Bangladesh was successful in attaining commitments towards a US$ 4.7 billion loan by the International Monetary Fund (IMF) in the beginning of the year 2023. But what might have been termed as a 'breathing space' for Bangladesh or even a 'bail-out' by some at the time, is currently also putting the country under a difficult magnifying glass about its present economic health as a delegation by the International Monetary Fund (IMF) visits Dhaka to discuss conditions of the loan fulfillment.
Analysts have noted that Bangladesh has failed to meet two of its critical targets as conditions of the IMF loan: on foreign currency reserves and tax collection. Consequently, the country is looking for exemptions to secure the IMF's second loan installment.
In spite of restrictions on non-essential imports, the reserves have been declining consistently in recent months, reaching US$21.15 billion in September, falling short of the IMF's target by over US$4 billion. In contrast, reserves stood at US$45 billion at the beginning of the year 2022.
The top three global sovereign credit rating agencies, Fitch Ratings, Moody's Investors Service and S&P Global Ratings have recently downgraded Bangladesh's credit ratings. In this regards, Fitch Ratings revised the outlook for Bangladesh's sovereign rating from stable to negative due to a decrease in the country's reserves and a shrinking dollar liquidity, terming the country more vulnerable to economic shocks. This in turn could further lead to Bangladesh being charged even higher interest rates when it tries to borrow money from other countries or institutions and also shy away foreign investors.
Sagarika Chandra, director of Asia Pacific sovereigns at Fitch Ratings, said in a statement that "Elevated oil prices and a further relaxation of import restrictions, will lead to a widening of the current account deficit through to 2025, and will keep the foreign exchange reserve outlook challenging."
Chairman of the Centre for Policy Dialogue (CPD) Professor Rehman Sobhan shared, "If the foreign reserves reach US$10 billion, it will be a cause for concern as even the International Monetary Fund (IMF) won't be able to help then." However, he also opined that the economic condition of Bangladesh was not like that of Sri Lanka, although there were concerns over the reserves.
On the other hand, Salman F Rahman, private industry and investment adviser to the prime minister have said earlier this month that the government will bring necessary reforms in the financial sector to reduce the pressure of inflation and overcome the forex crisis. Holding a credible election is the government's primary objective at the moment, he added. The World Bank at a meeting with Rahman has also recently offered Bangladesh loans from the institution at 5 per cent interest.
Fitch projects that Bangladesh's reserves in 2024-2025 will likely provide coverage for approximately 2.6 months of imports, falling short of the traditional rule of thumb of 3 months of reserves considered as adequate.
The IMF delegation has expressed concern that the Bangladesh Bank's monetary policy has not been effective in controlling inflation, pointing to the central bank's inability to fix the exchange rate based on the actual market conditions and to set a sufficiently high lending rate.
Similarly, executive director at the Policy Research Institute (PRI), Dr Ahsan H Mansur, shared that Bangladesh Bank is selling dollars at a rate much lower than the market rate, which could encourage illegal dollar transactions. He also stressed the need to tame inflation first, and stop printing new money.
As the election approaches, the government is facing challenges such as allowing for a more flexible exchange rate. However, the Bangladesh Bank has announced an increase in its key interest rate, along with a boost in repurchase rate by 75 basis points to 7.25 per cent.
The IMF also expressed worries regarding the non-performing loans (NPLs) in the state-run commercial banks, which reached 25.01 per cent, as compared to 6.46 per cent in private commercial banks. According to the latest data of the Bangladesh Bank, the bad loans of the banks range between 17 per cent to 58 per cent, whereby the IMF had set conditions to lower overall NPLs in the banking sector to below 10 per cent.
IMF further emphasised that the authorities need to implement measures to reduce the NPLs of Sonali Bank, Janata Bank, Agrani Bank, Rupali Bank and BASIC Bank to 10 per cent of their total advances.
At an event organised by the Economic Reporters Forum (ERF), Professor Rehman Sobhan further expressed concerns that defaulters have become powerful figures within the government and shared that "Reschedules and write-offs are happening. But not repayment …Bangladesh's official position is that defaulters cannot participate in elections. But before the election, we see that there is a scope to make 5 per cent down payments on loans and reschedule those. Once the payment is made and the person is elected, they don't make any more repayments".
The government also missed the IMF's prescribed minimum tax revenue target set for the 2023 fiscal year, falling short by 150 billion taka, as indicated by data from the National Board of Revenue (NBR). In this regard, the NBR attributed the shortfall to reduced tax collection resulting from restrictions on imports.
On the other hand, the visiting IMF delegation stressed automation, proper implementation of laws and justification of tax exemptions to certain sectors to increase tax revenues. The IMF also insisted rationalisation of subsidies to certain sectors such as the power sector, but the government is not willing to increase the power tariff before the next general elections.
Dr Franziska Lieselotte Ohnsorge, the World Bank Group's chief economist for South Asia, said Bangladesh is not yet in such a situation that it cannot repay its foreign debt installments, but the challenge for the government is to maintain this reputation. Weak internal revenue collection could escalate Bangladesh's debt repayment pressure as it is no longer in an advantageous position to get global loans, often incurring high interest rates, Ohnsorge said.
And we citizens also resonate with South Asian Network on Economic Modeling (Sanem) Executive Director Dr. Selim Raihan that Bangladesh may have managed the pre-COVID decade well. But the economy has come under strain with the advent of the pandemic and the Russia-Ukraine conflict. And there is increasing call to attention by experts to the Bangladesh government to take urgent steps to stabilise the macro economy to prevent further negative consequences.
Mehzabin Ahmed is a
development professional.
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