The International Monetary Fund (IMF) has agreed to release $645 million as the fourth tranche of the existing $4.7 billion loan programme for Bangladesh.
The lender made an announcement to this end through a statement after its team, led by Chris Papageorgiou, completed third review of the Bangladesh economy during 3-18 December.
A positive response also came from them to a request of Bangladesh authorities to enhance the existing loan programme by another $750 million to address emerging macroeconomic challenges.
This increase will raise the existing loan programme to nearly $5.3 billion, including $4 billion ECF and EFF arrangements alongside concurrent RSF arrangements of $1.3 billion.
In January 2023, the IMF approved the $4.7 billion loans for Bangladesh and the country has so far received $2.15 billion in three tranches.
The fourth tranche will include about $426 million ECF and EFF and $219 million RSF.
“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,” Chris Papageorgiou, head of the IMF team, said in the statement.
“The staff-level agreement is subject to approval by the Executive Board, which is expected in the coming weeks,” he added.
The IMF says 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.
The IMF predicts that 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.
To address the emerging external financing gap and persistently high inflation, near-term policy tightening is crucial. Fiscal consolidation should prioritise the swift implementation of additional revenue measures, such as removing tax exemptions, while restraining non-essential spending, the IMF suggests.
Coupled with monetary tightening, greater exchange rate flexibility and safeguarding foreign exchange reserve buffers will strengthen the economy’s resilience to external shocks, it said.
“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 rationalising exemptions, improving compliance, and separating tax policy from administration,” reads the statement.
A comprehensive strategy is also needed to curb subsidy spending and address arrears in the electricity and fertilizer 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.
“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 social vulnerabilities.
Strengthening institutional capacity and optimizing spending efficiency will aid in achieving climate goals.
The government should focus on implementing climate-sensitive social reforms and investing in sustainable, resilient infrastructure, according to the IMF.
Furthermore, robust management of climate-related risks will reinforce the stability of the financial sector.