Bangladesh expects $5.5b from WB, IMF in budget support

Bangladesh is for the first time looking to get more than $1 billion from the World Bank at zero interest – a fillip to dwindling foreign currency reserves.  

Besides, the finance ministry is in talks with the International Monetary Fund (IMF) to obtain $4.5 billion at low interests as a support for the country’s balance of payments.

In this way, $5.5 billion in total is expected in next three years from the two Washington-based lenders as part of precautionary measures to deal with external payment deficit and foreign currency shortages caused by the ongoing Russia-Ukraine war, according to finance ministry officials in the know about the development.

To secure the IMF loan to shore up forex reserves, top officials at the ERD will virtually meet with the IMF country representative today (Wednesday) to discuss it.

On 12 July, an IMF mission will come to Bangladesh for a negotiation over the loan. Before that, the finance ministry will send a letter to the development lender upon receiving permission from Prime Minister Sheikh Hasina in regard to implementing IMF terms and conditions, a finance ministry official told The Business Standard, seeking anonymity.

There are now big deficits in Bangladesh’s balance of payments and current account balance because of rising prices of commodities in the global market and higher import bills than export earnings.

As a result, the forex reserve has come under strain and inflation hit an eight-year high with taka losing its value substantially.

With Europe and the United States facing recession risks, Bangladesh might see its export earnings fall in days to come.

In July-April of the current fiscal year, Bangladesh’s trade deficit stood at $27.57 billion, while its current account deficit was $15.32 billion.

In FY22, the Bangladesh Bank has so far injected around $7 billion into the forex market to meet the dollar crisis. The country now has around $42 billion in its forex reserve.

In this situation, the government is planning to get the $4.5 billion budget support as a preparation to tackle possible risks in the next three years, considering the present global uncertainties, said ERD officials.

Sri Lanka and Pakistan have also sought budget support from the IMF to address their foreign exchange crises. The two countries had to raise fuel prices by withdrawing subsidies as part of compliance with the IMF conditions. Petrol now costs Rs500 per litre. The fuel price hike in Pakistan has caused uproar.

Noting that the IMF may not impose conditions on Bangladesh to withdraw subsidies on oil, gas, electricity and fertilisers, finance ministry officials said Bangladesh’s position is much better than Pakistan’s and Sri Lanka’s as the country’s subsidies are still low in proportion to GDP.

Asked about the IMF’s conditionalities for Bangladesh, a senior ERD official said those are not yet fixed. But implementing reforms in state-owned commercial banks, reducing non-performing loans, developing capital markets, especially for the domestic debt market, and improving monetary, fiscal and financial governance are expected to come with the loan offers.

Broader issues that may also be tagged include modernising monetary policy framework, improving fiscal frameworks and reducing fiscal risks, creating fiscal space for growth-enhancing and inclusive spending, reducing financial vulnerabilities by recognising problems, strengthening supervision and enhance regulation, enhancing the quality of data and carrying out reforms related to reducing climate related vulnerabilities, he noted.

Mentioning that Bangladesh has received IMF’s budget support three times before, a Finance Division official said the first such assistance was disbursed by the IMF was in 1991-1992.

The government took $500 million in budget support to cover the balance of payment deficit for the second time in 2012 when the value of taka against dollars fell sharply. At that time, the government enacted the much-discussed VAT law as part of meeting the IMF’s conditions.

Later, the government received a budget support amounting to $750 million from the IMF in Covid-19 times without requiring to fulfil many such conditions.

ERD and Finance Division officials said the government will take loans from three IMF programmes – the Extended Credit Facility, the Extended Fund Facility and the Resilience and Sustainability Facility – as there is no opportunity to borrow much from a single one.

There is no interest on the loan taken from Extended Credit Facility, not even any service charge. Bangladesh will get a grace period of 5.5 years to repay this loan over a period of 10 years.

The interest rates on two other packages vary between 1.54% and 1.79%.

Ahsan H Mansur, former IMF official and executive director at the Policy Research Institute told TBS that if the government pays attention to necessary reforms, budget support from the IMF will be available before the country falls in any crisis.

Once the crisis begins, it will be difficult to get the support, he said.

The IMF will impose conditions for different reforms on providing such a large amount of financial support, the implementation of which will require the government’s political consent.

No reform has been taking place in Bangladesh for many years, he noted, adding that this is the last chance for reforms, the government will not be able to reform next year when the national elections will be held.

“If we get budget support from the IMF, other agencies, including the World Bank, will come forward with such support,” he added.

New WB window

The World Bank for the first time has opened up the short maturity loan window without interest for all lower-middle-income countries like Bangladesh, to help the countries overcome pandemic shocks.

The loan window will remain open for three years from July 2022 to June 2025 under the 20th International Development Association replenishment (IDA20), the largest financing package involving $93 billion to date.  The repayment time is 12 years including a grace period of six years.
According to Economic Relations Divisions (ERD) officials, an IDA member country will have a scope for taking out 25% in a short maturity loan of what will be earmarked for it in the IDA20 package.

IDA-green, IDA-gap, and IDA-blend countries will be eligible for this interest-free loan.

The ceiling for IDA20 has not been set yet. Under IDA19, Bangladesh had access to $4.2 billion. The amount in the latest financing package will not be less than that. So, the zero-interest loan will stand at more than $1 billion, they noted.

As the IDA20 package will take effect from next July, Bangladesh has started trying to get the zero-interest loan as quickly as possible because if the loan is secured and utilised in the initial phase, there will be an opportunity to get more from those unused by other IDA members.