Bangladesh will have to go through a major reform for the disbursement of the 3rd and 4th tranche of the loan from the International Monetary Fund (IMF).
The third instalment of the loan is scheduled to be disbursed in June next year. Before that, the IMF will go through the second review of their loan programme.
Conditions imposed by the IMF for the third instalments of the loan include - reducing tax rebate, adjusting the price of fuel oil, adopting a strategy to make the subsidy logical and reducing the amount of default loan.
The review for the disbursement of the fourth instalment will be held next December. The government will have to take initiative for regularly publishing the list of vulnerable assets of the state owned banks, developing a plan to monitor the banking sector, fixing the structure of the policy interest rate and reducing financial risks of the state-owned agencies.
Bangladesh has received US $681 million as loan from the International Monetary Fund (IMF) in the second instalment as the global lender authorised the release of the money for the country after concluding it was making progress on programmes aimed at preserving macroeconomic stability.
The IMF’s executive body held a meeting in Washington on Tuesday and decided to release the money for Bangladesh. The money from the second instalment could be added to the central bank’s account today, Thursday.
In the revenue sector, the authorities need to reduce the longstanding concessions in income tax, VAT and tariff. A team, led by revenue board member Shams Uddin Ahmed, has already been working in this regard and the next budget is expected to reflect its outcome.
After approving the loan, the IMF imposed several conditions to be fulfilled under three separate programmes. To get that money from the IMF, several initiatives are to be taken for a major reform in 2024.
Economists say, 2024 is going to be the year of visible initiative to fulfil the IMF’s conditions for reform.
Speaking to Prothom Alo, private research organisation Policy Research Institute’s (PRI) Ahsan H Mansur said, “The IMF has imposed several conditions to implement some major reforms before the disbursement of the third and fourth instalments. It will be hard to get over the upcoming reviews without fulfilling these conditions. Such a big reform requires political goodwill. The reform is not possible without political goodwill.”
“A competent team and an active finance minister are required to overcome the crises,” he added.
Conditions to be fulfilled before June
According to the IMF sources, the authorities in Bangladesh have been asked to carry out major reforms in four key sectors – revenue, finance, energy, and social security.
In the revenue sector, the authorities need to reduce the longstanding concessions in income tax, VAT and tariff. A team, led by revenue board member Shams Uddin Ahmed, has already been working in this regard and the next budget is expected to reflect its outcome.
According to the National Board of Revenue (NBR), the tax concessions amounted to Tk 1258 billion in the financial year 2020-21, including corporate tax concessions of Tk 853 billion and Tk 400 billion at individual level.
Besides, the government has to collect an additional revenue of 0.5 per cent of GDP in the current fiscal year. The IMF asked the authorities to show its advancement before the approval of the third tranche of loan.
The NBR had a revenue collection target of Tk 4300 billion in the current budget, but the IMF revised the figure down to Tk 4000 billion.
However, the revenue authorities managed to collect Tk 1400 billion only in the first four months of the current fiscal.
The authorities have been asked to set up a risk management unit in the VAT and customs division before the next budget. The NBR has already set up two units, but is yet to go into operation in full swing.
There are two conditions for the subsidies. The government needs to formulate a price fixation strategy to adjust the fuel price with the fluctuations in the international market. Besides, it requires rationalizing the social safety net programmes to increase the number of true beneficiaries and widen its coverage.
By June, the government also needs to bring down the default loan ratio in the private and public banks, increase the capital supply, and ensure provisioning.
Bangladesh Bank sources said the IMF advised to keep the default loan below the threshold of 10 per cent. According to the latest reports, the overall default rate was around 9 per cent until September, but the rate rises to 25 per cent when it comes to the state-run banks in specific.
The IMF placed another condition to undertake a plan as per the international financial reporting standards (IFRS) to ensure transparency and accountability in the banking sector. The authorities have to prepare a set of directives for an eco-friendly banking as well as financial sector and a designated plan for overall management including loan repayment.
The conditions to be met before December
The overall progress on the implementation of the conditions regarding the banking and revenue sector will also be reviewed in December. At the same time, some major conditions regarding the banking sector need to be met.
part from that, a financial risk statement of the public banks should be published while declaring the budget for the upcoming fiscal. The IMF also has imposed a condition to bring the issues related to the policy interest rate within a frame.
For instance, there are obligations of raising the Bankruptcy (Amendment) Act and The Financial Debt Courts Act (Amendment) in the parliament.
Besides, the list of vulnerable assets held by the state-owned banks should be published regularly as per the Basel III standard. The Bangladesh Bank has started preparing the list of such assets.
There is another condition of finalising an implementation plan devised to increase the monitoring of the central bank.
Apart from that, a financial risk statement of the public banks should be published while declaring the budget for the upcoming fiscal. The IMF also has imposed a condition to bring the issues related to the policy interest rate within a frame.