The International Monetary Fund's staff-level delegation has just completed its first review of the program agreed with Bangladesh authorities last year for a $4.7 billion sovereign loan. An IMF mission team led by Rahul Anand, the country director for Bangladesh, was in Dhaka for a fortnight from October 4-19 to discuss economic and financial policies in the context of this review. This included reviewing Bangladesh's progress towards a number of financial sector reforms prescribed by the Fund as part of an 'Article IV consultation' - through which the IMF attempts to assess each country's economic health and to forestall future financial problems.

As such, the IMF delegation's work during the time they were here can be likened to a routine health checkup for the economy. At the end of the mission, the office of Anand released a statement that said "Bangladesh authorities and IMF staff conducted discussions for the 2023 Article IV consultation and reached staff-level agreement on the policies needed to complete the first review...The staff-level agreement is subject to IMF Management approval and Executive Board endorsement, which is expected in the coming weeks."

Completion of the first review will make available about $681 million for disbursement as the second tranche of the $4.7 billion loan sanctioned in January by the IMF board, with an immediate disbursement of about $476 million as the first tranche.

"The authorities have made substantial progress on structural reforms under the IMF-supported program, but challenges remain," the Fund said, adding. "Continued global financial tightening, coupled with existing vulnerabilities, is making macroeconomic management challenging, putting pressures on the Taka and FX reserves."

Immediate concerns

The IMF's end-of-mission statement said Bangladesh's near-term policy priorities should focus on containing inflation, softening the impact of economic disruptions on the vulnerable, and building external resilience. It welcomed Bangladesh Bank's decision to raise the policy rate by 75 basis points (bps) on October 4, 2023, that we reported on last week. Further calibrated monetary policy tightening, greater exchange rate flexibility, and tight fiscal policy will help restore macroeconomic stability, it said.

The staff mission assessed growth is projected to stay at 6 percent in FY24, in line with the Fund's latest quarterly outlook, while inflation is projected to moderate to 7¼ percent by end-FY24 (from the present 9.63 percent).

The IMF board is expected to approve the second instalment despite Bangladesh failing to meet targets agreed with the IMF on two key indicators: the foreign exchange reserve and the tax-to-GDP ratio.

Executive Director and spokesperson of Bangladesh Bank Md Mezbaul Haque, while briefing reporters on Thursday (Oct. 19), said: "The IMF had given us some conditions while approving the loan. Some of these conditions are fulfilled. There are failures in two areas. These are - low foreign exchange reserves and a shortfall of revenue collection."

The IMF staff mission agreed to excuse the two missed targets given the "substantial progress on structural reforms" made under the programme.

The target agreed with the IMF for minimum gross forex reserve was $24.46 billion at the end of the last fiscal. It stood at around $21 billion.

The end-of-mission statement of the IMF however presented a quite rosy outlook: "FX reserves are expected to increase gradually in the near term and are projected to reach about four months of prospective imports in the medium term."

It did warn however that "uncertainties around the outlook remain high and risks are tilted to the downside."

The revenue target of Tk 345,000 crore in the 2022-23 fiscal was also missed by a wide berth. The IMF's statement was harsher on this front:

"Raising revenue is critical to create additional space for social spending and investment. Concerted tax policy and administration measures are needed to raise Bangladesh's low tax-to-GDP ratio in a sustainable manner. Rationalising subsidies, improving expenditure efficiency, and managing fiscal risks will allow for additional spending on social safety nets and growth-enhancing investment."

A big victory for the government was in getting the IMF to factor in the present global economic context, and agree to lower its targets for net forex reserves, and tax revenue for future reviews. Originally, Bangladesh was supposed to have at least $26.8 billion in FX reserves at the end of December 2023. That target has now been fixed at about $18.4 billion. The new target for reserves at the end of June 2024, has been set at $20 billion, according to our sister newsagency UNB.

The budget deficit for fiscal 2023-24 cannot be more than 4.6 percent of GDP, as against the 5.2 percent set out in the national budget. Although the budget has set out to collect Tk 450,000 crore in tax, the IMF has given a lower, more realistic target, that may still prove hard to meet.

Interest/exchange rates: Market-ready?

One of the main concerns flagged by the IMF was to do with "modernising monetary and exchange rate policy frameworks and improving FX management remain important to bolster external resilience."

This indicates that further steps are needed on the part of Bangladesh authorities when it comes to setting the interest rate, and exchange rate management, even as it welcomed the introduction of the interest rate corridor system and the adoption of a unified single exchange rate, which is still in its early days. Building on these, the IMF said, Bangladesh Bank should continue to fully operationalise the interest rate targeting framework and gradually move to a flexible exchange rate regime.

Bangladesh Bank introduced a new formula in June to determine the lending interest rate and brought about a single exchange rate recently, but the visiting IMF delegation told senior central bank officials neither is working. It suggested that the BB officials take policy measures for the rates to be determined by the free market.

Bangladesh Bank in June this year withdrew the lending rate cap at 9 percent which was introduced in April 2020, as it was one of the IMF loan conditions.

