The International Monetary Fund’s $4.7 billion loan programme won’t be a miracle worker for the Bangladesh economy.
The programme would hold the economy back from falling off the cliff from the whiplash of the pandemic and the Ukraine war and turn it towards the right track.
“The authorities made the right decision to come to the Fund — and most importantly, to come to the Fund early,” said Rahul Anand, the IMF’s mission chief to Bangladesh, yesterday.
Turning to the IMF when the country is already in crisis could make the adjustments particularly hard on people — a situation confronting Pakistan and Sri Lanka.
But Bangladesh is not in crisis, Anand said.
“Just like countries around the world, Bangladesh is dealing with the impact of global shocks — first from the pandemic and then from the ongoing war in Ukraine,” he added.
In that vein, the programme’s immediate task is to prop up the country’s shrinking foreign exchange reserves, which has already hit businesses and ordinary people hard.
While the IMF would make $476 million immediately available, the lender’s impact would be beyond that: it would give the other multilateral agencies, such as the World Bank, to make more funds available for Bangladesh.
This along with the import curbs placed by the government will shore up the gross foreign reserves to $30 billion by the end of the fiscal year, according to the IMF’s projections.
As per the lender’s balance of payments and investment position manual (BPM6), gross foreign reserves calculation does not include the various funds that the Bangladesh Bank has formed from the reserves as well as the loan guarantees provided for Biman, the currency swap with Sri Lanka, the loan to Payra Port Authority and the below-investment-grade securities. These account for about $7.5 billion.
When these components are taken out, the IMF projection matches the government’s expected foreign currency reserve position at the end of fiscal 2022-23: $37.7 billion.
Gross reserves would increase to $34.2 billion in fiscal 2023-24 and $40 billion in the following year, as per IMF’s projections. It would hit $46.4 billion once the programme ends.
Other than restoring macroeconomic stability by way of the reserves, the programme would also give impetus to some long-due structural reforms such as raising more tax revenues, scaling up social spending, modernising the monetary policy framework, strengthening the financial sector and building climate resilience.
“While confronting challenges resulting from the global headwinds, the authorities need to accelerate their ambitious reform agenda to achieve a more resilient, inclusive and sustainable growth,” said Antoinette Monsio Sayeh, the deputy managing director of IMF, in a press release.
Thanks to the reforms ushered in by the programme, Bangladesh’s tax revenue would increase from 7.8 percent of GDP this fiscal year to 8.3 percent next year and then 8.8 percent.
At the end of the programme, it would be 9.4 percent of GDP, as per the IMF’s projections.
The programme would insist on cutting back on subsidies, which would free up more resources for social and development spending.
“Not all subsidies are helping the poor and vulnerable. In Bangladesh where gas and electricity are being subsidised, the rich drive more cars and use more air conditioning,” Anand said.
Rationalisation of untargeted subsidies will free fiscal resources to strengthen social safety nets and increase development spending.
Substantial investment in human capital and infrastructure will be needed to achieve Bangladesh’s aspiration to reach upper-middle income status by 2031 and meet the Sustainable Development Goals.
By the end of the programme, the size of the annual development programme would increase from the existing 5.2 percent of GDP to 6.5 percent, as per the IMF’s projections.
Public investment would increase from 8.8 percent of GDP this fiscal year to 11.2 percent of GDP in fiscal 2025-26, when the programme ends.
Subsequently, Bangladesh’s real GDP growth would be back to 7 percent by fiscal 2024-25.
This fiscal year, the growth would be 5.5 percent, as the IMF’s projections, which is in line with other multilateral lenders’ forecasts.
Earlier last month, the WB pared back Bangladesh’s growth forecast for this fiscal year by 1.5 percent to 5.2 percent. In December last year, the government revised down the growth forecast from 7.2 percent to 6.5 percent.
The IMF will disclose the specifics of the loan programme in the coming days.
The mandatory conditions would be a minimum level of net international reserves and domestic revenue collection and a ceiling on the government’s budget deficit, The Daily Star has learnt from people involved in the negotiations with the IMF staff mission to thrash out the terms for the loan.
Implementing the income tax law, setting up an asset management company to dispose of soured loans, bringing down the banking sector’s default loans to within 10 percent and raising the capital adequacy ratio to the BASEL 3 requirement of 12.5 percent, are among the reforms agreed upon.
Periodically adjusting the fuel price through a formula and increasing remittance receipts through formal channels are also on the task list.
A social spending floor and better targeted social safety net programmes, market-based exchange rate interest rate, developing the capital and bond market, expanding and diversifying exports and modernising the monetary policy framework and reporting on net foreign reserves are the other agreed reforms.
The interest rate on the loan would be about 2.2 percent. Of the $4.7 billion, $1.4 billion can be repaid over a 20-year horizon with a grace period of ten years. The remaining amount must be paid back within ten years; the grace period for a portion of the sum is 3.5 years and for another portion 5.5 years.