Bangladesh secures staff-level agreement with IMF for $1.3b disbursement amid reform commitments

Highlights:

• IMF expects Bangladesh's GDP growth to rebound in H2 of FY25
• Inflation projected to be around 8 ½% by end of FY25
• Domestic factors such as stress in banking sector, elevated global uncertainty tilt risks to the downside
• Says policy tightening essential to address the emerging external financing gap, support decline in inflation
• Enhanced exchange rate flexibility, reinforced forex reserve buffers will bolster resilience to external shocks

Bangladesh and the International Monetary Fund (IMF) have reached a staff-level agreement to unlock a fresh disbursement of approximately $1.3 billion under ongoing loan arrangements, contingent upon the implementation of key economic reforms.

The agreement follows extensive discussions in Dhaka, engagements during the IMF-World Bank Spring Meetings in Washington, DC, and subsequent virtual follow-ups, reads a press statement issued by Chris Papageorgiou on the IMF website today (14 May).

The IMF support package includes the Extended Credit Facility (ECF), Extended Fund Facility (EFF), and Resilience and Sustainability Facility (RSF).

The latest tranche comprises SDR650.5 million (about $874 million) under the ECF and EFF, and SDR333.3 million (about $448 million) under the RSF, subject to approval by the IMF Executive Board and fulfillment of prior reform commitments.

The IMF statement says that amid significant macroeconomic challenges, Bangladesh authorities also requested an augmentation of SDR567.2 million (approximately US$762 million) in IMF financial support to Bangladesh under the ECF and EFF arrangements.

"This increase would bring the total financial assistance under the ECF and EFF arrangements to SDR3,035.65 million (about $4.1 billion), alongside concurrent RSF arrangements of SDR 1 billion (about $1.3 billion)," the statement reads.

GDP expected to rebound in second half of FY25

The IMF, in its statement, noted that Bangladesh's real GDP growth slowed to 3.3% year-on-year due to the impacts of the July-August uprising in the first half of FY25.

The IMF, however, notes that the GDP is "projected to rebound in the second half, reaching 3.8% for the full fiscal year."

Inflation, which has approached double digits, has begun to decline and is projected to be around 8 ½% YoY by the end of FY25, it also notes.  "Nonetheless, domestic factors such as stress in the banking sector and elevated global uncertainty tilt risks to the downside."

Policy Tightening and Reform Critical

The international lender has made multiple recommendations for Bangladesh to deal with the emerging economic crisis.

"To address the emerging external financing gap and support a continued decline in inflation, near-term policy tightening is essential. Fiscal consolidation should focus on the prompt implementation of additional revenue measures—such as streamlining of tax exemptions—while containing non-essential expenditures.

"Alongside monetary tightening, enhanced exchange rate flexibility and reinforced foreign exchange reserve buffers will bolster the economy's resilience to external shocks. In this regard, steadfast implementation of the new exchange rate regime will remain critical," the statement reads.

The IMF also stated that Bangladesh's low tax-to-GDP ratio underscores the urgent need for tax reforms to build a fairer, more transparent, and simpler system while sustainably boosting revenues. "Key priorities include streamlining exemptions, enhancing compliance, and delineating tax policy from administration. In parallel, a comprehensive approach is required to rein in subsidy expenditures in the electricity sector. Increased revenues will also provide more fiscal resources to support the most vulnerable." 

The lender also said a carefully designed strategy for dealing with weak banks is essential to ensuring stability.

"Swift action is needed to operationalise new legal frameworks that facilitate orderly bank restructuring while safeguarding small depositors. Robust asset quality reviews for all large and systemic banks, bank restructuring aimed at forward-looking viability, strengthened risk-based supervision, and enhanced governance and transparency will be key to rebuilding trust and supporting the sector's soundness," it said.

At the same time, it added that institutional reforms to bolster the independence and governance of Bangladesh Bank will be essential for ensuring long-term macroeconomic and financial stability and for the effective implementation of broader financial sector reforms.

"Strengthening governance and promoting greater transparency are essential to improving the business environment, attracting foreign direct investment, and broadening the export base beyond the ready-made garment sector," reads the IMF statement.

"Enhancing resilience to climate change is crucial for mitigating macroeconomic and fiscal risks. Investing in institutional capacity and improving the efficiency of public spending will support progress toward climate objectives. The government should prioritise climate-responsive fiscal reforms and channel investments into sustainable, climate-resilient infrastructure. In addition, effective management of climate-related risks will help safeguard financial sector stability," it adds.