Will IMF loan help stabilise Bangladesh economy?

Sharmin Nahar Nipa :
The government and the International Monetary Fund (IMF) reached a preliminary agreement under which the global lender will provide a $4.5 billion loan package to stabilise Bangladesh economy and protect its people from climate vulnerability.
The IMF agreement came months after discussions between the global lender and Bangladesh officials. The amount will be disbursed in seven installments till December 2026. The first installment of $447.48 million will be cleared in February next year, while the loan’s interest rate would depend on the market rate at the time of maturity. Finance ministry officials calculated the interest rate to be around 2.2 per cent.
They also said IMF agreed to provide the loan under some conditions, including fuel price adjustment periodically, as per the in the international market price, withdrawal of banks’ lending cap, reduce public spending, raise taxes and implement reforms designed to lower their debt-to-GDP ratios, such as cutting subsidies for fuel or food. Of the $4.5 billion, $1.3 billion can be repaid over a 20-year with a grace period of ten years. The remaining amount must be paid back within ten years; the grace period for a portion of the sum is 3.5 years and for another portion 5.5 years.
Meanwhile, the IMF in a statement said it has “reached a staff-level agreement with Bangladesh to preserve macroeconomic stability and support strong, inclusive, and green growth, while protecting the vulnerable”.
Bangladesh economy currently suffers from plunging currency, runaway inflation, energy crisis, high current account deficit and dwindling foreign exchange reserves. It caused the foreign currency reserves to fall from around $48 billion in August 2021 to $41.82 billion on June 30 this year. The forex reserves stood at $34.3 billion at the end of November 7 after paying $1.35 billion to Asian Clearing Union as an import bill for September-October, and $131 million spent to meet LC liabilities. However, if the formula of the IMF is followed ($8 billion used as export development fund is excluded from the foreign exchange reserves), the forex reserves stand at $26.3 billion. This falling forex reserves forced the government to take austerity measures including power cuts, fuel rationing and restriction on imports of luxury goods and cars.
“An IMF credit programme is crucial to access bridge financing from sources such as the World Bank and the Asian Development Bank (ADB),” said economist Dr Ahsan H. Masur. “To bring out the country from economic difficulties, financing from international agencies is a must,” he added. Apart from IMF, Bangladesh also requested for a one billion dollar loan and 3 billion from several multilateral and donor agencies, including Japan International Cooperation Agency (JICA), as budget support.
Dr Zahid Hussain, former lead economist at World Bank’s Dhaka office, said, the IMF’s financing will help the government overcome the economic crisis because release of installment of loans from the IMF will encourage other international financial institutions to engage with Bangladesh. He added that the IMF loan will be a lifeline to the Bangladesh economy as it wrangled with an enormous current account deficit, high inflation and falling forex reserves.
But independent economists are identified several other areas that prompted Bangladesh’s current economic and financial crisis. These are: high cost of infrastructure projects (mega projects), widespread defaulted loans in banking sector, waste in resources in energy sector and capital flight.  
Since coming to power in 2009, the ruling Awami League government has undertaken several large infrastructure projects funded by various countries and multilateral agencies. These projects include the Padma Bridge, a nuclear power plant in Rooppur, Dhaka Metro Rail, and Karnaphuli Tunnel.
Padma Bridge, one of the largest projects in the country, cost about $3.6 billion, which was previously estimated to be $1.16 billion in 2007. The ambitious nuclear power plant is costing Bangladesh $12.65 billion, and the actual amount to be spent will not be known until it is commissioned. The Metro Rail project ballooned to $3.3 billion from its original estimate of $2.1 billion. The cost of the underwater Karnaphuli Tunnel reached $1.03 billion, though originally estimated at $803 million.
In 2017, the World Bank noted that the cost of road construction in Bangladesh was the highest in the world. The cost overrun is largely because of overpricing of materials, corruption, and long delays. Though experts have been warning of such a situation for years, the central bank has not taken effective steps, instead changing policies to help the loan defaulters.
Moreover, in the past decade, Bangladesh witnessed widespread money laundering according to watchdog Global Financial Integrity. Between 2009 and 2018, annually $8.27 billion was siphoned through misinvoicing of the values of import-export goods. The growth of deposits by Bangladeshis in Swiss banks in the past decade is indicative of capital flight. In 2021, it increased by 55.1 percent, reaching 871 million Francs ($912 million).
In such situation, economists urged the government policymakers to implementation corrective policies and reforms to regain macroeconomic stability and combat the ongoing financial crisis in the country. They said the government should immediately stop its reckless spending and check corruption and capital flight and focus more on the recovery of defaulted loans in order to safeguard the forex reserves as well as bring discipline in the banking sector.
“Unless the government implement prudent economic policies, curb corruption and check money-laundering and ensure good governance, only loans from donors and development partners will bring no good for our economy,” they added.

(The writer is a Senior News and Programme Presenter, Bangla TV).