IMF loan’s third instalment doubled, June reserves target sharply lowered

The International Monetary Fund (IMF) has reached a staff-level agreement on the release of nearly double the amount previously scheduled in the third tranche of the $4.7 billion loan to Bangladesh, while also lowering the net international reserve target for June from $20.10 billion to $14.76 billion.

The multilateral lender was set to release $681 million this month, but according to the staff-level agreement, Bangladesh will now receive about $1,152 million instead, which is 69.16% more than the stipulated amount.

Chris Papageorgiou, who heads the IMF visiting mission, shared the development with journalists during a press conference at the finance ministry yesterday evening.

He said the third instalment will be released after the staff-level agreement is approved by the lender's executive board, which is expected to take around a week.

Asked about the reason for increasing the third instalment amount, a finance ministry official with knowledge of the development told The Business Standard that the IMF officials are pleased with the steps taken by Bangladesh to fulfil their conditions.

"Moreover, while negotiating with the IMF team, we were able to make them understand that despite maintaining the agreement to pay $4.7 billion to Bangladesh in seven instalments over 42 months, it is now necessary to increase the amount of instalments. Because Bangladesh needs dollars the most at the moment," he added.

Therefore, Bangladesh emphasised increasing the amount of the next two instalments, including the third one, and adjusting it with the subsequent instalments, the official said.

He said, "In addition to highlighting our success in meeting the conditions, the amount of the third instalment loan is increasing due to our ability to convey the need for foreign currency at the moment." 

Bangladesh is receiving this loan from the Extended Credit Facility (ECF), Extended Fund Facility (EFF), and Resilience and Sustainability Facility (RSF). However, the official could not immediately say how much money would be released in the third instalment from which fund.

Zahid Hussain, former lead economist of the World Bank's Dhaka office, told TBS, "The Bangladesh Bank issued three circulars together on Wednesday. The central bank and the government are currently giving importance to the implementation of IMF's reform proposals.

"Therefore, in view of the request and demand of Bangladesh, the IMF has agreed to greatly increase the amount of the third tranche. However, this has been done by the IMF before in the case of various countries."

In January last year, Bangladesh signed a $4.7 billion loan agreement with the IMF due to dwindling foreign exchange reserves. The loan is being distributed in seven instalments by 2026. The lender cleared $447.8 million of the first instalment in February last year, and $681 million of the second instalment in December.

Despite lowering the target of net reserves in the new staff-level agreement, the Washington-based lender has not reduced the revenue collection goal.

The IMF said in a written statement at the press conference, "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."

It added, "At the same time, the 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 mobilising long-term financing to support growth."

The multilateral lender welcomed the Bangladesh Bank's actions to realign the exchange rate and simultaneously adopt a crawling peg regime with a band as a transitional step towards greater exchange rate flexibility to restore external resilience. Following the liberalisation 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," it added.

Reading out the statement, Chris Papageorgiou 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% in FY24 owing to ongoing import compression and policy tightening.

However, it is anticipated to rebound to 6.6% in FY25 as imports rebound and FX pressures ease. Inflation is projected to remain elevated at approximately 9.4% year-on-year in FY24 but is anticipated to decline to around 7.2% 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.

Considering Bangladesh's low tax-to-GDP ratio, it is imperative to prioritise 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% of GDP, read the statement, which was also distributed in the press conference.

At the same time, a medium- and long-term revenue strategy, with an accompanying implementation framework, should guide future reforms, suggested the lender, who added that reducing subsidies, improving expenditure efficiency, and managing fiscal risks will allow for additional spending on social safety nets and growth-enhancing investment.

"Maintaining the reform momentum is critical to aligning 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," said the visiting mission head.

Bangladesh has 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 spillover from tightening global financial conditions, and still elevated international commodity and food prices, coupled with domestic vulnerabilities, have led to persistently high inflation and declining foreign exchange reserves. This has heightened pressures on the economy and heightened the complexity of macroeconomic challenges, he added.

The statement pointed out, "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 mobilise climate finance, particularly from private sources."

At the same time, the government should prioritise 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, it added.

Asked why Bangladesh's holdings of foreign exchange have consistently decreased, Chris Papageorgiou said the reserves were high during the pre-pandemic period. Since then, they have started to deplete rapidly, mainly due to external shocks, global financial tightening, and increasing prices of daily commodities, including energy, in the international market.

The IMF team leader believes that the pressure on the reserves will continue for some more time, but this pressure will gradually reduce when the new flexible exchange rate comes into effect.

Asked whether inflation will increase due to the taka devaluation, the IMF officials said some policies may lead to an increase in inflation. However, they also emphasised policies that would reduce the impact of inflation on the poor.

The IMF has mentioned the flexibility of various policies of the Bangladesh Bank as transitional measures.

The officials said the Bangladesh Bank's raising policy rate may have an impact on inflation initially, but it will stabilise later. Inflation may come down to 5.5% in FY26.

The IMF has reduced the current fiscal year GDP projection from 5.7% to 5.4%. When asked the reason for this, the multilateral lender said the growth would decrease due to the global economic situation.

Asked why the IMF is not talking about money laundering and tax evasion in Bangladesh, the team leader told reporters that although the terms of the IMF's loan programme do not address it, they are working with the Bangladesh Financial Intelligence Unit (BFIU) and the National Board of Revenue to prevent money laundering and tax evasion.

The IMF delegation arrived in Bangladesh on 24 April before the release of the third instalment. The delegation was scheduled to leave Dhaka last night.

The IMF 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 during their stay here. Additionally, the team met with representatives from the private sector, think tanks, bilateral donors, and development partners.