IMF sets Bangladesh's net reserve target at $19.27b for 3rd instalment

The International Monetary Fund (IMF) has set the net foreign exchange reserve ceiling to $17.78 billion for December, revising it down from the previous target of $26.8 billion.

The new condition for maintaining net reserve was set at its first review report under the $4.7 billion loan package that the IMF disclosed Friday.

The IMF also disclosed that net reserve stood at $15.9 billion in October when gross reserve was $20.3 billion.

The net reserve target of $19.267 billion by next March set by the donor to receive the third tranche of the loan would be difficult to achieve, says economists.

The IMF eased conditions for the loan's third tranche due to a shortfall, originally set at $26.81 billion for December this year, with the target reduced to $17.78 billion.

An IMF board meeting on Friday approved the release of $689 million in the second tranche of the $4.7 billion loan package allocated for Bangladesh.

Bangladesh Bank failed to meet the net reserve target for June. The net reserve was $19.5 billion in June against the target of $23.7 billion, according to the IMF report. However, the targets are difficult to achieve to secure the third tranche of the global lender's $4.7 billion loan, economists say.

To add an additional $3.5 billion to the current $15.5 billion reserves in the next three months, at least half of the $12 billion export earnings will have to be repatriated in addition to reducing dollar sales from reserves, they say.

Meanwhile, the central bank has said $1.31 billion will be added to the reserves from various sources this December.

Economists pointed out flaws in the central bank's assertion saying the $689 million second tranche, approved this month, will be added to both assets and liabilities, so the money will not add to net reserves.

Additionally, to meet the December target, about $2 billion will have to be added to the reserves in the next 15 days, they added. This deficit will not be met with the budget support available from the Asian Development Bank, the World Bank, and other organisations.

Nevertheless, even if the condition of net reserves cannot be met in December, the March target must be met by bringing the export income of $12 billion from abroad quickly to the country.

Dr Ahsan H Mansur, executive director, Policy Research Institute of Bangladesh (PRI),  tells The Business Standard that even if the IMF eases the net reserve requirements, it will be difficult for Bangladesh to meet the December and March targets.

"Another $2 billion would have to be added by December to meet the IMF's conditions. Where will these dollars come from? And March's target is much higher. Meeting the March target would require an additional $3.5 billion from now, which is extremely difficult," says the economist.

Zahid Hussain, former lead economist at the World Bank's Dhaka office, notes that the challenge lies in Bangladesh Bank consistently selling about $1 billion per month from the reserve.

He says it is important to repatriate at least $5-$6 billion from the export bill and manage dollar sales from the reserve to meet the IMF's target

"It will be possible to achieve quantitative performance criteria, indicative targets and structural benchmarks to get the third instalment. The only hurdle will be meeting the net reserve target," he says.

Despite facing various challenges, Zahid Hussain says that there is still a possibility of receiving the third instalment.

First tranche of the loan package was cleared on 30 January. Bangladesh received $447.8 million on 2 February. The entire amount will be released in seven instalments till 2026.

The fourth instalment of the loan will be available in December 2024, requiring net reserves to be raised to $20.20 billion by next June.

Predictions and recommendations

According to the IMF, weaker growth in Bangladesh's major trading partners could adversely affect exports and remittances.

The multilateral lender further says delayed adjustments to monetary and exchange rate policies and insufficient efforts to address elevated non-performing loans (NPLs) in the banking sector could undermine financial stability and dampen growth prospects.

Besides, the upcoming national elections could further add to economic uncertainty. On the upside, prompt implementation of priority reforms could lift potential growth and strengthen climate resilience.

The lender has made six strong recommendations for Bangladesh to take. At the IMF meeting, multilateral lender IMF recommends that, given persistent inflationary and external pressures, Bangladesh should adopt a strategy of monetary tightening alongside a neutral fiscal stance and increased exchange rate flexibility to curb inflation and enhance external sustainability.

The IMF further suggests that raising tax revenues and streamlining expenditures would enable more social, developmental, and climate-related spending.

Continuous efforts to improve public financial and investment management are essential for efficient spending and to reduce fiscal risks.

The IMF advises focusing on financial reforms, strengthening banking regulation and supervision, and deepening capital markets to support growth objectives.

To address vulnerabilities in the banking sector, the IMF recommends implementing strategies to reduce non-performing loans (NPLs) and restore capital in state-owned commercial banks.

It underscores the importance of modernising the monetary policy framework and improving policy transmission for macroeconomic stability.

Economic scenario

The IMF observes that in FY23, real GDP growth in bangladesh slowed to 6% from the post-pandemic recovery peak of 7%, driven by rising living costs that dampened real wages and purchasing power, constraining private demand.

Investment remained low to protect foreign exchange reserves. Headline inflation hit a decade-high of 9.9% in August 2023, influenced by cost-push shocks from volatile food and fuel prices, and taka depreciation.

In FY24, real GDP growth is projected at 6%, down from the approved 6.5%. Export growth is expected to drive the economy, while subdued private demand persists due to inflation and ongoing monetary policy tightening.

Investment may pick up as forex pressures ease, but a simultaneous recovery in imports is likely. Inflation is projected to gradually ease to 7.2% by end-FY24, influenced by second-round effects from rising fuel and food prices and taka depreciation, the IMF says.

The IMF also praised Bangladesh for taking decisive measures to control subsidies by adjusting fuel prices in line with global increases.