Bangladesh seeks additional $750m from IMF to address economic challenges

Bangladesh has requested an additional $750 million loan from the International Monetary Fund (IMF) to address economic challenges and foreign exchange shortages.

If approved, the total loan amount from the Washington-based multilateral lender will go up to $5.3 billion.

Meanwhile, the IMF has projected that Bangladesh's real GDP growth will slow to 3.8% in FY25 due to output losses caused by the public uprising, floods, and tighter policies, but it is expected to rebound to 6.7% in FY26 as policies relax.

"Inflation is anticipated to remain around 11% (annual average year-on-year) in FY25 before declining to 5% in FY26, supported by tighter policies and easing supply pressures," the IMF said in a press statement released today (18 December).

"However, the outlook remains highly uncertain, with risks skewed to the downside," it added.

The IMF announced that a staff-level agreement has been reached to disburse a fourth tranche of $645 million under the ongoing $4.7 billion loan programme.

The IMF review mission, which arrived in Bangladesh on 3 December, will hold a press conference tomorrow before leaving the country.

The multilateral lender is willing to provide the additional amount under strict conditions, including a requirement to raise electricity prices. However, the government is reluctant to increase electricity prices until next June due to high inflation.

"The Bangladesh economy continues to grapple with persistent challenges and is facing emerging external financing needs. To address these issues, the authorities have requested an augmentation of IMF financial assistance by $750 million to maintain macroeconomic stability and strengthen the country's resilience to external shocks," reads the press release.

The authorities are committed to sustaining revenue-based fiscal consolidation to address the emerging external financing gap, tightening monetary policy to control inflation, and fully implementing exchange rate reforms to ensure greater flexibility, it added. 

"They have pledged to establish a healthy and competitive financial sector and are advancing their climate agenda to promote sustainable, inclusive and green growth."

The IMF said the timely formation of an interim government has fostered a gradual return to economic normalcy. However, economic activity has slowed significantly, and inflation remains elevated. Capital outflows, particularly from the banking sector, have pressured foreign exchange reserves. 

Additionally, tax revenues have declined, while spending pressures have increased. These challenges are further worsened by stress in parts of the financial sector.

The multilateral lender said that, amid significant macroeconomic challenges, the authorities requested an augmentation of $750 million in IMF financial support to Bangladesh under the ECF and EFF arrangements. 

This increase would bring the total financial assistance under the ECF and EFF arrangements to $4 billion, alongside concurrent RSF arrangements of $1.3 billion. 

"Upon completion of the third review, about $645 million will be made available," it added.

To address the emerging external financing gap and persistently high inflation, near-term policy tightening is crucial, the IMF pointed out. 

Fiscal consolidation should prioritise the swift implementation of additional revenue measures, such as removing tax exemptions, while restraining non-essential spending. Coupled with monetary tightening, greater exchange rate flexibility and safeguarding foreign exchange reserve buffers will strengthen the economy's resilience to external shocks.

The IMF said Bangladesh's low tax-to-GDP ratio calls for urgent tax reforms to establish a fairer, more transparent system and sustainably increase revenue, focusing on rationalizing exemptions, improving compliance, and separating tax policy from administration. 

A comprehensive strategy is also needed to curb subsidy spending and address arrears in the electricity and fertilizer sectors.

The multilateral agency emphasized that addressing vulnerabilities in the banking sector is essential. Immediate priorities include accurately assessing non-performing loans, ensuring the effective implementation of existing regulations, and formulating a roadmap for financial sector restructuring.

Key actions involve conducting an asset quality review and adopting a recovery and resolution framework aligned with global standards. 

Simultaneously, the authorities should advance risk-based supervision, while legal reforms are needed to strengthen corporate governance and regulatory frameworks. 

Institutional reforms to enhance the Bangladesh Bank's independence and governance will be critical for the successful implementation of financial sector reforms.

The IMF said enhancing governance, along with greater transparency, is critical to improving the investment climate, attracting foreign direct investment and diversifying exports beyond the ready-made garment sector. 

It also said building resilience to climate change is vital to reducing macroeconomic and fiscal vulnerabilities. Strengthening institutional capacity and optimizing spending efficiency will aid in achieving climate goals. The government should focus on implementing climate-sensitive fiscal reforms and investing in sustainable, resilient infrastructure. 

Furthermore, robust management of climate-related risks will reinforce the stability of the financial sector, it added.