IMF sets time-bound reform agenda as it releases first tranche of loan

The IMF wants Bangladesh to take up measures to increase the tax-GDP ratio by 0.5% by this June and adopt a periodic formula-based price adjustment mechanism for petroleum products by December as the global lender released the first chunk of its $4.7B loans.

It also wants the Bangladesh Bank to compile and report official reserve assets as per the BPM6 definition – IMF's balance of payment guideline – and use market-determined exchange rate for official forex transactions by June this year. The net forex reserve also must not drop below $26.8 billion by the end of this year.

Before publishing the 125-page document last night, the International Monetary Fund (IMF) released $476 million in the first tranche of the loan on Thursday – within three days of its approval of the package, the central bank confirmed yesterday.

The agreed MoUs between Bangladesh and the IMF will target a reduction of the average non-performing loan ratios to below 10% for state-owned commercial banks and below 5% for private commercial banks, while increasing the banks' capital adequacy ratios and provisioning coverages to statutory minimum by 2026.

The Bangladesh Bank has started relaxing lending interest rate restrictions and are committed to removing all caps over the programme period.

Besides, the Bangladesh Bureau of Statistics needs to take steps by this December to publish quarterly GDP data.

These are among a set of time-bound to-do lists the global lender has prescribed for government agencies for 12 months to help Bangladesh increase fiscal space for priority spending, increase exchange rate flexibility and enhance policy-making capacity.

To enhance monetary operation, the central bank should adopt an interest rate corridor system by the middle of this year while the finance ministry needs to submit to Parliament the Bank Companies (Amendment) Act 2020 and the Finance Companies Act 2020, drafted in line with best practices, by September to upgrade legal and regulatory framework for the financial sector.

Among the proposed structural benchmarks, to be initiated within 12 months after the IMF Board's approval of the loan package, include developing a plan by this December to reduce net national savings certificate issuance to below one-fourth of total net domestic financing by FY26.

Besides, the central bank should publish banks' distressed assets in the annual financial stability report before the end of June to support non-performing loan resolution and enhance transparency in the banking sector.

The IMF also proposed 11 reform measures under the Resilience and Sustainability Facility to be completed in the next two years: adoption of a national disaster risk financing strategy while integrating social assistance measures, updated PPP policy and framework that integrates climate-related risks and developing relevant guidelines and updating the Policy on Green Bond Financing by the end of 2025.

The IMF board on 30 January approved the loan packages for Bangladesh after a series of high-profile visits and discussions with the government high-ups.

A letter to IMF Managing Director Kristalina Georgieva dated 23 December 2022, co-signed by Finance Minister AHM Mustafa Kamal and Bangladesh Bank Governor Abdur Rouf Talukder affirmed the government's commitment to stepping up efforts to raise revenues to enable higher development and social spending and enhance fiscal governance, modernise the monetary policy framework and reduce financial sector vulnerabilities. It also referred to the government's pledge to improve the investment climate and boost productivity and establish an ecosystem to better adapt to climate change.

"This reform program is intended to raise saving and investment rates, strengthen our external position, and achieve broad-reaching, labor-intensive, and export-led growth," it said. The letter cited the Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of Understanding (TMU) setting out the major objectives of the government's reform program for the period 2023–2026 to avail of the lender's 42-month loan programme.

What IMF recommends

Identifying high NPLs as a failure to effectively address the problems in the banking system, the IMF has stressed the need to address main causes of weak bank performance, including structural weaknesses in governance, regulation, supervision, and legal systems.

To limit pass-through to inflation, it suggests targeted support to the vulnerable.

Fiscal discipline has kept Bangladesh at a low risk of debt distress, but higher revenues and enhanced fiscal management are needed to meet social and development objectives, it says, stressing that monetary and exchange rate policies focus on containing inflation and rebuilding reserves.

"Greater exchange rate flexibility will help strengthen external buffers and build resilience," the IMF says, while structural reforms to expand trade and foreign investment will further boost Bangladesh's growth potential and mitigate external vulnerabilities.

Reflecting elevated global commodity prices, subsidies for gas and electricity are expected to reach about 0.9% of GDP in FY23 compared to 0.4% of GDP in FY21, it predicts.

"We expect a difficult year ahead given high uncertainties, elevated commodity prices, growth slowdown in trading partners, and tighter global financial conditions," the lender warns.

While on track to graduate from the Least Developed Country (LDC) status by 2026, Bangladesh aspires to reach upper middle-income status by 2031. However, substantial gaps remain in social and development spending, tax revenue mobilisation, the scale and diversification of exports, foreign direct investment inflows, and vibrancy of the investment climate, the IMF points out, suggesting multipronged structural reforms to close these gaps, deal with the challenges of the gradual loss of preferential trade treatments and concessional financing and improve governance.

As Bangladesh's tax-to-GDP ratio is one of the lowest in the world, the programme envisages tax revenue mobilisation efforts of additional 0.5% of GDP annually in FY24 and FY25 and 0.7% in FY26, contributing to higher social spending and public investment.

The introduction of a periodic formula-based fuel price adjustment mechanism will help ensure no structural subsidies for petroleum products, it says.

Terming the recent increase in electricity prices a welcome step, the IMF hopes that the authorities will further explore options to gradually reduce gas and electricity subsidies, while strengthening social safety nets.

The classification for NPLs should be aligned with international best practices, it says, calling for full adoption of the Basel III standards for measurement of banks' financial statements and provision framework.

Existing policies for nomination and appointment of directors of state-owned commercial banks are being examined by an independent committee, which will suggest policy recommendations to strengthen the corporate governance of these banks, it recommends.

The Bankruptcy (Amendment) Act 2020 and the Money Loan Court (Amendment) Act 2003 will be subsequently submitted to Parliament by June 2024, and the Negotiable Instrument (Amendment) Act 2020 by June 2025, it adds, hoping that these reforms will help modernise the financial sector and facilitate recovery of loans.

Improving governance and reducing vulnerability to corruption would help enhance the business climate, thus boosting investment, it says.

What govt pledges

Earlier, in the Memorandum of Economic and Financial Policies, the government pledged to continue efforts to increase the number of registered taxpayers to 10 million by 2026 and eliminate all structural subsidies for petroleum products and move to a periodic formula-based price adjustment mechanism by December 2023. "Furthermore, we will aim at adjusting electricity prices further to reduce subsidies," the memorandum reads.

It also pledged steps to reduce the average NPL ratio to below 10% for state-owned banks and below 5% for private banks by 2026. To strengthen the corporate governance of state-owned banks, a committee is examining the existing policy for nomination and appointment of directors of these banks to suggest policy recommendations, the MEFP reads.

The government also pledged to combat corruption by safeguarding the independence of the AntiCorruption Commission.