$4.7 billion IMF credit lifeline to Bangladesh

The International Monetary Fund (IMF) this week approved a 42-month credit line of US$4.7 billion including US$3.3 billion under the Extended Credit Facility (ECF) and Extended Fund Facility (EFF), as well as US$1.4 billion under the newly created Resilience and Sustainability Facility (RSF).

This approval enables the immediate disbursement of US$476 million. Bangladesh is the first Asian country to access the RSF.

“The 42-month program will help preserve macroeconomic stability, protect the vulnerable, and foster inclusive and green growth. Reforms will focus on creating fiscal space to enable greater social and developmental spending; strengthening the financial sector; modernizing policy frameworks; and building climate resilience,” IMF said in a statement.

Bangladesh’s robust economic recovery from the pandemic has been interrupted by Russia’s war in Ukraine, leading to a sharp widening of Bangladesh’s current account deficit, depreciation of the Taka and a decline in foreign exchange reserves. The authorities have taken on a comprehensive set of measures to deal with these latest economic disruptions.

The World Bank in its latest Global Economic Prospects report issued last month forecast the country’s GDP growth rate to decline to 5.2 percent in the Financial Year (FY) 2023. It cites rising inflation and its negative impact on household incomes and firms’ input costs, as well as energy shortages, import restrictions, and monetary policy tightening as the reasons for the sharp slowdown from 7.2 percent in FY 2022 to 5.2 percent in FY 2023. However, the growth rate is forecast to rise to 6.2 percent in FY 2024.

IMF says that Bangladesh authorities recognize that in addition to tackling these immediate challenges, long-standing structural issues and vulnerabilities related to climate change will also need to be addressed to accelerate growth, attract private investment, enhance productivity, and build climate resilience. The IMF-supported program under the ECF/EFF arrangements will help preserve macroeconomic stability and prevent disruptive adjustments to protect the vulnerable, while laying the foundations for strong, inclusive, and environmentally sustainable growth.

The concurrent RSF arrangement will supplement the resources made available under the ECF/EFF to expand the fiscal space to finance climate investment priorities identified in the authorities’ plans, help catalyze additional financing, and build resilience against long-term climate risks.

Antoinette M. Sayeh, Deputy Managing Director, and Acting Chair, said, “Since independence, Bangladesh has made steady progress in reducing poverty and significant improvements in living standards. However, the COVID-19 pandemic and subsequent Russia’s war in Ukraine interrupted this long period of robust economic performance. Multiple shocks have made macroeconomic management challenging in Bangladesh.

“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. In this regard, 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 and Development Goals (SDGs). The authorities recognize these challenges and also the need to tackle climate change issues, which expose the economy to large risks that could threaten macroeconomic stability.”

The ECF/EFF arrangement will protect macroeconomic stability and rebuild buffers, while helping to advance the authorities’ reform agenda, she added. The implementation of the domestic revenue mobilization strategy that relies on both tax policy and revenue administration reforms will allow increasing social, development and climate spending sustainably. Fiscal reforms to strengthen the management of public finance, investment, and debt will improve spending efficiency, governance, and transparency.

“Reducing financial sector vulnerabilities, strengthening oversight, enhancing governance and the regulatory framework, and developing capital markets will help mobilize financing to support growth objectives. Structural reforms to create conducive environment to expand trade and foreign direct investment, deepening the financial sector, developing human capital, and improving governance to enhance the business climate are needed to lift growth potential. Access to RSF will provide financing to support Bangladesh’s climate change adaptation and mitigation efforts,” she said.

“The RSF reforms will complement reforms under the ECF/EFF by improving climate investment potential, strengthening institutions and enhancing climate-spending efficiency to build resilience and catalyze additional official and private finance.”

The Ukraine war pushed many South Asian economies into crisis in 2022, but the situation in Bangladesh – in purely economic terms – has been much less serious than that of countries such as Sri Lanka and Pakistan, says analysts.

Johann Chacko, an economic analyst, says, despite soaring import bills and a doubling of inflation, the International Monetary Fund and UN in October forecasted 6 per cent growth for 2022-23, which is markedly better than the region – 4.8 per cent – or the world as a whole – 1.9 per cent.

“The IMF Executive Board voted on January 30 in Washington to approve a $4.5-billion economic support package for Bangladesh, with the first payment of close to $450 million to go out in February. So why isn’t the mood of pessimism and alarm in Bangladesh dissipating, given all of these favourable conditions?,” Johann Chacko, says in an article.

“The short answer is that this crisis is about much more than the cost of petrol and electricity, or how much foreign exchange the country has. Corruption has remained a serious problem, with Bangladesh consistently scoring in the bottom 20 per cent of Transparency International’s global index, the worst in South Asia with the exception of Afghanistan. At its heart, it is about the widespread loss of confidence in the Bangladeshi government’s will to properly perform its duties of economic stewardship, whether protecting the vulnerable, supporting the middle class or enabling entrepreneurs and established businesses to succeed.”

The collection of taxes and duties has been poor, and most seriously, the weakly regulated banking sector has become an increasing source of concern for its growing portfolio of non-performing loans. The Ukraine war and its impact on energy prices were, of course, external to the Bangladeshi economy, but the government’s level of exposure to those shocks and the quality of its crisis management have brought to the fore a pervasive sense that a rotten political and bureaucratic culture had made things far worse than they needed to be, Chacko argues.

“For example, the government’s declining willingness to invest in existing domestic gasfields, or in developing coal reserves, or in pursuing industrial-scale renewable energy production led to a much greater reliance on imports and swings in a volatile global market than was necessary. While this was profitable for importers, the results for the rest of the economy were far more dire. This was magnified by the seemingly indiscriminate emergency controls placed on foreign exchange transactions by the government when reserves started to rapidly dip.”

Bangladesh’s leadership has been sensitive to donors and markets, and the IMF in turn seems to largely agree with public sentiment. The conditionalities on the loan disbursal require a 26-month programme of reforms: improved tax capture; improved regulation of the banking sector; investments in renewable power generation and more protection for vulnerable segments of the population, he says.

“This rare but fortunate alignment between the global financial institutions and public sentiment in a recipient country represents an opportunity for the Bangladeshi government. It is a chance to forge a new path by cleaning house and rebuilding its legitimacy with its people. The failure to seize this opportunity will not only derail its goal of sustained growth, but intensify political and economic instability, quite possibly beyond this government’s ability to contain. The next two years will reveal what course the government has chosen to embrace,” Chacko concludes.