IMF reforms, single exchange rate to help Bangladesh ease twin deficits: Fitch Ratings

Implementation of the International Monetary Fund's reforms recipe and introduction of a market-based single exchange rate will help Bangladesh ease the current account and fiscal deficits, says Fitch Ratings in its latest review.

Though lower imports, moderation in global commodity prices and resilient exports have partly eased external finances, the current account may remain under pressure with gradual lifting of import curbs and global uncertainties weighing on export performance, the global rating agency warns.

However, it expects Bangladesh's current account deficit to remain well below the average for 2021 and 2022 of 3.2% of GDP.

"Risks of a further deterioration in credit metrics remain significant, but implementation of Bangladesh's IMF programme and reforms should help alleviate pressures under Fitch Ratings' baseline," reads the special report released on Friday.

"However, we expect the government debt/GDP ratio to stabilize," it says.

Fitch Ratings hopes that the planned move to a single, more market-determined, exchange rate would be central towards stabilising forex exchange reserves and reducing external imbalances.

Bangladesh is on track of implementing a series of reforms agreed upon with the IMF to avail of the lending agency's $4.7 billion loan package, a crucial budget support at a time when the country's forex reserves were under a severe stress.

The first tranche of the loan package was disbursed in February after Bangladesh had agreed to reform its banking and revenue systems to discipline its financial sector, reduce bad loans and raise the tax-GDP ratio. The lender also set a threshold for forex reserve holding and specified the module for reserve calculation apart from setting a number of time-bound measures including some for phasing out energy subsidies to ease pressure on fiscal deficit.

An IMF team has been on a two-week visit to Dhaka since 25 April to review the implementation of the agreed reforms before the lender approves the second tranche in November. In a series of meetings, officials of the finance ministry, central bank and revenue authorities have assured the lending agency that most of the agreed reforms are right on track and will be reflected in the next budget.

Meanwhile, the central bank has announced that the single, market-determined exchange rate will be in force within a couple of months.

Bangladesh's external finances, particularly foreign-exchange reserves, have been under pressure since early 2022, owing to higher global commodity prices and US Fed tightening, Fitch Ratings points out.

Current account and fiscal deficits have widened and inflation has risen in Bangladesh, as elsewhere. Foreign exchange reserves have fallen from $45.9 billion in February 2022, when the Ukraine war started. Reserves are roughly around pre-Covid levels, at $31.0 billion as of 2 May 2023, but are lower as a percentage of current account payments, the rating agency notes.

To ease the twin deficit pressures, the Bangladesh's authorities imposed restrictions on non-essential imports, and power curbs, it adds. "Bangladesh's external debt repayment profile remains manageable, however, over the forecast horizon," it says, citing that some adjustments to external finances have been under way.