IMF Approves Bangladesh’s $4.5 Billion Loan Assistance

IMF Approves Bangladesh's $4.5 Billion Loan Assistance

On the 9th of November 2022, Washington-based multilateral lender, International Monetary Fund, finally agreed to approve a loan request of over $4.5 billion of the Bangladeshi government. As per the IMF press release, the loan will be provided to support Bangladesh’s economic policies under a 42-month arrangement of about $3.2 billion under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) as well as about $1.3 billion under the Resilience and Sustainability Facility” (RSF). With this, Bangladesh will be taking 13 loans from the IMF. The last package was taken in 2012.

As per the contract, this amount will be paid in a total of 7 installments and each installment will be released every 6 months. Finance Minister Mustafa Kamal said that the first installment, amounting to $447.48 million, will be received in February 2023. In subsequent installments, this amount will increase to $659.18 million.

Meanwhile, the interest rate on the repayment of the loan will depend on the market rate at the time of maturity. According to the finance ministry’s calculation, the rate would be around 2.2%. From the $4.5 billion, $3.2 billion under ECF & EFF program, should be paid back within 10 years, where the ECF program has a grace period of 3.5 years and 5.5 years grace period for the EFF program. The rest of the $1.3 billion under the RSF program needs to be paid over 20 years, which also has an extended grace period of 10 years.

While landing a loan, apart from interest, IMF also adds some conditions. They often insist governments to reduce public spending, increase taxes and apply reformed designs like withdrawing subsidies for fuel or food to minimize the debt-to-GDP ratio. Luckily, Bangladesh was fortunate that this time IMF didn’t offer any strict criteria or conditions. However, the multi-lateral organization wants the government of Bangladesh to accomplish previously taken fiscal & policy reformation agendas. Mr. Mustafa Kamal said, “We got what we wanted, we are getting the loan at the terms that we wanted.”

According to Mustafa Kamal, the government will endeavor to implement its reform agenda, including raising the tax-GDP ratio, implementing VAT, and setting up a company to manage soured debts. With this loan, the reformation will help build up the foreign currency reserves in the short term and create the fiscal space for higher social spending and mitigate the effects of climate change in the medium to long term.

Rahul Anand, the leader of the ten-member IMF mission said, “The immediate goal for the moment is to stabilize the macroeconomic situation by rebuilding the reserve buffer. During the pandemic, reserves went up to $48 million, but that was a one-off. Exports rebounded very quickly because of the stimulus package but also trade diversion from China, Vietnam, and Myanmar, while imports were very low. That led to an artificial build-up of reserves .”

After the pandemic, the economy started to rebound, but in the meantime, the Russia-Ukrain War happened, and the price of commodity products went up considerably. Due to high import prices, the balance of payment remains under pressure for a long time. In FY 2021-22, the average import bill has gone up to $6 billion per month, and Bangladesh Bank has already supplied $4.5 billion to keep the country’s economy running and support the foreign currency exchange rate. Thus, the country’s foreign exchange reserve started depleting and now it stands at $34.47 billion.

Mr. Anand also said, “Whether three months’ reserves are high or low is difficult to say in the current situation because the global economy is in such turmoil. There is so much uncertainty, nobody knows how this war will play out and what would be the spill-over effects.”

Additionally, IMF officials will ensure that the loan programme catalyzes additional financing from other development and bilateral partners, which will help to make the dollar stockpile high. And this way the IMF officials dismissed any possibilities of Bangladesh to become Sri Lanka.

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