The International Monetary Fund (IMF) and the Bangladesh authorities have reached a staff-level agreement on the policies needed to complete the first review of the fund-supported programme.
In a press release issued Thursday, the agency welcomed the progress of reform implementation and the authorities’ continued commitment to undertake decisive policy actions, amid a challenging environment.
Further monetary tightening, supported by neutral fiscal policy, and greater exchange rate flexibility, is needed to restore near-term macroeconomic stability, it read.
The IMF programme will continue to support the authorities’ efforts to preserve macroeconomic stability and protect the vulnerable while accelerating economic reforms and delivering on the climate agenda, the release added.
The agency emphasised the importance of Article IV policy consultation focused on reforms to create additional fiscal space for social and developmental spending, modernisation of policy frameworks, enhanced governance, and stronger climate resilience.
An IMF team led by Rahul Anand visited Dhaka between October 4 and October 19 to discuss economic and financial policies in the context of the first review of the IMF’s Extended Credit Facility (ECF), Extended Fund Facility (EFF), Resilience and Sustainability Facility (RSF) and the 2023 Article IV consultation.
At the end of the mission, Anand issued a statement saying, “The Bangladesh authorities and IMF staff conducted discussions for the 2023 Article IV consultation and reached staff-level agreement on the policies needed to complete the first review under the ECF/EFF/RSF arrangements.
“The staff-level agreement is subject to IMF Management approval and Executive Board endorsement, which is expected in the coming weeks.”
Completion of the first review will make available about $462 million (SDR352.35 million equivalent to 33 per cent of quota) under the ECF/EFF and about $219 million (SDR166.67 million equivalent to 15.8 per cent of quota) under the RSF.
Anand added, “The authorities have made substantial progress on structural reforms under the IMF-supported program, but challenges remain. Continued global financial tightening, coupled with existing vulnerabilities, is making macroeconomic management challenging, putting pressure on the Tk and FX reserves.
“Near-term policy priorities should focus on containing inflation, softening the impact of these economic disruptions on the vulnerable, and building external resilience.”
He then pointed out, “We welcome Bangladesh Bank’s decision to raise the policy rate by 75 basis points (bps) on October 4 this year. Further calibrated monetary policy tightening, greater exchange rate flexibility, and tight fiscal policy will help restore macroeconomic stability.
“Growth is projected to stay at 6 per cent in FY24, while inflation is projected to moderate to 7¼ per cent by end-FY24. FX reserves are expected to increase gradually in the near term and are projected to reach about four months of prospective imports in the medium term. However, uncertainties around the outlook remain high and risks are tilted to the downside.”
Adding that raising revenue is critical to create additional space for social spending and investment, Anand pointed out that concerted tax policy and administration measures are needed to raise Bangladesh’s low tax-to-GDP ratio in a sustainable manner.
Rationalising subsidies, improving expenditure efficiency, and managing fiscal risks will allow for additional spending on social safety nets and growth-enhancing investment.
Modernising monetary and exchange rate policy frameworks and improving FX management remain important to bolster external resilience. The introduction of the interest rate corridor system and the adoption of a unified single exchange rate are welcome steps.
Building on these, the Bangladesh Bank should continue to fully operationalize the interest rate targeting framework and gradually move to a flexible exchange rate regime, the statement read.
Addressing banking sector vulnerabilities remains important to meet Bangladesh’s growing financing needs.
Reducing non-performing loans of state-owned commercial banks, enhancing supervision, strengthening governance, and improving regulatory frameworks would increase financial sector efficiency.
Developing domestic capital markets will help mobilise financing to support growth objectives.
Discussions also focused on the structural reform agenda to support the authorities’ ambition to reach an upper middle-income status by 2031. Expanding trade, attracting more FDI, enhancing the investment climate, and raising women’s economic participation are crucial to boost growth potential.
Given Bangladesh’s high vulnerability to climate change, it is important to scale up resilient infrastructure investment, through climate-responsive public investment management and green public financial management reforms.
Better management of climate-related risks will help enhance financial sector resilience and mobilize private climate finance.
The statement concluded by mentioning that the IMF team is grateful to the Bangladesh authorities and other stakeholders for their hospitality and candid discussions.
The team held meetings with Finance Minister AHM Mustafa Kamal, Bangladesh Bank Governor Abdur Rouf Talukder, and other senior government and Bangladesh Bank officials.
It also met with representatives from the private sector, think tanks, bilateral donors, and development partners.
