IMF sees financial sector reforms, subsidy cuts crucial for Bangladesh

The global lender has set framework for reforms, including energy subsidy cuts, as it releases first instalment of loans

Published : 2 Feb 2023, 08:14 PM
Updated : 2 Feb 2023, 08:14 PM

The International Monetary Fund has emphasised financial sector reforms, strengthening policy and institutions and energy subsidy cuts to preserve macroeconomic stability in a country report on $4.7 billion loans it has approved for Bangladesh.

The key objectives of the loan programme include enhancing revenue mobilisation, reducing the issuance of national savings certificates, reining in subsidies, and increasing spending efficiency with fiscal institutional reforms, the global lender said on Thursday.

The IMF believes achieving these objectives will help Bangladesh boost its tax-to-GDP ratio, which is one of the lowest in the world, thus constraining critical spending.

“Extensive exemptions, complicated tax codes, and weaknesses in revenue administration have resulted in low tax productivity across all major taxes. Meanwhile, reliance on national saving certificates or NSCs has resulted in high government borrowing costs.”

The programme envisages tax revenue mobilisation efforts of additional 0.5 percent of

GDP annually in FY24 and FY25 and 0.7 percent of GDP in FY26, contributing to higher social spending and public investment

As a result, the overall fiscal deficit is expected to improve from 5.6 percent of GDP in FY23 to 5 percent of GDP by programme-end, underpinned by a primary deficit of around 3.3 percent.

The IMF said the programme includes a series of carefully sequenced reforms, which comprise both tax policy and revenue administration measures and will be anchored in a medium-term revenue strategy.

It said monetary and exchange rate policies should focus on containing inflation and stemming reserve losses. Pass through from recent taka depreciation and increase in fuel prices have added to inflationary pressures.

The monetary policy stance will be guided by the inflation outlook and will be anchored by an income tax ceiling on the level of reserve money under the programme, as a main operating target of Bangladesh Bank.

The IMF said continued progress toward modernising monetary policy framework and operations is vital. The current eclectic monetary policy regime may not be effective in meeting the challenges of a more diversified and open economy after Bangladesh’s graduation into a developing nation.

Further strengthening the exchange rate and foreign exchange reserve management framework would help build external resilience, the report said. “The authorities are committed to unifying the multiple exchange rates that resulted from disorderly FX market conditions and will continue to allow the interbank transactions at market-determined rates. BB will also use the market- determined exchange rate for all official FX transactions on behalf of the government and will reverse the temporary increases in margins for opening letters of credit on non- essential imports.”

A holistic and time-bound non-performing loan resolution strategy would help address bank balance sheet weaknesses while further strengthening monitoring and supervision of the banking sector is needed to enhance financial sector resilience.


The IMF has welcomed Bangladesh’s efforts to cut subsidies for the energy sector by raising the prices of fuel oil, gas and power, hinting at more price rises.

In the country report on the government’s request for loans, the IMF said the authorities will further explore options to gradually reduce energy subsidies.

The report said control measures could prolong the ongoing hardships and will likely hurt both near-term growth and medium-term economic potential, but the rationalisation of energy subsidies will free fiscal resources for social and development spending.

While recent price hikes have brought petroleum prices broadly in line with international prices, gas and electricity subsidies are expected to rise to 0.9 percent of GDP in FY23 from 0.5 percent a year earlier, the IMF said, welcoming the recent power price hike to cut the subsidies.

“The authorities will further explore options to gradually reduce gas and electricity subsidies, while strengthening social safety nets.”

The IMF Executive Board approved the loans for Bangladesh at the request of the government on Monday, helping the country build a buffer against depleting foreign currency reserves. The global lender on Thursday released $476 million in the first instalment of the $4.7 billion loans it approved for Bangladesh.

Over the loan programme period, the introduction of a periodic formula-based fuel price adjustment mechanism will help ensure no structural subsidies for petroleum products, the IMF said.

It said the programme will leverage the ongoing efforts to strengthen and expand social protection by other development partners. The government’s efforts to enhance social safety nets and increase development spending will be anchored by ITs on social and development capital spending under the programme.

