Budget support can create much-needed breathing space

In the face of rising economic challenges and dwindling foreign exchange reserves, the country is actively seeking budget-support loans from multilateral donors as a crucial relief mechanism. Newspaper reports say the government is looking for $8.0 billion in budget-support loan by December this year from development partners to pay back foreign liabilities and boost forex reserves. Recently, the Bangladesh Bank governor told foreign media that the country would seek $3.0 billion loan from the IMF as budget support. A finance ministry official said the authorities have already started talks with the IMF for the funds and that an IMF staff mission is likely to visit Bangladesh to discuss the loan towards the end of next month. IMF officials have reportedly informed the finance ministry and the central bank that it was assessing how much it could lend Bangladesh, going beyond the existing quota for the country. In addition, the government is set to seek $5.0 billion from other development partners like the World Bank, ADB, Japan International Cooperation Agency (JICA) and the Asian Infrastructure Investment Bank (AIIB).

The IMF's Asia-Pacific division has underscored the importance of these budget-support loans for Bangladesh, especially given the recent disruptions to its balance of payments and external financing. Bangladesh is also struggling to deal with a fragile banking sector hit by scams and defaulted loans. The IMF has so far released $2.3 billion under the $4.7 billion loan programme since its approval in January last year. Officials at the Economic Relations Division said they could get funds from the World Bank under three arrangements -- a policy-based loan, diverted regional funds or from slow-moving projects. Besides, Bangladesh could quickly get $1.0 billion to $1.5 billion from the ADB under two arrangements -- a policy-based loan or countercyclical support. Both JICA and AIIB could join the ADB arrangement, according to officials.

Budget support refers to a method of supporting a country aligned with its budgetary procedures. This differs from traditional project aid or loan, which disburses resources against specific expenditures associated with a project. These loans constitute roughly 20 per cent of total official lending to developing countries and are often linked to substantial economic reforms, structural changes, and initiatives that draw in private capital to meet development needs. Budget-support loan thus plays a key role in addressing critical economic reforms, supporting structural transformation in debt-stressed and other vulnerable countries, and facilitating the implementation of policy and institutional reforms based on a policy dialogue between donors and recipients.

Budget support is thus about policy dialogue, focusing on the development priorities of the recipient governments. It is here that the funds sought from development partners can be utilised by Bangladesh in a well planned manner. As the country navigates its current economic challenges, the budget-support loans from international development partners offer a strategic opportunity to work out and sustain critical economic reforms. With careful planning and collaboration, this support could provide the much-needed breathing space to realign the nation's economic course and lay the foundation for stronger economic resilience.