IMF's Second Review On Credit Program

Second review of the credit program Projects a future with better outcome.

IMF has published its second review on the ongoing credit program in Bangladesh,along with clearing the $1.15 billion third tranche of the credit. Bangladesh failed to meet the target of net international reserves ,which now stands at $12.8 billion (end of April), among the targets set by IMF. It noted that a negative financial account contributed to deterioration of international reserves. It is indeed true. In the 9 months of the current fiscal year,Bangladesh paid international debt and interest payments of $3 billion, a record in its debt servicing history. IMF forecast that inflation may remain around 9% throughout the 2024 and may decline to 7.2% in 2025. Real GDP is expected to be around 5.4% in 2024 and may become 6.6% in 2025. IMF advised tighter fiscal policy focusing on higher revenue generation to mitigate the inflationary pressure stemming from pass-through effects of depreciation. Despite NBR 's good track record, it is an uphill task for it to meet an ambitious revenue target. Last May, Bangladesh Bank depreciated Taka by 7 taka that helped to bag NBR an additional amount of Taka 15000 crores from import revenue. This time I think another round of depreciation is highly likely amid fulfilling the revenue target. Moody's already forecast that Taka may be depreciated by 2% by the end of this year. Under the crawling peg arrangement, Taka has already been depreciated by Taka 1. This depreciation also generates further revenue for Bangladesh Bank and NBR,discarding the need for printing and injecting money. But scope of further depreciation is there. Despite the inflationary concerns, it is good for two reasons: it works as incentives for the exporters and remitters and it brings revenues to govt.

Among the fiscal policy measures:

IMF notes that budget aims to raise corporate tax, raise VAT on further products,increase tax on tobacco products in order to give revenue generation a firm footing. The digitization of the income tax will complement this task.

IMF highlights reducing subsidies and observes that govt has to pay back the dues(1% of the GDP) of independent power providers in the span of 5 years.

IMF also expects that govt will increase greater monitoring on state-owned enterprises(SOE) by publishing a report on 40 largest SOEs. Expansion of Treasury Single Account may pave the path for better cash management and increasing reliance on electronic fund transfers in the process of public procurement may reduce the incidence of accompanying corruption. IMF acknowledges expansion of social safety net programs.

Monetary policy discussions include among other things:

The need to policy rate hike to mitigate macroeconomic instability. IMF anticipates policy rate may reach 9% by mid 2025 to contain the inflation at 7%.

Suggestion to ensure regular review of crawling peg arrangement so that it is aligned with other macroeconomic goals and the band gets regularly adjusted.

Progress on launching of Forecasting and Policy Analysis system and forming of Monetary Policy Committee within Bangladesh Bank to enhance its capacity to better policy formulation.

Financial policy discussions include:

A tentative plan to reduce NPL( which is 22% for State Commercial Banks) to 8 % for the banking sector. Reduction of time needed to write-off bad loans from 5 to 2 years. Performance criteria for selection of managing director of banks. Floating of private asset management companies to acquire and manage the NPL.

Merger of banks requires approval of central bank. Increasing dependence on stock market for long term industrial financing in the future.

Apart from this, emphasis on prioritizing pro-climate fiscal management reform, green infrastructure investment and management of climate risks in financial sector are also discussed.

The second review sounds more optimistic than the previous one. It projects a financial account surplus of 3.5% for 2025. Better outlook for 2025 is based on ongoing reforms and commitment to future reform programs. Quarterly publication of GDP data,fuel price adjustment, crawling-peg,gradual alignment of policy rate, NPL reduction strategy ( I still find it incomprehensible how reduction in time to write-off bad loans will result in lower NPL) will gradually bring the macroeconomy back on track.