Bangladesh has to have US$17.78 billion in minimum reserves for December and $19.26 billion for March as the IMF has set the revised targets, amid the country's depleting foreign-exchange stock.
After approving the second tranche of its loan from a package programme of lending, the International Monetary Fund (IMF) set the latest targets of minimum net international reserves (NIR), which economists see as tougher for the current reserves position.
The targets and a set of other terms are carried in the IMF Staff Report released Friday.
In the first review of the $4.7-billion loan programme, until June last, the NIR target was $24.46 billion which later was adjusted to $23.74 billion, but the reserves stood down the mark to count only $19.56 billion then.
At the end of October the NIR dipped further to $15.9 billion, according to the IMF report, which the economists predict may have further fallen as in November as the central bank continued forex support to dollar-strapped banks.
Being requested by the government of Bangladesh, the IMF now revised the targets for foreign-currency reserves for December and onwards.
NIR is the lone quantitative-performance criteria (QPC) Bangladesh missed as reviewed until end of June. Of the indicative targets, the IMF said, Bangladesh missed the target on tax revenues, "due to adverse spillovers from global economic developments and inadequate policy response".
The Staff Report mentions that rising global commodity prices, supply disruptions, slowdown in external demand, and shift in remittance back from formal to informal channels post pandemic, led to a sharp widening of the current-account deficit, depreciation of the Taka, and a rapid decline in foreign-exchange reserves.
The gross forex reserves declined to US$33.4 billion at the end of FY'22, it says, adding that while the current-account gap narrowed in FY'23, the deterioration of financial account resulted in continued decline in forex reserves. The gross forex reserves stood at $24.8 billion at the end of FY'23.
"Rebuilding forex reserves remains a critical priority in the short term," the IMF staff report remarks even about its lenient view taken in revising the goals.
The greater exchange-rate flexibility, tighter monetary-policy stance, and scaling back non-monetary use of foreign-exchange reserves are expected to stabilize forex reserves in the context of the IMF's credit programme, including by attracting remittances through formal channels and reducing export-repatriation delays, it notes.
Over the medium term, the lender recommends policies to support exchange-rate flexibility, expand and diversify export earnings, and attract FDI inflows in maintaining adequate reserves coverage.
Forex interventions, which have increased since the start of Russia's war in Ukraine, are expected to moderate as forex positions of commercial banks improved towards the end of FY23.
"Forex interventions should be limited to smoothening volatility and should not counter persistent trends," the staff report says on the to-do list prepared for the recipient of funds.
Meanwhile, the financier finds near-term economic outlook of Bangladesh weaker than envisaged at the time of credit-programme approval, reflecting larger and more persistent global headwinds and economic hardships.
The real GDP growth in FY'24 is projected at 6.0 per cent, down from 6.5 per cent projected at the programme approval.
It says inflation is projected to gradually moderate to 7.2 per cent year on year by the end of FY'24, compared to 5.9 per cent projected at programme approval, "as inflation expectations are expected to remain elevated on the back of second-round effects from rising fuel and food prices and the pass-through from Taka depreciation".
The current-account deficit is projected to remain compressed at around 0.8 per cent of GDP in the current fiscal year (FY24), compared to 4.2 per cent projected at programme approval.
Corrective policy actions are needed to restore external sustainability and to create more fiscal space for priority growth-enhancing expenditures
The multilateral donor suggests that monetary and exchange-rate policies should focus on containing inflation and restoring external stability, the near-term fiscal policy should support monetary tightening and sustainable revenue mobilisation need multi-pronged and sequenced reform efforts.
Also, it suggests further rationalisation of expenditure is vital for containing near-term spending pressures and ultimately channelling resources toward social and development spending, and effective implementation of risk-based supervision (RBS) is pivotal to safeguard financial stability
Dr Zahid Hussain, a former lead economist of the World Bank's Dhaka office, told the FE Friday the indicative targets and quantitative-performance criterion set for next March are achievable excepting the net international reserves.
"The target for March will matter," he said, adding that if the government wants to raise NIR to $19.26 billion in March, nearly $4.0 billion needs to be added.
Mr Hussain shows two ways that can get the country to the goal: bringing back the export proceeds amounting around $12 billion which remained abroad and lowering monthly spending from reserves.
