October 20, 2023
DHAKA – Bangladesh is hopeful of receiving the second tranche of the IMF’s $4.7 billion loan programme in December as the authorities agreed to further monetary policy tightening, tighter fiscal policy and greater exchange rate flexibility.
The second tranche, expected to be about $681 million, would be authorised by the management and executive board of the International Monetary Fund, said the staff in its end-of-mission press release. The IMF team wrapped up their 16-day tour of Bangladesh yesterday.
The IMF executive board is scheduled to meet on December 11, Md Mezbaul Haque, Bangladesh Bank spokesman, told reporters after the wrap-up meeting with the visiting staff mission yesterday.
“We are hopeful the IMF board will approve the second instalment of the loan,” he added.
A report prepared by the staff will be presented, subject to IMF management approval, for discussion and decision at the board meeting.
The report will contain details of the policies that the Bangladesh government have committed to for restoring near-term macroeconomic stability and the rationale for agreeing to the new lower quantitative targets.
The approval for the second tranche of the loan programme is based on the country’s performance as of June 30.
Of the three mandatory conditions, Bangladesh failed to meet one: minimum net international reserves (NIR).
The country failed to meet one of the four quantitative targets that are not mandatory but important for monitoring the progress in meeting the 42-month programme’s objectives: minimum tax collection.
But the IMF staff mission has agreed to excuse the two missed targets given the “substantial progress on structural reforms” made under the programme.
And factoring in the present economic context, the staff mission has agreed to lower targets for the two.
Originally, Bangladesh was supposed to have at least $26.8 billion in NIR at the end of the year. That target has now been fixed at about $17.5 billion, The Daily Star has learnt from BB and finance ministry officials informed with the proceedings.
At the end of the first half of 2024, the NIR must be at least $19.5 billion.
At present, the NIR, which is not published by BB, is less than $18 billion, according to calculations of Zahid Hussain, a former lead economist of the World Bank’s Dhaka office.
The mission, however, tightened the purse strings for the government. The budget deficit for fiscal 2023-24 cannot be more than 4.6 percent of GDP and not the 5.2 percent set out in the budget.
Although the budget has set out to collect Tk 450,000 crore in tax, the IMF has given a lower target.
The government also agreed to adopt the IMF-prescribed crawling peg method to manage the exchange rate.
The crawling peg is a system of exchange rate adjustments in which a currency with a fixed exchange rate is allowed to fluctuate within a band of rates.
The method is currently used by the Reserve Bank of India.
For the implementation of the crawling peg system, BB will incorporate RBI’s experience along with IMF’s technical assistance.
“Continued global financial tightening, coupled with existing vulnerabilities, is making macroeconomic management challenging, putting pressures on the taka and foreign exchange reserves,” said the IMF press release.
Near-term policy priorities should focus on containing inflation, softening the impact of these economic disruptions on the vulnerable, and building external resilience, it said.
“Modernising monetary and exchange rate policy frameworks and improving FX [foreign exchange] management remain important to bolster external resilience.”
Addressing banking sector vulnerabilities — by way of lower defaulted loans of state banks, enhanced supervision, strengthened governance and improved regulatory frameworks — and developing domestic capital markets will help mobilise financing to support growth objectives, it said.
Of the $681 million that is expected in the second tranche, $462 million (which is equivalent to Special Drawing Rights of 352.35 million) will come under the Extended Credit Facility and Extended Fund Facility.
The second tranche will also contain about $219 million (equivalent to SDR166.67 million) from the IMF’s climate-focused Resilience and Sustainability Facility (RSF) fund. In the first instalment of $447.8 million disbursed in February, there was no amount from the RSF fund.
The actual amount that would be disbursed in the second instalment would depend on the prevailing conversion rate of SDR, an international reserve asset defined and maintained by the IMF. Its value is based on a basket of five currencies: the US dollar, the euro, the Chinese renminbi, the Japanese yen and the British pound sterling.