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Published : 09 Apr 2025, 02:54 AM
Bangladesh's pursuit of the next tranche of the International Monetary Fund (IMF) loan is mired in intricate fiscal calculations.
The nation is caught between the imperative to elevate its financial policies and management to global benchmarks and the stark reality of its present implementation capabilities.
Ahead of the forthcoming 2025-26 fiscal year budget, it hopes to receive the fourth and fifth tranches of the loan.
While not large in amount, economists consider the funds to be critical.
They argue that the continuity of the IMF loan serves a more vital purpose for Bangladesh: signalling to the global community the nation's commitment to financial stability.
Failure to maintain this continuity could jeopardise budget support funds from other lenders.
Zahid Hussain, former chief economist of the World Bank’s Dhaka office, told bdnews24.com: “Bangladesh needs liquid funds to implement the upcoming budget.
“That budget support must come from the World Bank and the [Asian Development Bank]. Whether that happens depends on the IMF’s message. That’s where the importance of this tranche lies,” he added.
In response to a deepening financial crisis, Bangladesh entered into a $4.7 billion loan agreement with the global lender in early 2023 following several rounds of negotiations that began in 2022.
Under the agreement, the IMF released $476.2 million in February 2023 as the first instalment, followed by $682 million in December.
The third tranche, amounting to $1.15 billion, was disbursed in June last year.
The IMF, however, withheld the fourth tranche due to unmet conditions, including the market-based adjustment of the exchange rate, failure to meet the net foreign currency reserves target, and non-compliance with the revenue system targets set by the organisation.
An IMF mission visited Dhaka in December following the government change.
At the time, the interim government expressed hope that the fourth tranche would arrive between February and March this year.
Finance Advisor Salehuddin Ahmed had said then that if the IMF board approved the disbursement, Bangladesh could receive around $1.1 billion under the fourth tranche, with some additional funds included.
The IMF had originally planned to release $645 million within Feb 10, following a board meeting on 5 Feb 5, contingent on a review of the third instalment’s usage.
There were four key conditions tied to the fourth tranche: strengthening revenue collection to ease external pressure, tightening monetary policy to curb inflation, making the foreign exchange rate fully market-based, and implementing climate-related policies to ensure green growth.
The IMF reportedly remains unsatisfied with the progress in meeting the conditions related to the exchange rate and revenue mobilisation.
In February, Salehuddin noted that failure to meet two conditions could delay the fourth tranche and both the fourth and fifth tranches might be released together in June.
Currently, an IMF team is in Dhaka to review both the implementation of fourth tranche conditions and the use of third tranche funds.
The government, however, is reportedly unable to provide significant updates on the progress needed for the timely release of the fourth tranche, as required by the IMF.
As a result, uncertainty has grown among Bangladesh Bank officials over whether the fourth and fifth tranches will be released together.
Economists say the authorities must present the real reasons behind the failure to meet the conditions and work towards reaching an understanding with the IMF.
GOVT’S KEY CHALLENGES IN MEETING IMF CONDITIONS
Before releasing each loan instalment, the IMF reviews how the previous funds were utilised and may revise or introduce new conditions.
During the third tranche, the IMF relaxed the reserve target condition for Bangladesh.
This time, to secure both the fourth and fifth instalments together, Bangladesh must meet several key conditions.
Among the conditions tied to Bangladesh Bank are: further tightening of monetary policy, allowing the exchange rate to be fully determined by the market, and meeting the target for net international reserves.
The National Board of Revenue (NBR) must deliver on its own set of commitments, including raising additional revenue equivalent to 0.5 percent of GDP, separating tax policy from tax administration, ending tax exemptions, and moving the entire tax collection process online.
The Finance Division is expected to reduce interest subsidies on national savings certificates to a more reasonable level, while the energy ministry is tasked with cutting subsidies in the energy sector.
Progress in implementing these conditions has seen little improvement since December.
Against this backdrop, an IMF delegation began its latest mission in Bangladesh on Sunday. The team will hold meetings with different government offices and agencies until Apr 17.
The mission is being led once again by Chris Papageorgiou, head of the Development Macroeconomics Division in the IMF’s Research Department.
The 11-member team will hold discussions with the Finance Division, Bangladesh Bank, NBR, Power Division, Power Development Board (PDB), Bangladesh Energy Regulatory Commission (BERC), and the Energy and Mineral Resources Division, among others.
On the opening day of talks, Governor Ahsan H Mansur requested the IMF to allow time until June to implement a fully market-based exchange rate system.
Officials argued that if inflation drops to around 8 percent by June, it would be possible to adopt a floating exchange rate.
According to the latest figures from the Bangladesh Bureau of Statistics (BBS), overall inflation fell to 9.32 percent in February – the lowest in 22 months.
However, fresh data released on Tuesday show that inflation rose again in March, reaching 9.35 percent.
As part of its reform efforts, Bangladesh Bank issued a circular on Dec 31 announcing yet another change in its method for dollar trading.
IMF PRESSES BANGLADESH FOR BOLD REVENUE MEASURES
To unlock the next two instalments of its loan package, the IMF has asked Bangladesh to raise its revenue collection by 0.5 percent of GDP by the end of the current fiscal year.
To help meet this goal, the IMF has advised splitting the NBR into two entities – separating tax policy from tax administration.
The government announced this decision just before the Eid-ul-Fitr holidays, but little progress has been made in implementing the plan.
On Monday, IMF delegates held talks with NBR officials.
During the meeting, NBR requested a relaxation of the condition requiring an additional Tk 570 billion in revenue collection in the next fiscal year, saying other measures would take more time to implement.
Al Amin, associate professor at Dhaka University’s Department of Accounting and Information Systems, told bdnews24.com that it would not be “realistic” to expect the NBR to quickly meet IMF conditions.
“The IMF always pushes for international standards. We, too, want to get there. But we must assess how far reality diverges from those expectations,” he said.
“What matters is whether our implementation capacity is improving, and that should be part of the review.”
Economist Zahid Hussain suggested phasing out tax exemptions and further lowering tax rates while increasing direct tax collection.
“NBR has a plan on how to raise direct tax revenues. The question is not whether there is a plan, but whether it is being implemented,” he said.
“Transparency on how far implementation has progressed would help build trust and make discussions easier.”
The IMF loan programme also requires the government to cut subsidies in the power and energy sectors.
In response, the government has been adjusting fuel and energy prices in line with global market trends.
Highlighting an alternative strategy, Zahid, a former World Bank economist, said the government aims to reduce subsidies not by raising prices, but by cutting operating costs and depreciation.
He also noted that the IMF wants a transparent pricing mechanism for fuel and energy.
[Writing in English by Arshi Fatiha Quazi and Sheikh Fariha Brisry]
