lending rates were not raised by the amount they were supposed to, which in turn failed to control inflation," he said.

According to the central bank's policy, the lending rate is determined based on the six-month moving average rate of treasury bills (SMART) plus an additional 3%. Currently, the SMART rate is 7.20%. So, the maximum lending rate charged by banks is 10.20%.

Higher interest on consumer loans reduces the money supply to the market and the costly dollar slows down reserves' erosion.

Mezbaul Haque, executive director and spokesperson of the Bangladesh Bank, said, "The IMF gave us some conditions while approving the loan. Some of these conditions have been fulfilled. There are two failures – maintaining the foreign exchange reserve and increasing revenue collection.

"As per the IMF conditions, banks have published quarterly statistics reports on their stressed assets, reserve calculation was done as per BPM-6. Besides, market-based exchange rates and new rules for lending rates have been introduced."

Mezbaul Haque said Bangladesh Bank officials explained to the IMF why some conditions could not be met.

"The first meeting was held today and a series of meetings will be held with the IMF team till 18 October. We will discuss all the issues gradually," he said.

One of the IMF's conditions was to maintain net reserves of $24.46 billion in June, $25.30 billion in September and $26.80 billion in December.

The Bangladesh Bank publishes data on total gross reserves and BPM6 reserves, but does not disclose the net reserves data.

According to officials, the Bangladesh Bank regularly informs the IMF about the net reserves, which now stand below $20 billion.

According to the central bank, Bangladesh's gross foreign exchange reserves stood at $21.15 billion on 26 September.

The IMF in January this year approved a $4.7 billion loan for Bangladesh: $3.3 billion under the Extended Credit Facility and Extended Fund Facility arrangements, and $1.4 billion under the new Resilience and Sustainability Facility.

The global lender disbursed the first tranche of $476 million to Bangladesh in February and the team will now review the terms fulfilled before releasing the second tranche in December.

Another meeting will be held on Thursday where the central bank will present climate-related green finance initiatives, implementation of sustainable finance and green bond policies, concerns about capital flight, financial account reversals in FY23, errors and omissions totalling $3 billion, trade credit, cross-border private loans, and the appropriateness of monetary policy/stance for the balance of payments to the IMF team.

During their stay till 18 October, the IMF officials will sit with the Bangladesh Bank seven times.

The Bangladesh Bank plans to update the IMF on key areas – foreign exchange intervention and import restrictions, delays in export proceeds, concerns about capital flight, recent performance and outlook of the financial sector as well as an overview of risks and new regulations.