"Unless that can be done, meeting the forex target won't be easy," he says.
The IMF will conduct the second review of the programme in April next before approving the third tranche of loan in June.
In the near term, the focus should be on containing inflation and rebuilding external resilience. "This would require a calibrated monetary policy tightening, which is supported by a prudent fiscal-policy stance. At the same time, a more flexible exchange rate system will help alleviate foreign exchange pressures and rebuild external buffers," says Rahul Anand, the IMF Mission chief for Bangladesh.
He was speaking at a press briefing with Bangladeshi journalists organised by the IMF.
"Based on our discussions with authorities and the progress so far, we are encouraged that the authorities remain fully committed to taking necessary steps to restore near-term macroeconomic stability and accelerate economic reforms, while also protecting the vulnerable and delivering on the climate agenda."
Responding to a query on free-floating exchange rate, the IMF mission chief said authorities were now with an arrangement with a bank corridor which is the intermediate step where the exchange rate is in line with demand and supply.
"It is important taka or currency enough flexible to absorb the external shock as the first line of defense to fight external shocks."
And monetary policy needs to be tight.
On tax collection, the mission chief said tax revenue needs to be gone up, He said tax reform digitalization and efficiency should be enhanced to raise the tax GDP which remained one of the lowest.
He said Bangladesh's import restriction led to lower collection form trade-related taxes leading to an overall fall in resource mobilisation.
He said Bangladesh has taken several measures which help attain most of the targets.
He stressed the need for modernization of monetary policy.
On export, he said the country's export is concentrated in terms of products. As Bangladesh graduates from the LDC, it needs both export market and product diversification.
He said Bangladesh has had inflation stable between 5-6 per cent for long time. He said Bangladesh's import of many goods and services and global problems pushed the inflation up.
As inflation gives pain to the poor he said social spending should be protected.
The IMF Executive Board completed the first review of the IMF-supported programme and the Article IV consultations on December 12. The Board's approval "unlocked" disbursements of about US$468.3 million of the second tranche of the Extended Credit Facility (ECF)/ Extended Fund Facility (EFF), bringing the total disbursements under the ECF/EFF thus far to about US$936.6 million.
Additionally, the Board's approval also unlocked about US$221.5 million, as the first tranche of the Resilience and Sustainability Facility (RSF), a concurrent programme to help address the country's large climate- financing needs.
During the introductory remarks, the mission chief said Bangladesh's economy continued to face economic challenges.
External headwinds, coupled with initially inadequate domestic policy response, have made macroeconomic management challenging. An unprecedented reversal of the financial account deteriorated the overall balance of payments in FY2023, leading to continued pressures on FX reserves and the Taka.
In response to these shocks, the authorities have taken several measures to deal with macroeconomic challenges.
Bangladesh Bank has tightened monetary policy, allowed greater exchange rate flexibility, and unified the multiple exchange rates. The authorities also kept the fiscal primary balance within the program target.
"Thanks to these efforts by the authorities, and despite the difficult macroeconomic environment, the overall program performance has been broadly satisfactory.
"I am happy to report that most program targets and reform commitments were met."
"We also need to focus on growth-boosting reforms. By that, we mean reforms that target the most binding structural constraints on Bangladesh's economic activity. Let me outline a few areas:
First, raising tax revenues and rationalizing non-priority expenditure is key. This will allow the authorities to increase investment in social development and climate spending. Continued efforts to enhance public financial and investment management are also needed to increase spending efficiency and mitigate fiscal risks.
Second, modernizing the monetary policy framework and improving policy transmission will foster macroeconomic stability. Further reforms to modernize the exchange rate framework and strengthen FX reserve management would enhance external resilience.
Third, reform priorities should also focus on addressing vulnerabilities in the financial sector by strengthening banking regulation, supervision, and governance. We would also encourage the deepening of capital markets to help mobilize private financing to support growth objectives.
He said further trade liberalization and enhancements to the investment climate will boost foreign direct investment and help diversify exports.
"Raising productivity, including through education and skills development, as well as further increasing female labor participation will further boost growth potential".
Building resilience to climate change and natural disasters is a priority for achieving high, inclusive, and green growth. To do that, improving efficiency in climate spending and mobilizing climate financing will be crucial.
syful-islam@outlook.com
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