IMF grants additional $645m to help Bangladesh economy

The International Monetary Fund (IMF) on Wednesday said, it will grant US$645 million to support Bangladeshi economy, about US$105 million less than the US$750 million sought by Bangladesh Government to overcome current economic challenges.

Of this, around US$426 million will be provided under IMF’s Extended Credit Facility (ECF) and Extended Fund Facility (EFF), while US$219 million will be made available under the Resilience and Sustainability Facility (RSF), IMF said in a statement following a series of discussions on the latest economic situation in the country that witnessed the fall of a 15-year regime of Sheikh Hasina in August this year. An interim administration led by Nobel Peace Prize winner Professor Muhammad Yunus is running the country since August 8, 2024. This increase would bring the total financial assistance under the ECF and EFF arrangements to US$4 billion, alongside concurrent RSF arrangements of US$1.3 billion.

Bangladesh’s external debt increased to US$103 billion, while the country’s nominal gross domestic product (GDP) reached US$451 billion this year.

“The Bangladesh economy continues to grapple with persistent challenges and is facing emerging external financing needs. To address these issues, the authorities requested an augmentation of IMF financial assistance of US$750 million to maintain macroeconomic stability and strengthen the country’s resilience to external shocks,” the statement said. “The authorities are committed to sustaining revenue-based fiscal consolidation to address the emerging external financing gap, tightening monetary policy to control inflation, and to fully implement exchange rate reforms to ensure greater flexibility. They have pledged to establish a healthy and competitive financial sector and are advancing their climate agenda to promote sustainable, inclusive, and green growth.”

Bangladesh’s Gross Domestic Product (GDP) growth has declined to 3.8 percent in the 2024-25 financial year starting from July 1, 2024 – after maintaining a more than 6 percent growth year-on-year for the last 16 years.

“We are pleased to announce that the IMF team reached a staff-level agreement with the Bangladesh authorities on the policies needed to complete the third review under the ECF, EFF, and RSF arrangements. The IMF’s Executive Board will consider completion of the review based on the implementation by the authorities of prior actions,” Chris Papageorgiou, IMF Deputy Unit Chief said following a three-day tour of Bangladesh.

“The timely formation of an interim government has fostered a gradual return to economic normalcy. However, economic activity has slowed significantly, and inflation remains elevated. Capital outflows, particularly from the banking sector, have pressured foreign exchange reserves. Additionally, tax revenues have declined, while spending pressures have increased. These challenges are further exacerbated by stress in parts of the financial sector.

“Amid significant macroeconomic challenges, the authorities requested an augmentation of US$750 million in IMF financial support to Bangladesh under the ECF and EFF arrangements. This increase would bring the total financial assistance under the ECF and EFF arrangements to US$4 billion, alongside concurrent RSF arrangements of US$1.3 billion. Upon completion of the third review, US$645 million will be made available, comprising US$426 million under the ECF and EFF and US$219 million under the RSF.”

Real GDP growth is projected to slow to 3.8 percent in fiscal year (FY) 2025 due to output losses caused by the public uprising, floods, and tighter policies but is expected to rebound to 6.7 percent in FY2026 as policies relax. Inflation is anticipated to remain around 11 percent (annual average year-on-year) in FY2025 before declining to 5 percent in FY2026, supported by tighter policies and easing supply pressures. However, the outlook remains highly uncertain, with risks skewed to the downside.

“Pressure on the external sector is expected to persist in FY25, easing later if global conditions improve and exchange rate flexibility increases,” said Dhruv Sharma, World Bank Senior Economist.

Enhancing governance, along with greater transparency, is critical to improving the investment climate, attracting foreign direct investment, and diversifying exports beyond the ready-made garment sector. Building resilience to climate change is vital to reduce macroeconomic and fiscal vulnerabilities. Strengthening institutional capacity and optimizing spending efficiency will aid in achieving climate goals. The government should focus on implementing climate-sensitive fiscal reforms and investing in sustainable, resilient infrastructure. Furthermore, robust management of climate-related risks will reinforce the stability of the financial sector, IMF prescribed.

Chris Papageorgiou said, “To address the emerging external financing gap and persistently high inflation, near-term policy tightening is crucial. Fiscal consolidation should prioritize the swift implementation of additional revenue measures, such as removing tax exemptions, while restraining non-essential spending. Coupled with monetary tightening, greater exchange rate flexibility and safeguarding foreign exchange reserve buffers will strengthen the economy’s resilience to external shocks.

“Bangladesh’s low tax-to-GDP ratio calls for urgent tax reforms to establish a fairer, more transparent system and sustainably increase revenue, focusing on rationalizing exemptions, improving compliance, and separating tax policy from administration. A comprehensive strategy is also needed to curb subsidy spending and address arrears in the electricity and fertiliser sectors.

“Addressing vulnerabilities in the banking sector is essential. Immediate priorities include accurately assessing non-performing loans, ensuring the effective implementation of existing regulations, and formulating a roadmap for financial sector restructuring. Key actions involve conducting an asset quality review and adopting a recovery and resolution framework aligned with global standards. Simultaneously, the authorities should advance risk-based supervision, while legal reforms are needed to strengthen corporate governance and regulatory frameworks. Institutional reforms to enhance Bangladesh Bank’s independence and governance will be critical for the successful implementation of financial sector reforms.