IMF agrees to relax loan terms for reserve, revenue targets

The International Monetary Fund (IMF) has agreed to revise Bangladesh's foreign exchange reserves target under its $4.7 billion loan package.

According to a senior finance ministry official involved in discussions with the IMF mission, the global lender will lower the forex reserve target by approximately $6.7 billion, setting the new target at $20.19 billion by June 2024.

The development comes at a time when Bangladesh, one of the leading South Asian apparel exporters, is grappling with declining demand in the West, worsened by inflation and the high import costs of energy, fertilisers, and industrial raw materials. 

These challenges have eroded the country's forex reserves and led to a huge depreciation of the Bangladeshi taka since the onset of the Russia-Ukraine conflict in February last year.

In a meeting with the finance ministry officials on Tuesday, an IMF mission visiting Dhaka for an initial review of the loan programme also agreed to lower the government's revenue collection target for the current fiscal year. 

The global lender, however, decided to increase the government's primary balance target.

Economists welcomed the IMF's decision to relax some loan conditions but warned that achieving the new targets will be difficult without careful management. 

Earlier this year, the IMF had set a net forex reserve target of $25.34 billion for Bangladesh by September this year. However, based on the Sixth Edition of the IMF's Balance of Payments and International Investment Position Manual (BPM6), this figure currently stands at $21.15 billion and has further decreased to $18 billion in terms of net reserves.

"The IMF has now agreed to revise the net reserves target to $20.19 billion by June next year, down from the previous target of $26.81 billion. This adjustment brings significant relief to Bangladesh," said the finance ministry official.

The IMF team arrived in Dhaka on 4 October and has been holding discussions with officials of various government agencies, including the Bangladesh Bank, Finance Division, and National Board of Revenue. The team will continue discussions with Bangladeshi officials until 19 October.

The outcomes of these discussions are expected to be communicated by the IMF team on the last day of their mission. The mission will hold a press conference on 19 October to present its observations on Bangladesh.

Ahead of Tuesday's meeting with the IMF mission, Finance Secretary Khairuzzaman Mozumder held another meeting with representatives of ministries, departments, and agencies (MDAs) to assess their readiness to meet the IMF's conditions.

Bangladeshi officials convinced the IMF during the meeting that the $26.81 billion forex reserve target by the end of June next year is unattainable, given urgent import bills, foreign loan repayments, global price increases, and the country's current remittance and export earnings.

New revenue target

The IMF initially set a revenue collection target of Tk4,10,400 crore for the current fiscal year in its loan terms. 

However, during the meeting with the IMF team, National Board of Revenue (NBR) officials argued that achieving this target would be difficult in an election year. The IMF then decided to lower the revenue target to Tk3,94,500 crore. 

Finance division officials believe that even the revised revenue collection target will be difficult to achieve, given the unlikely lifting of import curbs and the inability to reduce tax exemptions. This makes a big leap in revenue collection not feasible in the current financial year.

In the last fiscal year, the NBR missed the IMF-set revenue target by Tk14,000 crore. It has to collect 0.50% additional revenue as a proportion of the GDP in this fiscal to achieve the new target. 

Despite its promise to collect Tk61,560 crore in the first three months of this fiscal year, the NBR has fallen short of its target.

Primary balance

The IMF also set the target for deficit in primary balance at Tk1,38,000 crore instead of the previously set Tk1,62,600 crore, narrowing the fiscal space.

The primary balance is the fiscal balance excluding net interest payments on public debt. In other words, it is the difference between a government's revenue and its spending on public goods and services.

Finance Division officials said IMF representatives responded positively to their statements, so there does not appear to be any problem with the disbursement of the second tranche of the loan. However, the final decision rests with the IMF board.

Economists welcome IMF decision

Ahsan H Mansur, executive director of the Policy Research Institute (PRI), told The Business Standard, "The IMF is taking a realistic approach. Our future economic performance will depend on how we manage our policies and the outcome of the national elections. Therefore, we should not be too ambitious about our new targets. Achieving them will be difficult if not managed properly."

Zahid Hossain, the former lead economist of the World Bank's Dhaka office, said given the realities on the ground, the IMF is revising the reserve and revenue targets. It is not possible to increase Bangladesh's net reserves to $26 billion by the end of next June, so the IMF wants to prevent the current reserves from declining further. Instead, it aims to achieve a slight increase by June.

"The Bangladesh Bank should reduce its dollar supply to the market to increase reserves. However, this raises the question of how to meet urgent import needs. To address this, the government should take steps to increase remittance flows and export earnings, and make the foreign exchange rate fully market-oriented," he said.

The government should also seek budget and balance of payments support from development lenders. Any unused funds from these loans would increase reserves, the economist said.

He also suggested reducing tax exemptions to achieve revenue targets. 

Regarding the primary balance, the economist said that although the IMF has increased the target, it is still less than the budget target. In other words, to achieve this goal, the government needs to increase revenue and reduce expenditure.

IMF's $4.7b loan

The IMF is lending $4.7 billion to Bangladesh in seven instalments over 42 months. The loan has 38 targets, mostly reforms and some financial targets, in various sectors including banking, revenue, and environment.

The IMF board approved the $4.7 billion loan on 30 January and disbursed the first instalment of $476.27 million the next day. Bangladesh is now waiting for the second instalment. 

Bangladesh has implemented most of the conditions it promised to fulfil before this tranche release, but it has fallen short of maintaining foreign exchange reserves, revenue income, and a periodic formula-based price adjustment mechanism for petroleum products.

Officials from the Bangladesh Bank, the NBR, and the Energy Division met with the IMF mission to explain why Bangladesh had fallen short of its reserve, revenue, and fuel pricing targets. 

Revenue collection is low due to low imports and slow implementation of government development projects. Similarly, the Bangladesh Bank must pay $1 billion per month to import essential products such as fertiliser, food, and fuel, they told the IMF mission.