Farhad Chowdhury: Despite various challenges, Bangladesh has met most of the International Monetary Fund’s (IMF) conditions for the second tranche loan. However, it could not meet the very important targets of foreign exchange reserve conservation and tax collection. In this case, the multinational lender has waived off about $690 million of the second installment. The money has been deposited in Bangladesh Bank on Friday. The government has been able to excuse this by citing external shocks, including national elections, high inflation, and the Russia-Ukraine war. However, after the election, there is a promise to strengthen the reforms in the economy in the new year.
The government’s letter to the IMF last month, seeking a second tranche of concessions, exemptions to meet unmet conditions and revised targets, contained a strong commitment to speed up reforms. The IMF published the letter in the Bangladesh Country Report on the first review post-loan approval. The letter signed by Finance Minister AHM Mustafa Kamal and Bangladesh Bank Governor Abdur Rauf Talukdar has promised to raise interest rates to control inflation. It has announced plans to increase electricity prices amid pledges to reduce subsidies to the energy sector. Apart from this, there is a promise to adjust the fuel oil formula-based price from time to time in line with the international market by next March. The letter is accompanied by a memorandum on economic and financial policies for the period 2024-26.
The Asia and Pacific Department of the IMF held a virtual press conference on Bangladesh on Friday morning ahead of the release of the Country Report. IMF mission chief Rahul Anand said at the time that the reform measures under the loan program are on the right track. Bangladesh Bank has increased the policy interest rate. Has taken steps to increase the interest rate at the customer level. The loan interest rate has now reached 11 percent. Further tightening of monetary policy is needed to control inflation. On the other hand, the exchange rate should be more flexible to increase the reserves by increasing the supply of foreign currency.
In response to a question, Rahul Anand said that the IMF does not comment on the internal political situation of Bangladesh. However, according to the report of the organization, the elections in Bangladesh in January may increase the uncertainty in the economy. Asked whether the IMF takes into account the rise in corruption and money laundering while giving loans, he said they are working with Bangladesh to prevent this problem.
The IMF report said the near-term scenario is weaker than when the loan was approved for Bangladesh last January. By implementing appropriate policies, the economic situation will gradually improve. A further tightening of monetary policy will reduce demand in the private sector. However, economic growth will be 6 percent based on exports. While the foreign exchange reserves may decline slightly in the near term to cover import expenditure, the situation will improve in the medium term. Inflation will come down to 7.2 percent by the end of the fiscal year.
The Reserve targets reduced
organization’s board has approved the exemption that Bangladesh formally requested from the IMF as it could not achieve the foreign exchange reserve conservation target at the end of last June. At the same time, a revised target for reserve conservation has been set at the end of December. At the end of December, net reserves were expected to be $26.8 billion. The revised target is set at $17.8 billion. The tax collection target was not achieved at the end of June. However, in this case the December target was not revised.
According to the IMF report, Bangladesh has achieved two out of the three quantitative performance criteria without reserve. These two conditions are related to government budget deficit and government foreign debt repayment.
Of the four indicative targets, three have been met except for tax collection. These three terms are government social spending, capital investment and money supply. Apart from this, most of the conditions of structural reforms have been fulfilled, including bank company reform, formulation of plans to increase revenue, introduction of interest corridor system. Met six out of seven structural benchmark-related targets. Only the amendments to the Financial Institutions Act were not tabled in Parliament within the stipulated time.
Executive Director of Policy Research Institute (PRI) Ahsan H Mansoor asked to know about meeting targets and monitoring of IMF,said that two important targets were not met. But the IMF may have given concessions ahead of the elections. Keep in mind, the IMF may not grant concessions repeatedly. The former senior official of the multinational lending bank said that the IMF may suspend its program if some basic conditions are not met.
Ahsan H. Mansoor believes that the current net reserves are about 15 billion dollars. Even if the target for December is reduced, it will need to raise at least $2 billion to meet it, which is very challenging in the current environment. It should be noted that though IMF loans are added to gross reserves, they are not part of net reserves. Because it is an asset and a liability at the same time.
Memorandum of finance minister and Governor
The finance minister and governor’s letter to the IMF managing director first presented a summary of the country’s economic situation. It has been said that Bangladesh has to face various challenges due to ongoing external shocks, which are hindering the recovery of the macro economy. The country’s current account deficit has been reduced by reducing imports amid a sustainable situation in exports. But the reserves are not being increased due to unprecedented fiscal deficit. Inflation is high due to external shocks and devaluation of money. Despite this difficult situation, the IMF’s programs are being implemented on time in most cases. Although challenges will continue for the next few months due to elections, high commodity prices in the global market and the global financial situation, the government hopes that the situation will gradually improve.
It is said in the letter that the government will take necessary policy steps to protect the stability of the macro economy. Monetary policy has already been tightened to control inflation. Government borrowing from Bangladesh Bank has been stopped. Harmonized exchange rates were introduced and became more market oriented. The budget deficit has been kept under control. The monetary policy framework will be further modernized. Along with reducing the risk of the financial sector, steps will be taken to develop the capital market. Investment environment will be improved.
In the memorandum attached to the letter, it is said that tax exemptions will be further reduced in the future to increase revenue. The tax rate structure will be simplified to increase the tax reach. Subsidy pressure on the budget will be further reduced. BPC did not need any budgetary support in the last financial year due to rising oil prices. Apart from this, the subsidy pressure in the budget has been reduced by increasing the prices of fertilizers, gas and electricity. In the future, there is a plan to stop all structural subsidies on energy products and the government will move towards formula-based rate adjustments from time to time. The proposal will be submitted to the Prime Minister for approval and will be implemented by next March.
Second installment to BB
$689.83 million of IMF and $400 million of ADB were added to the reserves yesterday. Bangladesh Bank Spokesperson and Executive Director Majbaul Haque gave this information. The reserve will release $20 billion. Reserves were $19.17 billion last Wednesday. However, after the addition of IMF and ADB loans, the amount of reserves will be known after a day or two, the spokesperson said. Earlier, on February 2, Bangladesh received a loan of $447.8 million from the IMF in the first installment.
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