The Executive Board of the International Monetary Fund has approved $4.7 billion in loans for Bangladesh at the request of the government, helping the country build a buffer against depleting forex reserves.
Bangladesh secured about $3.3 billion under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) arrangements. This approval enables the immediate disbursement of about $476 million, the IMF said in an emailed statement on Tuesday.
The IMF Executive Board also approved about $1.4 billion under the newly created Resilience and Sustainability Facility (RSF). Bangladesh is the first Asian country to access the RSF.
Bangladesh’s robust economic recovery from the pandemic has been interrupted by Russia’s war in Ukraine, leading to a sharp widening of Bangladesh’s current account deficit, depreciation of the taka and a decline in foreign exchange reserves, the IMF said.
“The authorities have taken on a comprehensive set of measures to deal with these latest economic disruptions. The authorities recognise that in addition to tackling these immediate challenges, long-standing structural issues and vulnerabilities related to climate change will also need to be addressed to accelerate growth, attract private investment, enhance productivity, and build climate resilience,” the Washington-based lender said.
The IMF-supported programme under the ECF/EFF arrangements will help preserve macroeconomic stability and prevent disruptive adjustments to protect the vulnerable, while laying the foundations for strong, inclusive, and environmentally sustainable growth.
The concurrent RSF arrangement will supplement the resources made available under the ECF/EFF to expand the fiscal space to finance climate investment priorities, help catalyse additional financing, and build resilience against long-term climate risks.
“Since independence, Bangladesh has made steady progress in reducing poverty and significant improvements in living standards. However, the COVID-19 pandemic and subsequent Russia’s war in Ukraine interrupted this long period of robust economic performance,” Antoinette M Sayeh, IMF’s deputy managing director, and acting chair, said at the conclusion of the Executive Board’s discussion. “Multiple shocks have made macroeconomic management challenging in Bangladesh.”
While confronting challenges resulting from global headwinds, the authorities need to accelerate their ambitious reform agenda to achieve more resilient, inclusive, and sustainable growth, Sayeh said.
“In this regard, substantial investment in human capital and infrastructure will be needed to achieve Bangladesh’s aspiration to reach upper-middle income status by 2031 and meet the Sustainable Development Goals. The authorities recognise these challenges and also the need to tackle climate change issues, which expose the economy to large risks that could threaten macroeconomic stability.”
Bangladesh is the first to secure such funds out of three South Asian countries that applied last year amid economic troubles.
The country last year also sought $2 billion from the World Bank and the Asian Development Bank amid efforts to bolster its foreign exchange reserves, Reuters report. Bangladesh's regional counterparts, Sri Lanka and Pakistan, are doing much worse economically but have not been able to get final approval for IMF loans.
Bangladesh's current account deficit hit a record $18.7 billion in the last financial year, which ended on Jun 30, as exports of garments failed to offset a surge in energy costs. The Bangladesh central bank expects the deficit to fall to about $6.8 billion at the end of the current fiscal year.
The government has also raised fuel and energy prices in recent months as it approached the IMF. It announced a 5 percent increase in retail power prices from Wednesday, the second such rise this month.
The ECF/EFF arrangement will protect macroeconomic stability and rebuild buffers, while helping to advance the authorities’ reform agenda.
The implementation of the domestic revenue mobilisation strategy that relies on both tax policy and revenue administration reforms will allow for increasing social, development and climate spending sustainably.
Fiscal reforms to strengthen the management of public finance, investment, and debt will improve spending efficiency, governance, and transparency.
Reducing financial sector vulnerabilities, strengthening oversight, enhancing governance and the regulatory framework, and developing capital markets will help mobilize financing to support growth objectives.
Structural reforms to create conducive environment to expand trade and foreign direct investment, deepening the financial sector, developing human capital, and improving governance to enhance the business climate are needed to lift growth potential.
Access to RSF will provide financing to support Bangladesh’s climate change adaptation and mitigation efforts. The RSF reforms will complement reforms under the ECF/EFF by improving climate investment potential, strengthening institutions and enhancing climate-spending efficiency to build resilience and catalyze additional official and private finance.
'ECONOMIC BASE IS STRONG'
Earlier, Bangladesh Finance Minister AHM Mustafa Kamal announced the development in a statement on Monday night, thanking the global lender, especially Sayeh and staff mission head Rahul Anand who visited Bangladesh to discuss the loans.
Kamal also expressed gratitude to Bangladesh Bank Governor Abdur Rouf Talukder, Finance Secretary Fatima Yasmin and other officials who worked on the loan programme.
The finance minister said the global monetary agency’s decision came as an answer to critics who doubted the strength of Bangladesh’s economy.
“The approval of the loans proves that our macroeconomic base is strong and better than many other countries.”
Bangladesh reached a staff-level agreement with the IMF in November last year for the loans that officials expect will help the country stabilise its economy and prevent a crisis.
The funds will come at an interest of 2.2 percent, Kamal had said at that time.
The IMF loans are expected to create a reserve buffer for Bangladesh with no sign of the global economy improving anytime soon amid the Russia-Ukraine war.
The shrinking reserves also triggered fears that an ongoing energy crisis would worsen, which affected daily life and factory production with a gas supply crunch and rolling power outages.
After meetings with Bangladesh officials during her visit earlier in January, Sayeh said they focused on the key elements of the funding programme, including the long-standing challenges of raising tax revenues, and building a more efficient financial sector.
“Reforms in these areas, combined with measures to facilitate private investments and export diversification will help create conditions to make Bangladesh’s economy more resilient and support long-term, inclusive and sustainable growth.”
They also discussed Bangladesh’s plans to address the longer-term challenges related to climate change that could threaten macroeconomic stability. “The IMF’s RSF aims to provide affordable, long-term financing to support Bangladesh’s climate investment needs, catalyze climate financing, and reduce the balance of payment pressures from import-intensive climate investment,” Sayeh said.