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Dhaka Tribune

Bangladesh seeks $4.5bn loan from IMF

Economists say the government needs responsible reforms in financial sector to get the IMF loan

Update : 27 Jul 2022, 03:15 PM

Bangladesh has sent a formal request for a $4.5 billion loan to the Washington-based multilateral lender International Monetary Fund (IMF) to combat the ongoing financial crisis. 

Another reason for the loan request is foreign exchange (Forex) reserves declining against excessive imports.

The loan request was made in a letter to IMF Managing Director Kristalina Georgieva on Sunday.

According to sources, the government sought the amount as a balance of payment and budget support as well as to mitigate the effects of climate change on Bangladesh.

Of the $4.5 billion sought, $1.5 billion would most likely be interest-free and the remaining amount would come at an interest less than 2%, said finance ministry officials.

To begin the talks, an IMF mission is expected to visit Bangladesh in September. The terms and conditions for the loan will be ironed out during their visit.

By December, the deal is expected to be locked in for placing at the IMF's board meeting in January, the officials added.

However, renowned economist Debapriya Bhattacharya thinks that Bangladesh will have to go through several conditions to get a loan from the Washington-based multilateral lender.

“Right now, we have a large trade deficit. At the same time, remittances are also on the decline. There is great pressure on the exchange rate. 

“Due to a lack of foreign exchange, the necessary imports cannot be made. At a time like this, going to the IMF is logical and the right move. Sri Lanka's delay in doing so caused them a huge loss.”

“This money will mainly be used to meet the large deficit in foreign transactions at the moment, and to stabilize the exchange rate of Taka against the dollar by selling dollars,” he added.

“However, before receiving this money, the government has to take several steps to show they are responsible in the eyes of the IMF. This is what we call pre-action. Also, they have to take some steps before releasing each installment,” he further said.

Asked about the possible reform and IMF conditions, Debapriya said: "The exchange rate of Taka should be floating and based on the market. The incentives given by the government to the foreign currency now may need to be adjusted. Monetary policy should be harmonized with fiscal policy.”

“In that case, a level has to be specified in the subsidy in order to control the expenditure. Besides, the role of the central bank should also be strengthened. And in that case, there may be conditions for the recovery of defaulted loans,” he added.

“In fact, the IMF is saying what independent economists have been telling the government for a long time. But unfortunately, the government has not taken them into account so far. Even now, if these reform measures are taken, it will be good for our economy.”

“Needless to say, it will not be very pleasant politically when the government has to resort to such controls on the eve of elections,” he warned.

IMF delegates visit Dhaka 

Earlier last week, a visiting IMF delegation sat with Bangladesh Bank officials. During the meeting, they expressed concern over the weakness of Bangladesh's banking system and the high rate of non-performing loans (NPLs). 

Requesting anonymity, a senior official of the Ministry of Finance earlier said: “IMF has recommended removing the interest rate caps on lending and borrowing. Apart from a market-based floating exchange rate of Taka or foreign currency exchange rate system, the organization has also suggested resetting the methodology on foreign currency reserves.”

Other countries seeking IMF loan

In South Asia, Sri Lanka, facing its worst economic crisis in seven decades, is currently in negotiations for an IMF bailout.

The island nation ran out of foreign currency to import, even its most vital essentials, triggering long queues at petrol stations, food shortages and lengthy power cuts.

Pakistan’s foreign exchange reserves are depleting rapidly. 

According to an Al-Jazeera report, Pakistan reached an agreement with the IMF earlier this month that would pave the way for the release of an additional $1.2 billion in loans and unlock more funding.

Other countries also sought help this month, from the IMF. The agency agreed to provide Tanzania with $1.05 billion, while Ghana, one of West Africa's largest economies, has sought $1.5 billion in loans.

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