IMF reaches agreement with Bangladesh to release $1.15bn third tranche of loan

It completes the second review of the $4.7 billion credit programme

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The International Monetary Fund has reached a staff-level agreement with Bangladesh on the policies for $1.15 billion in the third tranche of a $4.7 billion loan programme.

It completed the second review of the programme under the IMF’s Extended Credit Facility, Extended Fund Facility, and Resilience and Sustainability Facility, the global lender said in a statement on Wednesday.

The review is pending IMF Executive Board approval, which is expected in the coming weeks, said Chris Papageorgiou, who headed a mission to discuss economic and financial policies in the context of the second review in Dhaka.

At the end of the mission which started on Apr 24, Papageorgiou said Bangladesh made significant progress on structural reforms under the IMF-supported programme, including the implementation of a formula-based fuel price adjustment mechanism for petroleum products.

“Nonetheless, larger-than-expected spillovers from tightening of global financial conditions, and still elevated international commodity and food prices, coupled with domestic vulnerabilities, has led to persistently high inflation and declining foreign exchange reserves.

"This has exacerbated pressures on the economy and heightened the complexity of macroeconomic challenges.

“Against this backdrop, we welcome Bangladesh Bank’s bold actions to realign the exchange rate and simultaneously adopt a crawling peg regime with a band as a transitional step toward greater exchange rate flexibility to restore external resilience,” he said.

Following the liberalisation of retail interest rates, Papageorgiou said, additional tightening of monetary policy should help alleviate any inflationary pressures resulting from the exchange rate reform.

“Fiscal policy should support these monetary tightening efforts through revenue-based consolidation. If external and inflationary pressures intensify, the authorities should stand ready to tighten policies further.”

The IMF economist said the macroeconomic outlook is expected to gradually stabilise as policy actions start to take hold.

Real GDP growth is projected to moderate to 5.4 percent in FY24 owing to the ongoing import compression and policy tightening. However, it is anticipated to rebound to 6.6 percent in FY25 as imports rebound and foreign exchange pressures ease.

Inflation is projected to remain elevated at approximately 9.4 percent year-on-year in FY24 but is anticipated to decline to around 7.2 percent in FY25, on the back of the continued tighter policy mix and projected lower global food and commodity prices.

“Nevertheless, uncertainties surrounding the outlook remain high, with risks predominantly leaning towards the downside,” Papageorgiou remarked.

He said it is imperative to prioritise sustainable revenue generation to bolster investments in social welfare and development initiatives, considering Bangladesh’s low tax-to-GDP ratio.

“To this end, tangible tax policy and administrative measures should be incorporated into the FY25 budget to augment tax revenues by 0.5 percent of GDP. At the same time, a medium- and long-term revenue strategy, with an accompanying implementation framework, should guide future reforms.

“Reducing subsidies, improving expenditure efficiency, and managing fiscal risks will allow for additional spending on social safety nets and growth-enhancing investment.”

He also said reducing banking sector vulnerabilities remains a priority.

“Efforts to implement the non-performing loan reduction strategy should help support the growing financing needs of the economy.

“At the same time, Bangladesh Bank should continue the transition to risk-based supervision to enhance financial sector resilience, while continuing legal reforms to improve corporate governance and regulatory frameworks.”