As per the BB's new interest rate formula, banks can impose a 3 percent margin on the "six-month moving average rate of treasury bills", abbreviated as SMART. The SMART was 7.20 per cent in September and it will be applicable for October, up from 7.14 percent in August. As a result, the highest lending rate would be at 10.20 percent for October and in effect this is also an interest cap, according to the IMF.

Meanwhile the Association of Bankers, Bangladesh (ABB) and the Bangladesh Foreign Exchange Dealers Association (BAFEDA) have been fixing the exchange rate since last year as per the informal directive of the central bank. The two platforms implemented a uniform exchange in September, in line with the central bank's latest monetary policy statement, announced in June.

The dollar crisis that peaked in March is still ongoing with the exchange rate of the US dollar soaring to Tk 110.50 a dollar from Tk 87 a dollar during this period. Yet, the dollar is not available as per the demand. Opening of LCs fell by 18 percent in July-August this year, to $1.05 billion, from $1.28 billion in the similar period of the previous year, while settlement of LCs dropped by more than 22 percent.

The crisis hit the kerb market after the licences of seven money changers were revoked. Most of the money changers in Dhaka allegedly stopped selling dollars, increasing the exchange rate of the US dollar to Tk 119-120 a dollar in the kerb market. The huge spread that has opened up between the official and kerb market rates is widely held to be the main factor behind the worrying drop in remittances that the country has been grappling with.

In response to the IMF delegation, the BB officials informed that if the exchange rate was totally left to the whims of the open market, it would spiral out of control, bringing about negative implications on the rest of the economy. Furthermore, it will be difficult to bring it down later and that is why the BAFEDA and ABB are devaluing the taka in phases, they said.

In the event, the IMF has suggested that Bangladesh Bank adopts the 'crawling peg method' to manage the exchange rate. The crawling peg is a system of exchange rate adjustments in which a currency with a fixed exchange rate is allowed to fluctuate within a band of rates. It is generally viewed as an exchange rate regime that allows depreciation or appreciation to happen gradually. The central bank conveyed that it is open to adopting the crawling peg but sought technical assistance on how to implement it.

Since the method is currently used by the Reserve Bank of India, it is understood that Bangladesh Bank will look to incorporate RBI's experience along with IMF's technical assistance, for the implementation of the crawling peg system.

Saved by the election?

In general, the outcome of the review suggests the government was able to convey its constraints to the IMF delegation, and moreover, able to win its sympathy on the pretext of this being a politically fraught period, just before the elections. It has emerged that it was even able to convince the IMF that most of the reforms prescribed for it would have to be withheld till after the election.

At a meeting between the BB and a delegation of the Association of Bankers, Bangladesh at the central bank headquarters, Governor Abdur Rouf Talukder said a floating US dollar rate would not be materialised before the upcoming national election.

After the meeting, Selim RF Hussain, chairman of the ABB, said that there will be no benefit even if the exchange rate of the dollar is brought to the level of hundi, to increase the inflow of remittance. If the dollar exchange is raised to Tk 130, then the hundi traders will offer Tk 140, he said.

The fact is that the dollar exchange rate does not matter to the money launderers. They will launder money at any rate as it is black money, he added.

Speaking regarding the dollar price in the open market, Selim RF Hossain said around $30-40 million is transacted every year in the open market. The amount is quite low considering the size of the Bangladesh market, according to him, and so there is no need to consider the dollar rate in the open market as the standard.

The ABB chairman also said that the governor asked banks to repatriate export proceeds as early as possible. They also discussed the policy issues that the central bank has already introduced to rein in inflation. There is a pressure on the liquidity in the banking sector but the BRAC Bank chair called it normal.

Md Mezbaul Haque, the central bank spokesperson said the governor asked banks to bring in remittances at ABB-BAFEDA's fixed rate.

The bankers also said the payments against exports are being deferred by foreign buyers. As a result, a portion of earnings are not being transferred to the country, he said.

According to Haque, there has been higher export growth this year but realisation of these proceeds has fallen in proportion to the shipments: "There is a gap between the export figures of the Export Promotion Bureau and the real proceeds."

A section of exporters don't want to cash in their forex incomes immediately in order to benefit from the downward trend of the taka.

In 2022-23, products worth more than $55 billion were shipped from Bangladesh, but around $46 billion came to the country, Haque pointed out.

It was reportedly conveyed from the central bank's side that leaving the dollar price to the market could result in a further decline in the forex reserve which could affect the import of daily commodities. As a result, the price of consumer products may spike further.

Therefore, the central bank stressed speedy repatriation of export income instead of hoping that the price of dollars would be market based. In addition to the $9 billion of export earnings from the 2022-23 fiscal mentioned by the BB spokesperson, another $3 billion from the current fiscal remains unrealised yet. The central bank emphasised speedy repatriation of these unrealised export earnings.

For now, this is what the central bank will be relying on to hopefully boost the country's coffers of foreign exchange. Any reform measures, it has been made clear, will have to wait till after the election.