Bangladesh, IMF reach staff-level agreement for second review of loan programmes

The International Monetary Fund (IMF) staff and
the Bangladesh authorities have reached a staff-level agreement on the
policies needed to complete the second review of the programmes being
supported by the IMF’s Extended Credit Facility (ECF), Extended Fund Facility
(EFF), and Resilience and Sustainability Facility (RSF).

“The staff-level agreement is subject to approval by the Executive Board,
which is expected in the coming weeks. Completion of the second review will
make available SDR704.70 million (about US$932 million, equivalent of 66
percent of quota) under the ECF/EFF and SDR166.68 million (about US$220
million, equivalent of 15.6 percent of quota) under the RSF,” said Chris
Papageorgiou, IMF Mission Chief to Bangladesh, at press briefing at the
Finance Ministry conference room in the city today.

An IMF mission team led by Chris Papageorgiou visited Dhaka during April 24 –
May 8, 2024 to discuss economic and financial policies in the context of the
second review of the IMF’s ECF, EFF and RSF.

In his speech, Chris Papageorgiou said the authorities have made significant
progress on structural reforms under the IMF-supported program, 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 (FX) reserves. This has exacerbated
pressures on the economy and heightened the complexity of macroeconomic
challenges,” he added.

He said, “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. Following the liberalization of retail interest
rates, 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 macroeconomic outlook is expected to gradually stabilize 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 FX 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,” he added.

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

“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. Looking ahead, domestic capital market
development will be instrumental in mobilizing long-term financing to support
growth,” he added.

He said, “Maintaining the reform momentum is critical to align with the
authorities’ goal of reaching upper middle-income country status by 2031.
Diversifying trade, attracting more foreign direct investment, enhancing the
investment climate, and strengthening governance will be crucial in this
regard.”

“Building resilience to climate change will help mitigate macroeconomic and
fiscal risks. Ongoing efforts to strengthen institutions and enhance spending
efficiency would help meet climate objectives and mobilize climate finance,
particularly from private sources. At the same time, the government should
prioritize climate-responsive fiscal management reforms and undertake green
and resilient infrastructure investment. Better management of climate-related
risks will enhance financial sector resilience as well,” he added.

He mentioned that the IMF team is grateful to the Bangladesh authorities and
other stakeholders for their hospitality and candid discussions.

“The team held meetings with State Minister of Finance Waseqa Ayesha Khan,
Bangladesh Bank Governor Abdur Rouf Talukder, and other senior government and
Bangladesh Bank officials. The team also met with representatives from the
private sector, think tanks, bilateral donors, and development partners,” he
added. (BSS)