IMF agrees to $4.5b loan, first instalment in Feb

The International Monetary Fund (IMF) and the Bangladesh government have reached an agreement for a $4.5 billion loan to Bangladesh, pending the approval of its board.

"We are getting the loan just the way we wanted. A total of $4.5 billion will be lent to Bangladesh," Finance Minister AHM Mustafa Kamal told the media during a briefing in Dhaka on Wednesday afternoon.

"The amount will be disbursed in seven instalments till December 2026. The first instalment of $447.78 million will be cleared in February next year. The rest will be $659.18 million each.

"The interest rate of the loan will depend on the market rate at the time of maturity. The finance ministry has calculated that the rate would be around 2.2%."

He also said the IMF had advised reducing non-performing loans and increasing revenue collection.

The international money lender, however, did not say anything regarding government subsidies, Kamal added.

An IMF press release on Wednesday said, "The IMF staff and the Bangladesh authorities have reached a staff-level agreement to support Bangladesh's economic policies with a 42-month arrangement of about $3.2 billion under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) as well as of about $1.3 billion under the Resilience and Sustainability Facility (RSF).

"The objectives of Bangladesh's new fund-supported programme are to preserve macroeconomic stability and support strong, inclusive, and green growth, while protecting the vulnerable. The RSF is expected to provide affordable, long-term financing to support Bangladesh's climate investment needs, catalyze climate financing, and reduce balance of payment pressures from import-intensive climate investment."

Government revenue collection will be increased by strengthening the reform of the revenue system and enhancing the efficiency of tax administration, said the minister.

"We have taken the initiative to set up EFD machines for VAT collection. So far 6,732 machines have been installed," he added.

He said 60,000 more machines will be installed next year and 2,40,000 machines will be installed in the next four years; fuel oil prices will be adjusted from time to time in line with the international market price; the task of determining the exchange rate would be left to the market; the issue of climate change risk would shape the government's development plan, the annual development programme and development projects will be undertaken with that in mind; a disaster risk financing should be planned, including disaster relief and more.

Addressing the development, Rahul Anand, who is leading the IMF delegation visiting Bangladesh, said, "To successfully graduate from Least Developed Country status and achieve middle-income status by 2031, it is important to build on past successes and address structural issues to accelerate growth, attract private investment, enhance productivity, and build climate resilience.

"Against this backdrop, and following initial measures to maintain macroeconomic stability, the authorities have put together a programme – supported by the IMF – that is expected to bolster its external position, reduce vulnerabilities, and prepare the ground for a robust and inclusive growth pick-up by scaling up much-needed social, development and climate spending.
 
The 5 keys

The IMF said there would be five key elements in the programme.

The first is to create additional fiscal space, which would need higher revenue mobilisation and rationalisation of expenditures with the impact on the vulnerable mitigated by higher social spending and better targeted social safety net programmes.

The second is to contain inflation and modernise the monetary policy framework, where the monetary stance would be guided by the inflation outlook.

Another area would be strengthening the financial sector by reducing vulnerabilities, strengthening oversight, enhancing governance and the regulatory framework, and developing capital markets.

The fourth is to boost growth potential by creating a conducive environment to expand trade and foreign direct investment, developing human capital, and improving governance.

And the fifth agenda is to build climate resilience by strengthening institutions and creating an enabling environment, support large-scale climate investments, and help mobilise additional climate financing.

During its visit, the IMF team held meetings with Finance Minister AHM Mustafa Kamal, Bangladesh Bank Governor Abdur Rouf Talukder, Finance Secretary Fatima Yasmin, and other senior government and Bangladesh Bank officials.

It also met with representatives from the private sector, bilateral donors, think tanks, and development partners.

The Bangladesh government had sought the loan as it grappled with the impact of the Russia-Ukraine war that depleted reserves, stoked inflation and pushed the country towards the brink of a dollar shortage.
 
No tough conditions

Finance Minister AHM Mustafa Kamal said while many thought Bangladesh wouldn't get the loan or that it would come with stringent conditions, it wasn't like that.  

"The IMF has given the conditions such as working on reducing bank defaults and increasing revenue collection of the NBR. We have already taken the initiative to set up an asset management company to reduce defaulted loans," he added.

The finance minister also said if the IMF said everything was fine, then no country in the world could disagree.

On not giving tax exemptions, he said it wasn't discussed but it was explained that such exemptions would be necessary for daily necessities, otherwise the lower income groups would find it difficult to survive.   

The IMF had noted that Bangladesh has been very late in implementing the VAT Act of 2012.

About inflation, the finance minister said it was increasing all over the world, an observation echoed by the IMF.

Regarding lifting the cap on interest rate of bank loans, the minister said if it is lifted then the interest rate will be 18-20% as before, which was not desired.

Regarding the reason for adding EDF debt to the reserve, the finance minister said it was transferred from one account of the government, so it was shown in the reserve. But the IMF has asked to exclude it and calculate reserves, he added.

