The IMF will provide the fourth tranche in the amount of $645 million

The International Monetary Fund will provide $645 million to Bangladesh as part of the fourth tranche of a $4.7 billion loan program, bringing total disbursements to $2.31 billion.

However, no decision was taken on Bangladesh’s request for additional funds under the existing program during the 16-day visit of a team of IMF staff to Dhaka.

After taking office, the interim government verbally asked the IMF for $3 billion in new loans to replenish foreign exchange reserves.

The government ultimately demanded $750 million, IMF staff said in a statement at the end of the visit.

“Amid significant macroeconomic challenges, the authorities have requested an increase of SDR 567.2 million (approximately US$750 million) in IMF financial support for Bangladesh,” said a team of IMF staff led by Chris Papageorgiou.

SDRs (Special Drawing Rights) are an international reserve asset created by the IMF to supplement the official reserves of its member countries.

If the IMF’s executive board approves the request for additional funds, its total loan package for Bangladesh will reach $5.3 billion from the existing $4.7 billion.

The formation of the interim government “facilitated a gradual return” to normal economic life in Bangladesh, the statement said.

Economic activity in Bangladesh has slowed significantly and inflation remains high. Capital outflows, especially from the banking sector, put pressure on foreign exchange reserves.

In addition, tax revenues have declined and spending pressures have increased, the statement said.

“These challenges are further exacerbated by stress in some parts of the financial sector.”

Real GDP growth is forecast to slow to 3.8 percent in FY2024-25 due to output losses caused by civil unrest, floods and tighter policies, but growth is expected to recover to 6.7 percent in FY2025-26 as policy relaxation.

Inflation is expected to remain at around 11 percent (year-on-year average) this fiscal year before easing to 5 percent next fiscal year on tighter policy and easing supply pressures.

“However, the outlook remains very uncertain, risks are shifted to the downside. Short-term tightening of policy is critical to overcome the external financing deficit and persistently high inflation.”

Fiscal consolidation should prioritize the rapid implementation of additional revenue measures, such as the abolition of tax incentives, while curbing non-essential spending.

In combination with the strengthening of monetary policy, greater flexibility of the exchange rate and preservation of buffers of foreign exchange reserves will strengthen the economy’s resilience to external shocks.

Bangladesh’s low tax-to-GDP ratio calls for urgent tax reforms to establish a fairer, more transparent system and sustainably raise revenue, focusing on streamlining exemptions, improving compliance, and decoupling tax policy from administration.

A comprehensive strategy is also needed to curb subsidy spending and eliminate arrears in the electricity and fertilizer sectors, the statement said.

“Fixing vulnerabilities in the banking sector is essential.”

Immediate priorities include an accurate assessment of overdue loans, ensuring effective implementation of existing regulations and formulating a road map for restructuring the financial sector, the statement said.

The main actions involve conducting an asset quality check and adopting a recovery and settlement mechanism that meets global standards.

At the same time, authorities must develop risk-based supervision, and legal reforms are needed to strengthen corporate governance and the regulatory framework.

“Institutional reforms to strengthen the independence and governance of Bangladesh Bank will be critical to the successful implementation of financial sector reforms.”

Improved governance, along with greater transparency, is critical to improving the investment climate, attracting foreign direct investment and diversifying exports beyond the garment sector, the statement said.

In addition, building resilience to climate change is vital to reducing macroeconomic and fiscal vulnerabilities.

Strengthening institutional capacity and optimizing cost effectiveness will help achieve climate goals.

The government should focus on implementing climate-sensitive fiscal reforms and investing in sustainable, resilient infrastructure.

In addition, it adds that sound management of climate-related risks will strengthen the stability of the financial sector.