IMF relaxes conditions, loan installment to be released

A participant stands near a logo of IMF at the International Monetary Fund - World Bank Annual Meeting 2018 in Nusa Dua, Bali, Indonesia, 12 October 2018.
Reuters file photo

The International Monetary Fund (IMF) has relaxed the conditions on its loan to Bangladesh to an extent. As a result, the second installment of USD 681 million (USD 68 crore 10 lakh) will now be available. IMF has said Bangladesh's foreign exchange reserves are low but it is hoped that this will steadily increase within a short time. In the mid-term, this reserve will be equivalent to four month's import costs. However, IMF feels that Bangladesh is faced with a high degree of uncertainty and risks ahead.

IMF made these observations in a press statement released on Thursday. It said that in order to achieve macro-economic stability, Bangladesh must increase its revenue earnings and ensure efficiency in its spending. It must also pay more attention to address the pressure of high inflation on the public.

It is also important for Bangladesh to tackle the weaknesses in its banking sector in order to meet the growing demands for funding. The efficiency of the finance sector will increase if default loans in the state-owned commercial banks are reduced, if supervision of the entire banking sector is increased and good governance is ensured. Improvement of the share market is also required to achieve the growth target.

The IMF team led by the institution's Asia-Pacific department chief Rahul Anand, spent 15 days from 4 to 19 October in meeting with various offices of the government. Yesterday, Thursday, they met with Finance Minister AHM Mustafa Kamal, Bangladesh Bank governor Abdur Rauf Talukdar and finance secretary Khairuzzaman Majumdar.

Three days after approving the loan proposal for Bangladesh on 30 January, IMF provided USD 476 million (USD 47 crore 62 lakh 70 thousand) as the first installment of the USD 4.7 billion loan package. This recent visit by the IMF team was to evaluate the first installment before releasing the second.

IMF had given certain time-bound targets to Bangladesh. However, Bangladesh hadn't been able to reach the targets pertaining to reserves, revenue, etc, before the second installment. But the concerned offices managed to convince the visiting IMF team to relax these targets given the realities prevailing in the country. They explained it would be difficult to meet the conditions before the national elections to be held in January. The government will be attentive to these issues after the election, they said. The IMF team apparently understood the situation and indicated that the conditions on these three issues would be relaxed, according to finance division sources.

Sources say that the news target for net reserves will be USD 18 billion (USD 1800 crore) by December and USD 20 billion (USD 2000 crore) by June next year. As part of the loan conditions, IMF had fixed the reserve target at USD 26.81 billion (USD 2,681 crore) till June next year. That means the target till June may be brought down by over USD 6 billion (USD 600 crore).

Meanwhile Bangladesh hopes to receive technical assistance from IMF regarding meeting the revenue target of the National Board of Revenue, reducing the budget deficit and introducing a uniform exchange rate.

In its statement, IMF said that Bangladesh must modernise its monetary policy and currency exchange rate system. IMF lauded the initiative for interest rate corridor system and uniform exchange rate, saying that Bangladesh Bank should leave the interest rate and exchange rate completely to the market.

Advising on a short-term step to control inflation, the IMF warned that the various causes that were affecting the economy should not have an impact on the unprotected public. They welcomed Bangladesh Bank's step to increase interest rates by .75 percentage points from 4 October.

Head of the IMF delegation Rahul Anand, in the statement, said that Bangladesh and the IMF team reviewed Article 4 of 2023 and reached a consensus on taking up policies to complete the first review under the Extended Credit Facility (ECF) and the Resilience and Sustainability Facility (RSF). Accordingly, in the second installment under ECF and RSF, a total of USD 681 million (USD 68 crore 10 lakh) will be available.

Uncertainties and risks

IMF feels Bangladesh will be able to achieve 6 per cent growth in the 2023-24 fiscal. And by the end of the financial year, inflation may fall to 7.25 per cent. While IMF hopes reserves will also increase in this span of time, it also said there was a high degree of uncertainty and risks. It did not elaborate on this.

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Rahul Anand, in the statement, said that it was important to increase revenue collection in order to increase expenditure in the social sector and also for investment. The tax-GDP ratio was very low in Bangladesh and this called for an integrated tax policy and administrative system for sustainable increase in revenue collection. However, if subsidies could be justified, expenditure capacity increased and if financial crisis could be tackled, it would be possible to increase investment in the social security sector and growth.

Former IMF official and executive director of Policy Research Institute (PRI) Ahsan H Mansur told Prothom Alo, it is true that the government will have to spend before the election, but it must ensure that reserves do not fall below USD 15 billion (USD 1500 crore) otherwise Bangladesh will fall into high risk and a crisis in confidence will arise.

When asked about the new target for up till June and also the consequences of not being able to meet the target, Ahsan H Mansur said this would certainly head towards IMF cancelling it loan package. But the fact that it was possible to convince IMF is a positive factor and the institution has displayed significant sensitivity. So there are no conditions or problems till December. But the government must be alert to ensure that the target for June is not missed in any way.

Second tranche on the way: BB

Meanwhile, at a press briefing yesterday, Thursday, Bangladesh Bank said Bangladesh has reached an understanding with IMF about the release of the second tranche of the loan. This will be approved at the IMF board meeting to be held in December.

Speaking at the press briefing, the Bangladesh Bank spokesman Mezbaul Huq said quite a few of the conditions put forward by IMF have been met. However, the conditions concerning reserves and revenue have not been fulfilled. IMF was apprised of the local and global reasons behind this. After that an understanding was reached about the release of the second tranche of the loan.       

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