IMF Disburses First Tranche of the Loan Stipulating Conditions

IMF has disbursed first tranche of the USD 4.7bn loan amounting to USD 476mn with stipulation of several conditions targeting both fiscal and monetary policy as well as climate change issues.  

We view the criteria and reform measures prescribed by IMF, if complied, will bolster forex reserve of Bangladesh and enhance resilience of the economy. Notably, the IMF program will lead the central bank to adopt market-based exchange rate and phase out interest rate caps gradually.  

Following are the key conditions: 

IMF has imposed three QPCs (Quantitative Performance Criteria): 

 FY23 FY24 
Criteria Mar’23 Jun’23 Sep’23 Dec’23 
Floor on net international reserve, USD bn* 22.9 24.5 25.3 26.8 
Floor on primary balance/budget deficit, BDT bn (1,483.4) (1,686.4) (822.0) (1,141.1) 
Ceiling on accumulation of external payments arrears 0.0 0.0 0.0 0.0 
*Net international reserve = gross reserve minus central bank FX liabilities which include loan to export development fund and loan to Sri Lanka 
  • Currently, Bangladesh’s net international reserve stands at ~USD 25bn as on Jan’23 and targeted budget deficit for FY23 is BDT 2,451bn (as mentioned in budget for FY23). 
  • Bangladesh will have to take measures for limiting the erosion of forex reserve and revise its budget to comply with the criteria.  
  • Government has already started repricing fuel, energy and power prices to curtail subsidy.  

There are four indicative targets: 

 FY23 FY24 
Criteria (BDT bn) Mar’23 Jun’23 Sep’23 Dec’23 
Ceiling on reserve money 3,575.0  3,951.0  3,892.0  4,004.0 
Floor on tax revenue 2,073.8 3,456.3  615.6  1,436.4 
Floor on Priority social spending 605.0  1,033.0  155.0  309.9 
Floor on capital investment by Government 389.9  1,141.1  49.8 222.8 
  • There is room for ~14.0% growth on reserve money considering the ceiling on reserve money as on Jun’23.  
  • Estimated tax revenue for FY23 by government is close to floor on tax revenue set by IMF.  

Apart from QPC and indicative targets, there are 12 structural benchmarks mentioned below: 

Measure Target Date 
Revenue Mobilization  
MoF (Ministry of Finance) adopts tax revenue measures yielding an additional 0.5% of GDP in the FY24 budget End-Jun’23 
NBR (National Board of Revenue) staffs Compliance Risk Management Units in the customs and VAT wings End-Dec’23 
Public Spending Efficiency  
MoF develops a plan to reduce net NSC issuance to below ¼ of total net domestic financing by FY26 End-Dec’23 
Government to adopt a periodic formula-based price adjustment mechanism for petroleum products End-Dec’23 
Public Financial Management  
MoF develops a policy note to guide decisions on integrating bank accounts still remaining outside the TSA and on the sequencing of TSA enhancements End-Dec’23 
Monetary and Exchange Rate Policy  
BB (Bangladesh Bank) adopts an interest rate corridor system End-Jul’23 
BB compiles and reports official reserve assets as per BPM6 definition End-Jun’23 
BB uses market determined exchange rate for official FX transactions on behalf of the government End-Jun’23 
Bangladesh Bureau of Statistics publishes quarterly GDP End-Dec’23 
Financial Sector Policy  
BB completes the pilot risk-based supervision action plan End-Jun’23 
MOF submits to Parliament the Bank Companies (Amendment) Act 2020 and the Finance Companies Act 2020, drafted in line with best practices End-Sep’23 
BB publishes banks’ distressed assets in the annual financial stability report End-Jun’23 

Some notable commitments made by central bank: 

  • BB has already relaxed interest rate cap on consumer loans and commits to remove other interest rate caps over the IMF program period (no deadline specified). 
  • BB will take measures to reduce the average NPL ratio to below 10.0% for state owned commercial banks and below 5.0% for private commercial banks by 2026.