He said the reserve would be calculated showing how much was spent on different sectors and how much was in the net reserve.

"We will disclose everything, hide nothing," he said.

Bangladesh Bank Governor Abdur Rauf Talukder said the IMF loan assistance was being taken keeping four objectives in mind: stabilising the external sector, stabilising the financial sector, achieving the target of graduation of LDCs and promotion to developed countries by 2041.

About the condition of defaulted loans, he said the IMF has given conditions to limit the rate of defaulted loans to 10%. Non-performing loans in the banking sector are below 10%.

Regarding the foreign exchange reserve calculation, the governor said, "We show the total reserve. The IMF asked to show net reserves. We talked about showing both. We have no problem going through due process."

On EDF, he said it could be liquidated in 120 days if needed.

Regarding the initiative to increase remittances, the governor said the exchange houses have said they will not charge any fee, while the houses will also remain open during holidays.

He said currently the country's reserves are $34.3 billion. Of this, loans to EDF and Sri Lanka are about $8 billion, which leaves a net reserve of about $26 billion.

Former lead economist of the World Bank, Dhaka Office, Zahid Hossain told The Business Standard that neither the finance ministry nor the IMF had said anything about what needs to be done before receiving the first instalment in February or what had to be implemented before disbursing the remaining ones.

He said nothing was discussed about when and what kind of programme will be implemented under the IMF's programme to deal with the stress that is going on and increasing in the macroeconomy.

It is difficult to comment without knowing these things, he added.

Zahid also said the loan amount wasn't big enough in the current context, but it would be helpful.

"$1-1.5 billion has been guaranteed from the IMF to cover a deficit of $5-6 billion in balance of payments every year," he said.

Ahsan H Mansoor, a former IMF official and executive director of Policy Research Institute, said it is good that the government took steps to prevent the crisis before it started and got a timely loan guarantee from the IMF.

"This will reduce our economic tension. But without knowing what conditions the government will fulfil under this programme, it cannot be said at this point whether the tension will be completely reduced or not.

"GDP may decrease this year, but if the IMF programme is properly implemented, inflationary pressure and dollar volatility will be slightly reduced."

'Bangladesh has never defaulted on loans'

The IMF expressed confidence in Bangladesh's ability to repay its loans and said one of the priorities of the programme was to safeguard reserves.

Speaking at a press conference at the Finance Division, Rahul Anand, mission chief to Bangladesh, IMF, said the global money lender had expected Bangladesh's reserves to go down.

"During the pandemic, reserves went up, but it was a one-off. Because the formal channel was the only way to remit money and exports rebounded quickly because of the stimulus package. Exports also got a boost as there was a lot of trade diversion [in other countries]. Imports were also low. So, this led to an artificial build up of the reserve," he said.

Rahul said after the war, while Bangladesh -- which imports almost every item -- increased import quantities, the price of everything had also shot up, resulting in depleting reserves.

He, however, said there were no worries about the loan to Bangladesh.

"Bangladesh has always been a very good partner with the IMF. Bangladesh has never defaulted on any loan and we don't expect the election cycle will change anything on this front," he said, adding every country in the world was going through a similar crisis in terms of inflation and reserve pressure.  

On the creation of the Economic Development Fund and its impact on reserves, he said, "The IMF has a manual on how we compute things -- the Balance of Payment Manual. It guides us on which items have to be in the gross international reserves. And there are certain criteria…the bottom line is reserve should be available and be unencumbered. It should be available to use when the time comes. From our perspective, the EDF does not count for gross international reserves."

On the question of whether Bangladesh's current reserves being good for three months of payments was enough or not, Rahul said it depended on the situation, the economy and several other factors. In times of such uncertainty, it was hard to say, he added.

On the comparisons with Sri Lanka, he again pointed out Bangladesh's debt to GDP ratio, saying it was not on the way to becoming unsustainable.

Rahul stressed that there were no additional conditions being imposed and the IMF worked as a trusted advisor of the government.

"Let me be very clear: this is a programme of the authorities. They own the programme, with the support of the IMF. So the ownership of the programme lies with the authority.

"We are not on any fact finding mission. We have had close engagement over the years."

The IMF programme is to help authorities stabilise the macro situation in the near term, relax financial constraints and prepare the groundwork for longer structural reforms to successful graduation from Least Developing Country status and reach the Middle Income Status.

On the air of secrecy shrouding the meetings, he said the discussions were bound by confidentiality.

Asked how the IMF would monitor the programme, the IMF mission head said there would be six-monthly reviews, adding, "We look at some critical numbers and see whether targets are met on specific numbers. Everything cannot be quantified and some reforms cannot be quantified. So we also look at those. Ultimately, it is the authorities' programme."

At the end, he clarified that the loan was not finalised yet and would have to be approved by the IMF's management team and the executive directors.