IMF’s resilience and sustainability facility: An opportunity for green cities

AFP file photo

The loan granted by the International Monetary Fund (IMF) to Bangladesh is intended to act as a vehicle for investment in Bangladesh's green future, paving the road to sustainable growth and green cities. The funds provide the government with a significant opportunity to make reforms that align Bangladesh’s sustainability priorities with the need to raise revenue and facilitate green finance.

To ensure greener, more liveable and productive cities are a key outcome of this intervention, CPD recommends taking this opportunity to promote green investments to meet IMF targets which are specifically aimed at combatting air and plastic pollution. CPD’s research has shown that the economic, social, and environmental costs of air and plastic pollution in Bangladesh’s cities are high and rising and present a serious threat to the growth of the green economy. Therefore, mechanisms to tackle these challenges should be built into the IMF reform measures.

In early 2023, the IMF approved Bangladesh’s request for a USD 4.7 billion loan with the goal of preserving its macroeconomic stability, protecting the vulnerable and fostering inclusive green growth. The fund was approved as part of the agreement under the Extended Fund Facility (EFF), the Extended Credit Facility (ECF), and most importantly for developing greener cities, the Resilience and Sustainability Facility (RSF), which will be pivotal to combat climate change challenges and strengthen private climate investments. Bangladesh’s priorities are making infrastructure investments green and resilient, strengthening climate fiscal management, and mobilising private climate finance while enhancing financial sector resilience. Based on these priorities, the RSF proposes 11 reform measures or steps required to increase climate resilience and reinforce infrastructure to mitigate climate risks.

The measures suggested by IMF under the RSF are designed to support economies facing climate change challenges. The RSF programme can be adjusted to include policy measures which advocate for less air and plastic pollution in urban areas of Bangladesh.

To address the first priority area identified by Bangladesh, making infrastructure investments green and resilient, CPD recommends considering the sources of air pollution in the analysis of costs and benefits for public infrastructure projects and incorporating them into the Green Book,. The Green Book essentially refers to the standards or protocols necessary for the ratification and amendment of public sector development projects.  Additionally, the appraisal of major infrastructure projects should include an analysis of the costs of air and plastic pollution before making green and resilient infrastructure investments.

Furthermore, the government should revise the public-private partnership policy framework to include guidelines requiring the use of sustainable and eco-friendly materials during project implementation wherever possible, in lieu of single-use plastic products. The policy framework should also involve provisions for extended producer responsibility, which is an environmental policy tool that ensures the recycling of the products from the producers’ end. It should also necessitate the inclusion of plastic recycling plants and proper channels for waste segregation involving plastic waste management, and effective collection of all plastic waste generated during a project to increase the pace of recycling. This may act as a criterion for project selection for climate resilience policy programmes initiated by the government, as mentioned in IMF’s reform measures. Additionally, the new module utilised for registering public assets should be easily accessible by all and must be updated regularly.

 According to the second priority outlined by the government, it is essential to strengthen the climate fiscal management to meet social and development objectives. This includes management of public finance, investment, and debt to achieve spending efficiency, good governance, and transparency. The reform measures recommended by IMF in correspondence with this priority area consist of adopting a public procurement policy paper, in which CPD suggests including issues related to air and plastic pollution. In the policy paper, CPD recommends that Bangladesh should update the fossil fuel price monthly in line with international prices and phase out subsidies on fossil fuels to address IMF’s recommendation on developing a periodic formula-based price adjustment mechanism for petroleum products. Additionally, the government must maintain an emission database for the air pollutants and include it in the Medium-Term Macroeconomic Policy Statement.

The last priority for Bangladesh is mobilising private climate finance and enhancing financial sector resilience. An efficient Task Force on Climate-Related Financial Disclosures (TCFD) should be built comprising of policymakers, independent experts, academics, representatives of NGOs and CSOs, and representatives of the private sector with a view to utilising their insights and building a framework. Moreover, Bangladesh Bank should conduct and publish climate stress testing regularly for the overall financial system. The policy on Green Bond financing including the annex on green taxonomy, needs to be revised by Bangladesh Bank so that it is aligned with the investment areas which have been given precedence by the government’s policy programmes. Promoting sustainable finance for environment-friendly products is essential to replace plastic. Bangladesh Bank can facilitate the development of advanced technologies by providing sustainable finance for better waste management infrastructure and efficient brick production technology to reduce plastic and air pollution. 

Apart from the RSF, the IMF has also suggested that Bangladesh needs to adopt new sources of revenue collection which should yield an additional 0.5 per cent of GDP in the FY2024 budget, under the EFF/ECF arrangements. Thus, to better align revenue collection targets with climate goals and alleviate air and plastic pollution, the government needs to reinstate a 5 per cent supplementary duty on polythene bags and a new levy on single-use plastics which may include cutlery, plates, straws, food containers made of expanded polystyrene and other plastic products in FY2024. The government should also impose a 3 per cent carbon tax on fossil fuels from FY2024, which could be gradually increased to 5 per cent and 15 per cent by 2025 and 2041 respectively to meet the government’s target, as set out in the Eighth Five Year Plan. Furthermore, to reduce air pollution from vehicle emissions, the advance income tax (AIT) on fossil fuel-powered vehicles should be increased by 5 per cent to 50 per cent depending on engine size, in comparison to that imposed on hybrid and fully electric vehicles. To further drive the adoption of cleaner modes of transportation, the government should also introduce an additional AIT on motorcycles, starting from FY2024.

Air and plastic pollution are a price citizens have paid, for the rising urban development of Dhaka city. However, the extreme levels of pollution have become a slow poison, permeating the natural environment, the human body and finally, feeding back into the economy itself by inhibiting the productivity of the city. The IMF’s support to Bangladesh under the EFF, ECF, and RSF arrangements present a real opportunity to not only strengthen Bangladesh’s existing policies but also take the strategic steps required for the country to transition into a greener and cleaner economy.

*Fahmida Khatun is the Executive Director of the Centre for Policy Dialogue (CPD).

*Afrin Mahbub is a Programme Associate (Research) at CPD.

*Marium Binte Islam is a Research Associate at CPD.

*Views expressed are those of the authors only and do not represent that of Prothom Alo or CPD.