Following the IMF’s approval of the loans, the government decided to resume buying liquefied natural gas from the open market after an eight-month pause due to high prices and low dollar reserves.

The halt on LNG purchases amid the global crisis triggered by the Russia-Ukraine war forced the government to cut electricity production rapidly and ration supply by introducing rolling power outages.

As the lack of gas and power hit production, industries urged the government to resume LNG import even if it had to raise gas prices.

The government in January raised gas prices by a maximum of 178 percent for industries and power plants for resuming LNG import. The government will start charging for gas at the new rates once new LNG is supplied to the industries and power plants.

The government has also raised the prices of power at both the wholesale and retail levels for February. Retail prices have gone up 5 percent for the second time in a month, while wholesale prices are seeing an increase of 8.06 percent.

The electricity price hike came after parliament passed a new law which provides discretionary powers to the government from the regulator to change electricity and energy prices whenever necessary.

State Minister for Power, Energy and Mineral Resources Nasrul Hamid said: “If we want to cut back on subsidies, we must increase prices. We will adjust the prices of gas and electricity every month if necessary to keep in step with the international market. In that case, if the price decreases in the international market, it will also drop here.”


Despite several “serious” macroeconomic challenges, Bangladesh remains at a low risk of external and overall debt distress, the IMF report said.

The country faces increased external borrowing in the near term, but favourable debt dynamics in the medium term keep the public and publicly guaranteed external debt-to-GDP ratio on a declining path, and the overall public debt- to-GDP ratio is expected to stabilise at around 42 percent of GDP, according to the report.

“All external debt and debt service indicators remain below relevant thresholds under the baseline, but the space to absorb shocks is limited as the present value of the debt-to-exports ratio would temporarily breach its respective threshold in an extreme scenario.”

The IMF is of the view that the main risk to the programme is limited scope to relax fiscal or monetary policy in the event of additional adverse real shocks, given narrowing fiscal space, high inflation, and reserve losses.

The report noted that due to the effects of the Russia-Ukraine war, Bangladesh’s headline inflation rose to a decade high of 9.5 percent year on year in August 2022; the current account deficit sharply widened to 4.1 percent of GDP in FY22 from 1.1 percent of GDP in FY21; and the taka depreciated by 23 percent year-to-date.

It said gross foreign currency reserves declined to $25.7 billion, as of end-November 2022, from their peak of $40.7 billion in August 2021, although the government’s count shows the reserves around $32 billion.   

“Despite these abrupt changes, the overall external position remained broadly in line with the level implied by fundamentals and desirable policies in FY22,” the IMF said.

It said considerable uncertainties surround the outlook and risks are tilted to the downside. Main external risks include intensifying spillovers from Russia’s war in Ukraine, further commodity price shocks, larger-than-expected slowdown in Bangladesh’s major trading partners, and local COVID-19 outbreaks.

Domestically, elevated non-performing loans could dampen growth prospects, while slow progress on the Rohingya crisis could lead to donor fatigue. The risk of natural disasters is a continuous threat. On the upside, swift implementation of priority reforms could improve growth potential and strengthen climate resilience.


The IMF said global headwinds are expected to weigh on the near-term outlook and inflation is set to remain elevated.

In FY23, real GDP growth is projected to slow to 5.5 percent due to demand management measures, the report said.

Average headline inflation in FY23 is expected to increase to 8.9 percent, driven by rising domestic food and fuel prices and the pass-through of large taka depreciation.

“High inflation, while adding to economic uncertainty, will reduce consumer spending.”

Meanwhile, export growth is forecast to slow, albeit from a high base in FY22, in line with slowing demand from Europe and the United States which together account for nearly 80 percent of total external demand.

Fiscal and external imbalances are likely to persist with emerging financing gaps. The overall fiscal deficit is expected to widen to 5.6 percent of GDP in FY23 due to lower tax revenues and elevated expenditures, including subsidies.

Given strict import controls, the current account deficit is expected to improve to 3.2 percent of GDP in FY23.

Considering Bangladesh’s large financing needs for pursuing development goals and concurrent necessity of maintaining adequate foreign exchange reserves, a financing gap of about $9.1 billion is expected to emerge over FY23 and FY26.