IMF approves $689m second tranche loan for Bangladesh

• Approval comes despite some unmet conditions
• Govt assured IMF of meeting conditions after JS polls
• Govt must enact specific policies to secure the 3rd instalment
• There will be some changes in agreement for third instalment
• Entire $4.7 billion to be released in 7 instalments till 2026

The International Monetary Fund (IMF) has approved the release of $689 million in the second tranche of the $4.7 billion loan package allocated for Bangladesh.

Finance Minister AHM Mustafa Kamal late last night confirmed that the approval came at the multilateral lender's board meeting, according to Gazi Touhidul Islam, information officer of the finance ministry.

Officials of the Bangladesh Bank and finance ministry expect the second instalment to be available on Wednesday.

The Executive Board of the International Monetary Fund (IMF) completed the first review under the Extended Credit Facility (ECF), Extended Fund Facility (EFF) and  Bangladesh's Resilience and Sustainability Facility (RSF) arrangements for Bangladesh, allowing the authorities to withdraw the equivalent to about $468.3 million under the ECF/EFF, and about $221.5 million under the RSF.

This brings total disbursements under the ECF/EFF thus far to about $936.6 million and under the RSF to about $221.5 million. The Executive Board also concluded the 2023 Article IV consultation with Bangladesh.

The approval also brings clarity to a period of uncertainty, stemming from the country's non-compliance with certain IMF directives attached to the loan.

Bangladesh had been instructed to implement measures, including raising forex reserves, a 0.5% increase in the tax-GDP ratio by June, and the adoption of a formula-based price adjustment mechanism for fuel oils by December.

However, the mandated actions were not implemented within the specified timeframe.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh and a former IMF official, said the government effectively communicated to the IMF the reasons behind the inability to fulfil these requirements and assured that it will take steps to meet the conditions after the elections.

However, he feels that it will be very difficult to get the third instalment of the loan next June.

"The government must enact specific policies to secure the third instalment. Non-compliance after the elections may lead to the IMF withholding the loan," he added.

The IMF approved the first tranche of the loan package on 30 January. Bangladesh received $447.8 million on 2 February. The entire amount of the IMF loan will be released to Bangladesh in seven instalments over three and a half years till 2026.

Zahid Hussain, former lead economist of the World Bank's Dhaka office, said the IMF realised the conditions imposed on foreign exchange reserves were not realistic and the lender revised it.

"Besides, the IMF staff is satisfied with the steps the government has taken in the budget to increase revenue collection," he said.

He declined to comment on the possibility of getting the third instalment. "There will be some changes in the loan agreement in getting the third instalment. Without looking at the conditions, it would not be right to comment on the possibility of getting the third instalment," he added.

In October, an IMF delegation came to Bangladesh on a two-week visit, reviewed the loan programme and gave a green signal to Bangladesh from staff level.

After concluding the review, the mission said the IMF staff and the Bangladesh authorities had reached staff-level agreement on the policies needed to complete the first review.

The IMF staff welcomed the progress of reform implementation and the authorities' continued commitment to undertake decisive policy actions, amid a challenging environment.

IMF conditions

Six quantitative targets were set by the IMF for the first half of 2023.

One of those unmet centred maintaining a minimum net international reserve (NIR) of $24.46 billion by the end of June.

This target was missed by around $3 billion as the government had to use the reserves to pay for essential imports of fuel, fertiliser and foodstuff.

Another goal missed was the tax revenue target set at at least Tk3,45,630 crore in FY23.

The target was missed by a shortfall of Tk17,946 crore.