Release of $3 billion foreign loan may get stuck

Bangladesh has already held several meetings over the release of the fourth and fifth installments of the International Monetary Fund (IMF) loan. But uncertainty looms over the release of the fourth tranches as Bangladesh could not fulfil the prior conditions, and there has been disagreement between the government and the IMF over the issues. Even if Bangladesh exits this loan programme, there are concerns about getting the $3 billion in the loan pipeline from international lending organizations.

The IMF mission ended in the first week of April after reviewing the economic situation regarding the installment. No agreement was reached on the conditions at that time. In late April, while attending the IMF and World Bank spring meetings in Washington, the United States, senior officials, including Bangladesh's Financial Advisor Salehuddin Ahmed and Bangladesh Bank Governor Ahsan H. Mansur, met with IMF officials. 

A responsible source in the Ministry of Finance said that an agreement was reached on the revenue collection target in that meeting. Earlier, the IMF had set a target of Tk570 billion for the current fiscal year. Now, a new target of Tk455 billion has been set, to which Bangladesh has agreed.

But the issue of opening up the foreign exchange rate remained unresolved in the meeting. The IMF wants the exchange rate to be left entirely to the market. If there is a problem in the economy, then the current Tk3 fluctuation limit can be increased to Tk7 to 8. However, Bangladesh Bank believes that leaving the exchange rate to the market will create pressure on various sectors, including reserves. To deal with that pressure, Bangladesh needs a stabilization fund of 1 billion dollars. However, the IMF is not accepting it, and this has stalled the matter.

According to sources, a total of about 3 billion dollars is in the pipeline, including 500 million from the World Bank, 500 million from the Asian Development Bank (ADB), 400 million from the Asian Infrastructure Investment Bank (AIIB), 250 million from JICA, and about 2.5 billion dollars from the IMF. If the IMF loan program is canceled, the loans of these international lending organizations may also be blocked.

Amidst the foreign exchange supply crisis, Sheikh Hasina's government sought a loan from the IMF in 2022. After several rounds of negotiations, the Washington-based financial institution approved a loan of 4.7 billion dollars in seven installments on January 31, 2023.

After that, Bangladesh also received money in three installments. On February 2, 2023, Bangladesh received the first installment of 476.3 million dollars from the IMF. In December of that year, it received the second installment of 681 million dollars. And in June last year, it received the third installment of 1.15 billion dollars. Bangladesh has received $2.31 billion from the IMF in three installments. The remaining $2.39 billion of the loan is expected to be received in four installments.

As the two parties (government and IMF) could not reach an agreement, receiving $2.39 billion of the remaining four installments has now become uncertain.

Returning to the country on April 29 after participating in the World Bank-IMF spring meeting, Finance Adviser Salehuddin Ahmed said: "Bangladesh is no longer dependent on the IMF and the World Bank. The interim government is not desperate to receive the remaining installments of the IMF loan. We do not want to take a loan by accepting all their conditions. Bangladesh's economy is better than at any time in the past. Therefore, we will not accept any of the organization's conditions against giving a loan."

He also said: "The IMF wants the foreign exchange rate to be left to the market. If that is done, the dollar exchange rate could reach Tk160- 200. Then the situation could be like Sri Lanka or Pakistan. In the country's economic situation, it is not possible to leave the dollar exchange rate completely to the market. We will not accept all the IMF conditions. We will make our own decisions. If the IMF gives the installment, we will pay; if not, we will make our budget."

An official of the Ministry of Finance told Views Bangladesh on condition of anonymity: "The IMF loan programme cannot be discussed right now. We will have to wait for a few more days for this. However, if the IMF exits the loan programme, there will be no problem for now. There may be a problem in the long term."

He said that the reason is that the foreign exchange reserves are currently $26 billion. And according to the IMF, this reserve is $20 to $21 billion. As a result, there will be no problem if Bangladesh is not in the loan programme at the moment. However, there may be a problem if the loan is needed again in the future. A decision will have to be made keeping this in mind.

Last December, Bangladesh Bank set a limit of fluctuation of up to 2.5 percent based on the fixed price of the dollar. At that time, it was said that the dollar could be traded up to Tk123. Now, banks are buying and selling dollars at a rate of Tk122 to 123.

According to central bank officials, it is difficult to leave the exchange rate completely to the market in a developing country like Bangladesh. If a completely market-based exchange rate system is introduced, the economy could suffer a major blow at any time.

The dollar rate has risen in Bangladesh since 2022. The dollar has been artificially held for a long time, and the dollar exchange rate has suddenly risen due to global conditions, including the Ukraine war. In two and a half years, the US dollar price has risen from Tk85 to Tk120 during this period.

Apart from the dollar price, the IMF also has conditions such as reducing subsidies in various sectors, including agriculture and energy, and reforming the revenue sector. However, Bangladesh is fulfilling these conditions step by step.

Bangladesh has taken small and large loans from the IMF 13 times since its independence. The last extended credit assistance was taken in 2012 when Bangladesh received $1 billion from the (ECF). Bangladesh has also received all the installments.

Contacting concerned officials, Views Bangladesh learned that no loan programme has been completed completely before this. The last time, in 2003, it was supposed to receive $490 million from the Poverty Reduction and Growth Facility (PRGF) programme. However, after receiving three installments due to the lack of desired reforms, the IMF suspended the remaining three installments.

In addition, in 1991, another loan programme was suspended midway due to the failure to reach an agreement with the then Finance Minister Saifur Rahman on economic reforms as a condition. Bangladesh did not go for any loan programme with the IMF for the next 10 years. Bangladesh first took a loan of about $40 million from the IMF in 1973.

Regarding this issue, Zahid Hossain, former chief economist of the World Bank's Dhaka office, said that the negative message that would be sent to the global community if the IMF loan is suspended could cause Bangladesh to lose confidence in foreign investors. In addition, the discussions underway with the World Bank and ADB for budget assistance of $200 to 250 million may be closed.

He said, the economic reforms, including the banking sector, tax system, government expenditure management, exchange rate policy, etc., that have been talked about for a long time, but could not be done due to political influencers, can be done if the IMF programme continues. Besides, it will send a message to the outside world that the IMF is on Bangladesh's side. Otherwise, the opposite picture may emerge.