Will IMF loan act as a cushion?

In a welcome development Bangladesh has reached a staff-level agreement with the International Monetary Fund for a US$4.5 billion loan, a key step that would allow the nation to buffer its economy amid dwindling foreign exchange reserves.

The IMF and Bangladesh agreed on US$3.2 billion under the extended credit facility and US$1.3 billion under the Resilience and Sustainability Facility, the multilateral creditor said in a statement.

The 42-month programme is meant to cushion the South Asian nation from economic disruptions. It will be subject to approval by the IMF’s management and board in the coming weeks. Bangladesh, with its US$416 billion economy and a robust garments sector that supplies to global chains like H&M Hennes & Mauritz AB and Gap Inc, has sought support from creditors to fortify its finances after elevated energy prices caused power outages and strained FX reserves.

The loan is subject to approval by IMF management and consideration by the Executive Board, which is expected in December 12, 2022.

The nation’s dollar stockpile had slipped to US$35.75 billion as of Nov 2 - just enough to cover about four months of imports - from US$46.49 billion a year earlier.

We have said in previous columns that it will be too early to use term ‘crisis”. The IMF itself stated earlier that Bangladesh is not in a crisis. It is in a vastly different situation from some of the neighbouring countries. Even though the reserves have come down, they are still high enough to cover 4-5 months of prospective imports. The widening current account deficit has put pressure on the currency and the taka has depreciated. The external debt is relatively low and mostly concessional in nature”.

The global conditions are very uncertain and Bangladesh is an import-dependent economy. Commodity prices are expected to remain elevated and volatile, which will have an impact on imports. Given the uncertainty surrounding global developments, the pressure on the balance of payment is likely to continue. That is why this is an opportune moment that the Bangladesh government has preemptively asked for the IMF's support.

Bangladesh sought IMF support as a preemptive measure to cushion the impact of war in Ukraine, bolster its external position and be prepared to deal with any further deterioration in external conditions. Incidentally Bangladesh has also sought assistance from the World Bank and the Asian Development Bank. The government made a move about a year ago to take out loans from the foreign exchange reserve to finance development projects. A window named the Bangladesh Infrastructure Development Fund was created to facilitate lending from the reserve to implement development projects.

 Usually, IMF conditions range from, as evident from the recent talks, reforms and an improved governance of the financial sector, reduction in non-performing loans, the modernisation and overhaul of revenue administration, the expansion of the tax net and an increase in the tax-to-GDP ratio, the implementation of the VAT law, reduction in public subsidies, bringing down interest rates on savings certificates and the withdrawal of interest rate caps.

Most of such reforms and measures have for long been requested by local economists and policy analysts and they should have been implemented by the government on its own. There is no question that the government needs to discipline the financial sector, bring down non-performing loans, increase the tax-to-GDP ratio, modernise the tax laws with an emphasis on direct taxes to reduce inequality and stop money laundering. As for public subsidy, it is unwise and unjustifiable for any government to reduce them at a time like this when rising inflation has substantially weakened people’s purchasing power.

Hopefully the IMF package will help Bangladesh tide over the current macroeconomic volatility and will further the authorities' hold to build an inclusive, resilient and green economy. The programme will also help Bangladesh prepare for successful graduation from the least-developed country bracket in 2026.