Fund may delay releasing fourth tranche of loan

Finance officials fear the release of next tranche of International Monetary Fund (IMF) loan can be delayed, or even halted, as the government backtracked on the
just-hiked VAT and
SD for some items.
An IMF note of dismay to Bangladesh finance authorities bears such indication as the lender thinks this somersault could create a significant gap to revenue-earning target, while the Fund is pushing for narrowing the country's tax-GDP ratio.
Officials say the National Board of Revenue (NBR) Thursday cut down or reverted to previous rates for eight items in case of value-added tax (VAT) and supplementary duty (SD) amid stakeholders' discontent. They say the businesses have protested since January 9, 2025, the day when the government increased the indirect taxes on nearly a 100 lines of products and services through an ordinance to boost domestic revenue receipt and to meet the conditions set by the IMF in the lending package.
However, the government is under pressure from different business groups to lower VAT and SD to the previous rates. Officials say next week the government may be forced to follow suit in case of some other products, too.

A senior finance ministry official told the FE that the VAT-SD hike was meant for collecting an additional Tk 120 billion by next June which was necessary to meet the IMF-set revenue-generation target.
"As the VAT and SD rates now revised down in case of eight items and some more items can see the same, a gap of Tk 30 billion in revenue earnings can be created against the target at the end of this fiscal year," he said.
Another senior finance official told the FE the IMF officials had been closely monitoring the developments following the tax hike on 100 types of items. As the government agreed to lower the taxes on eight items, the IMF officials Thursday conveyed their dismay over the decision.
The IMF mission chief for Bangladesh, Chris Papageorgiou, at a press briefing on December 19 last said $645 million could be available to Bangladesh in the fourth tranche by February 10 following a board meeting on February 5, provided two prior actions-- revenue mobilisation and exchange-rate flexibility-- are done.
Another ministry-of-finance official says the IMF officials have clearly mentioned that "Bangladesh's fourth-tranche issue may not be placed before the board in February, even in March, as it has now become clear that, like in the past, revenue target is going to be missed again".
The IMF approved US$4.7 billion worth of loan for Bangladesh in January 2023 to help support the country's dwindling economy which has been facing severe macroeconomic instability since the war broke out in Ukraine.
However, since then, Bangladesh could not meet the all the targets set by the IMF as prerequisites for releasing every tranche from the credit package. The IMF, however, had been providing waiver against non-observance of performance criteria being requested by the government.
As part of efforts to augment revenue generation, the IMF this past December asked the government to separate tax policy and tax administration by June next as the authority failed to meet revenue targets repeatedly, leaving yawning gaps and resulting in the country's budget deficit.
In Bangladesh, tax-to-GDP (gross domestic products) ratio has remained stagnant at 7.0 per cent for long, much lower than that of the neighbouring countries, and one of the lowest worldwide.
The Washington-based Fund thinks the revenue-mobilisation effort needs to be prioritised for two reasons-one is if revenue is not in place, Bangladesh would not have required fiscal space to raise social spending and in capital spending.
The other reason is Bangladesh moves to become a middle-income country and beyond an emerging market, and with such a low revenue generation the country would not be able to keep high growth and low inflation.
Finance Division Secretary Dr Khairuzzaman Mozumder did not respond to a phone call to make a comment on the latest developments.
Dr Zahid Hussain, a former lead economist at the World Bank's Dhaka office, says the government had no option but to backtrack on the VAT-and SD-related stance as stakeholders responded uncompromisingly.
"The suspension of IMF's credit programme will enhance risk of many other loan programmes from other donors," he told the FE, adding that halting such a big financial inflow will have a big impact on international trade of the country.
Mr Hussain thinks still there is option for the government to negotiate with the IMF. "The government needs to lessen budget deficit through expenditure adjustment."
He says the government has to tell the IMF that it has signed loan programme when there was no reform initiative. Moreover, it continued disbursements even though the government missed the reserves targets in both reviews during the political regime.
"The government should ask them why the IMF now becoming such harsh in this transition period," Mr Hussain says, insisting that the IMF should be realistic.
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