Explainer: Why IMF granted $4.7b loan to Bangladesh

Rahul Anand, the Mission Chief of the International Monetary Fund (IMF) in Bangladesh, has answered a set of questions that are frequently asked about the international lender's programme in Bangladesh. 

Q. What was the rationale for the IMF to consider and approve the financing arrangements for Bangladesh?

Ans: In light of the sustained risks that confront the global economy, Bangladesh has requested IMF-supported program to restore macroeconomic stability. And even as Bangladesh tackles these immediate challenges, it also recognizes the need to undertake some long-due structural reforms, such as raising more tax revenues, which is critical to increase public investments to support the poor and vulnerable. 

The IMF always recommends countries to come early. The authorities made the right decision to come to the Fund—and most importantly, to come to the Fund early. Turning to the Fund when countries are already in crisis could make the adjustments particularly hard on people.

Q. What is the IMF's assessment on Bangladesh's near-term economic outlook?

Ans: Bangladesh is not in crisis. Just like countries around the world, Bangladesh is dealing with the impact of global shocks – first from the pandemic and then from the ongoing war in Ukraine. Bangladesh's robust economic recovery from the COVID-19 pandemic was interrupted by Russia's war in Ukraine.

Near-term growth is projected to slow to 5.5 percent in FY23 and 6.5 percent in FY24, compared to the pre-war growth projections at above 7 percent. Rising global commodity prices, supply disruptions, and slowdown in external demand have led to high inflation, a sharp widening of the current account deficit, depreciation of the Taka and the rapid decline of foreign exchange reserves. Nevertheless, Bangladesh's overall risk of debt distress remains low.

Q. How does the IMF assess Bangladesh's policy response to recent global shocks?

Ans: The authorities took the necessary steps to navigate these challenges, including tightening of the monetary stance, allowing for a more flexible exchange rate, imposing temporary restrictions on non-essential and energy-related imports, and adopting measures to reduce electricity demand. Steps were also taken to reprioritize spending to protect the vulnerable. Bangladesh's request for an IMF-supported program is part of the authorities' measures to cushion its economy from the disruptions caused by these global challenges.

Q. What are the key policy priorities for Bangladesh?

Ans: The IMF-supported program aims to support government's plans to preserve macro stability and foster growth. The authorities and IMF staff have worked closely to come up with a program that is most relevant to the  country's economic and development priorities. The authorities laid out the reform agenda and the program will support their efforts in addressing the longstanding structural issues of mobilizing revenue, scaling up social spending, modernizing the monetary policy framework, strengthening the financial sector, and building climate resilience.

Q. How will the program help the poor and the vulnerable in Bangladesh?

Ans: IMF financing plays the role of a shock absorber by protecting the broader economy, especially the vulnerable populations, from even greater economic disruption than what might otherwise occur.

The program aims to preserve macroeconomic stability, lay the foundations for further growth, while preventing disruptive adjustments to protect the vulnerable. In fact, the program focuses on social spending, safety net programs and protecting the poor in several ways:

• First, by raising progressive taxes, it aims to increase financing for spending on health care, education and clean water, as well as increase access to electricity, transportation and other infrastructure.
• Second, keeping in mind that social spending is a core component of the social contract, the program also aims to protect and increase social spending by including social spending floors.
• Third, expanding well-targeted social spending under the program will help improve access to basic services and provide economic opportunities for disadvantaged groups.

Q. Why is IMF asking to cut subsidies that will hurt the poor most?

Ans: Not all subsidies are helping the poor and vulnerable. In Bangladesh where gas and electricity are being subsidized, the rich drive more cars and use more air conditioning.

Rationalization of untargeted subsidies will free fiscal resources to strengthen social safety nets and increase development spending. In addition, the programme aims to protect and increase social spending by including social spending floors. This will allow expanding well-targeted social spending to protect the poor and vulnerable.

Q. How will the RSF arrangement support Bangladesh's efforts toward strong, inclusive, and green growth?

Ans: The RSF arrangement under this program aims to help manage climate change related macroeconomic risks. Reflecting Bangladesh's large climate financing needs, the IMF-supported program will expand the fiscal space to finance climate priorities identified in authorities' plans, including by catalyzing other financing.

Bangladesh is the first country in Asia to receive financing under the RSF.

Q. What is the timeline of the program? When will the arrangement be disbursed? 

The Executive Board of the International Monetary Fund (IMF) approved a 42-month ECF/EFF arrangement of SDR 2.5 billion (equivalent to 231.4% of quota or about US$ 3.3 billion), and a concurrent RSF arrangement of SDR 1 billion (equivalent to 93.8% of quota or about US$ 1.4 billion) to support Bangladesh's economic policies. SDR figures for the program are converted at the market rate of US dollar per SDR on the day of program approval.

Approval of the ECF/EFF arrangement enables immediate disbursement of SDR 352.35 million (about US$ 476 million).