Government on the Right Track with IMF Loans

The annual meetings of the International Monetary Fund (IMF) and the World Bank will begin in Thailand on October 12 and continue until October 18. Bangladesh is expected to present its position on domestic reforms and a possible new lending programme at the meetings.

Bangladesh’s economy faces two major challenges: the ambition for rapid development and the pressure of dependence on foreign loans amid global uncertainty. The government believes that domestic reforms could help maintain subsidies and incentives for local industries, strengthen social safety nets and reduce the direct tax burden on ordinary people. To achieve these goals, it will need to increase domestic revenue collection and explore alternative sources of foreign assistance.

The government aims to secure between $4.5 billion and $5 billion in loans from the IMF under a new programme. An IMF delegation is scheduled to arrive in Dhaka on October 29 for a visit of about two weeks. The delegation will review the overall state of Bangladesh’s economy and assess progress in meeting the conditions attached to the previous five loan instalments. The discussions in October are therefore being viewed as Bangladesh’s first major test in securing new financing.

However, Finance Minister Amir Khosru Mahmud Chowdhury has said the government will no longer accept IMF conditions and has cancelled the loan agreement. He said the government had decided to stand on its own feet after cancelling the agreement and that Bangladesh’s economy would reach $1 trillion by 2034 without assistance from donor agencies.

The minister said Bangladesh must move “from high street to world street” to compete with leading global economies. He stressed the need to develop the bond market, securitisation and equity market to secure long-term financing. Bangladesh must reduce its dependence on foreign financing and raise funds from international markets, he added.

According to the minister, the IMF programme was cancelled because its conditions were unacceptable to the government. He also said international investors and financial markets had responded positively to Bangladesh’s plans. At a recent meeting on Wall Street in the United States with Prime Minister Tarique Rahman, prominent global investors reportedly expressed strong confidence in Bangladesh’s economic transformation and reform measures.

The minister said the government was planning to introduce dollar bonds in New York and a Bangladesh-dedicated fund in Hong Kong. It also plans to use international financial instruments such as Samurai and Panda bonds to transform the financing structure of both the public and private sectors. Dr Rashed Al Mahmud Titumir, the prime minister’s adviser on finance and planning, has also said the government does not want to pursue reforms imposed by external organisations.

Speaking to Inqilab, Mr. Titumir said that, for the first time, a political party had identified the country’s problems on its own and developed a programme based on its election manifesto and political commitments. He said the government had identified weaknesses in banking, revenue collection and other parts of the financial sector as part of efforts to restore the fragile economy it inherited.

He stressed that the reforms were not being imposed by international organisations. The government would seek support from the World Bank and the IMF to implement its own reform agenda. He said multilateral lenders had already welcomed the programme and called for cooperation to move it forward.

Financial experts have welcomed the decision to pursue economic reforms based on Bangladesh’s political mandate and domestic realities rather than follow the IMF’s strict conditions and reform programme. Some leading economists and analysts have described the government’s position as a positive step towards protecting national interests.

They argue that blindly accepting broad and strict IMF conditions could reduce subsidies and increase the tax burden on ordinary people. They also point to Pakistan, where the economy has faced serious difficulties despite the country’s substantial resources and reliance on IMF loans.

According to these experts, identifying the financial sector’s actual weaknesses, including non-performing loans, and addressing them through locally designed reforms could produce more sustainable results. They also believe the government’s approach has strengthened confidence among institutions such as the Asian Development Bank (ADB), the Asian Infrastructure Investment Bank (AIIB) and the Islamic Development Bank, potentially improving Bangladesh’s access to concessional loans.

Professor Abu Ahmed, a financial sector analyst, told Inqilab that IMF conditions conflicted with Bangladesh’s current economic realities. He said the country had inherited a fragile economy and that a decline in the export of Bangladeshi workers to various countries could affect future remittance inflows.

He argued that it was inappropriate to impose various taxes on people in a poor country simply to meet IMF conditions. Bangladesh should move away from unreasonable conditions and negotiate terms that reflect its own circumstances, he said. Citing China as an example, he argued that Bangladesh should also negotiate from a stronger position and seek conditions that serve its national interests.

Dr Zahid Hussain, former lead economist at the World Bank’s Dhaka office, offered a more cautious assessment. He said the previous IMF programme had included measures to rationalise subsidies, reduce tax exemptions and reform the National Board of Revenue (NBR). However, the new government had reversed some of those measures in response to current conditions, raising questions about the continuity of reforms and the government’s credibility.

He also pointed to a lack of continuity in tax reform. Although there had been plans to reduce different tax rates and move towards a uniform rate, no progress had been made towards a unified value-added tax (VAT) rate. The IMF could also question discussions about extending the period for classifying loans as non-performing from 90 days back to 180 days.

Mr. Hussain said the government would need to explain why it had moved away from earlier reforms and was now making fresh commitments. The IMF might insist that Bangladesh return to the previous reform path before discussing a new programme, he added.

Dr Khondaker Golam Moazzem, an economist and president of the Knowledge Hub Institute, said that despite the government’s opposition to IMF conditions, avoiding the institution’s loans would be difficult given the country’s current financial situation.

He said reform was a key IMF requirement and that the institution would not provide financing without it. However, the government’s budget documents indicated that major reforms would not be undertaken during the first two years. Instead, the government had planned public welfare measures, including family cards, salary increases for government employees and a large Annual Development Programme (ADP).

Mr. Moazzem said the IMF had concerns about such spending plans. However, he added that it would be positive for Bangladesh if the government could align its domestic reform agenda with the IMF’s requirements while keeping the country’s economic realities in mind.

The IMF’s central requirement is reform, and it is unlikely to provide financing without progress in this area. At the same time, Bangladesh’s fragile economy and development needs require the government to introduce public welfare programmes. The government’s budget documents indicate that it does not plan to undertake major reforms in the first two years, while prioritising family cards, salary increases for government employees and a large ADP.

Reducing complete dependence on IMF conditions and developing an independent economic strategy could bring long-term benefits, particularly by protecting household living standards and domestic markets. Officials at the Finance Ministry said many reforms included in the previous programme would be difficult to implement under the current political and economic conditions. However, the IMF might not agree to abandon them entirely. The two sides could therefore discuss delaying implementation or introducing the measures in phases.

Increasing revenue collection, reforming and restructuring the NBR, improving the banking sector and making the exchange rate system more flexible are expected to remain important elements of any new programme.

Bangladesh entered a $4.7 billion IMF loan programme in January 2023. The programme was later increased to $5.5 billion. More than $3.6 billion has been disbursed in five instalments so far. However, the release of about $1.3 billion in the fifth and sixth instalments was held up because of insufficient progress in revenue collection, exchange rate management and financial sector reforms.

The main objectives of the loan were to address the foreign exchange reserve shortfall, control the budget deficit, strengthen discipline in the financial sector and restore investor confidence. In the aftermath of the COVID-19 pandemic, the energy crisis and the Russia-Ukraine war, Bangladesh’s economy was under severe pressure. Volatility in the dollar market, import restrictions, inflation and irregular remittance inflows added to the strain on public finances.

The IMF stepped in with a promise of financial support. However, the assistance went beyond providing money, as the programme also sought to reshape the country’s broader economic policy direction.