BB's balancing act: Reforms, resilience and the wait for IMF nod

Argentina's economic history reads like a well-worn script: make grand pronouncements of reform, only to renege; accumulate debt, then default. This has been the South American nation's modus operandi for over six decades.

Yet, this lamentable track record has not deterred the International Monetary Fund from extending yet another lifeline. On 11 April this year, the global lender sanctioned a $20 billion programme – its 23rd bailout for Argentina, a country once scathingly labelled a "serial deadbeat" by The Economist.

South Asia's struggle for IMF tranches

This latest financial injection for Argentina arrives at a critical juncture for three South Asian nations – Bangladesh, Pakistan, and Sri Lanka – all grappling with rigorous evaluations by IMF teams to unlock pending instalments from previously agreed loan packages totalling nearly $15 billion. Each of these countries has navigated periods of political upheaval and transitions in leadership in recent years, leaving them in pressing need of emergency financial support.

Disbursements for these South Asian nations have only commenced after protracted negotiations and exhaustive reviews conducted before each tranche is released.

Bangladesh's compliance conundrum: Reforms meet IMF reservations

Bangladesh is currently engaged in intense efforts to align with the IMF's stipulations and secure the release of the subsequent instalments of its $4.7 billion loan arrangement. This package was approved in 2023 under the previous administration, and to date, $2.3 billion has been disbursed across three tranches. However, the remaining two instalments, amounting to $1.3 billion, remain in limbo. A series of high-level meetings and visits by IMF missions and staff teams have so far failed to yield a breakthrough. The impasse was also a subject of discussion at the IMF-World Bank Spring Meetings held in Washington in April, where Finance Adviser Salehuddin Ahmed and Bangladesh Bank Governor Ahsan H Mansur articulated Bangladesh's stance on the agreed reform measures.

Sticking point: The exchange rate debate

Another meeting between the governor of the central bank and IMF officials concluded without resolution on Monday, 5 May. Sources indicate that the IMF is steadfastly advocating for greater exchange rate flexibility, a measure that Bangladesh currently deems impractical given prevailing inflationary pressures and the volatility of global exchange rates. This issue remains a significant obstacle in the ongoing negotiations with the IMF.

Consequently, the release of the forthcoming loan tranches remains uncertain, as both parties maintain firm positions on the matter of exchange rate flexibility.

Signs of progress in Bangladesh amidst IMF scrutiny

Since the transition of power, the central bank, under its new leadership, has achieved notable success in reinstating discipline within the financial sector and preventing further losses in the banking system. Initiatives have been launched to recover assets illicitly transferred abroad. The erosion of foreign reserves has largely been contained, enabling the central bank to maintain stable reserves even after settling payments for fuel and electricity imports. Bangladesh's gross reserves currently exceed $21 billion, providing import cover for nearly four months. Furthermore, the exchange market has exhibited stability for several months.

Steps have also been implemented to curtail tax exemptions with the aim of gradually meeting the IMF's target for the tax-to-GDP ratio.

Despite these demonstrable improvements, the IMF remains unconvinced to release the next tranches of funding.

Bangladesh's frustration and a hint of defiance

Bangladesh boasts an unblemished record of never defaulting on its external debt obligations. Nevertheless, it is subjected to stringent scrutiny before each tranche is disbursed. Senior public officials are required to dedicate considerable time engaging with IMF staff, addressing frequently reiterated queries.

Amid this deadlock, Chief Adviser's Special Assistant Anisuzzaman Chowdhury previously voiced his frustration, suggesting that Bangladesh might consider withdrawing from the IMF programme if additional conditions are imposed.

Similar hurdles for Sri Lanka and Pakistan

Two other South Asian nations – Sri Lanka and Pakistan – have encountered similarly rigorous evaluations by IMF teams in their pursuit of loan instalment disbursements.

Sri Lanka's reforms and political realities 

In March of this year, the IMF approved $334 million as the fourth tranche of its $2.9 billion programme for Sri Lanka, but only after the nation successfully cleared its performance review under the four-year agreement. Sri Lanka, which teetered on the brink of financial collapse in 2022, secured its IMF agreement in 2023 and has since received $1.3 billion. However, the newly elected Marxist-led government was compelled to reverse a key privatisation reform – agreed upon by its predecessor – as a condition of the bailout.

Pakistan's austerity measures and hope for a final bailout

The IMF approved a $7 billion loan for Pakistan, a nation grappling with severe cash shortages, in September of the previous year under a three-year bailout programme. In March this year, IMF staff conducted a review and consented to release an instalment, bringing the total disbursements to $2 billion thus far. The IMF stated that its ongoing loan programme has been instrumental in stabilising Pakistan's economy. To adhere to the IMF's stringent guidelines, the country implemented tough reforms and witnessed a sharp decline in inflation to the 1-1.5% range, a significant drop from over 30% a year earlier.

Pakistan's Prime Minister Shehbaz Sharif affirmed that his country had fulfilled all the "strict" conditions of the ongoing loan programme, which Pakistan hopes "will be its last".

Argentina's easier path despite past failures

In stark contrast, Argentina secured its latest IMF bailout with comparatively less difficulty, despite a history of failing to meet reform targets. The IMF now expresses optimism regarding President Javier Milei's assertive austerity measures, including substantial spending cuts, which have shown early indications of economic recovery – such as a reduction in inflation from 287% to 55% within a year, the creation of a fiscal surplus, and the stabilisation of poverty indicators. 

IMF's enduring bet on Argentina's austerity

Since 1958, Argentina has received a staggering $177 billion across 23 IMF programmes, the highest amount for any single nation. Despite this extensive support, the country has experienced repeated defaults, loan restructurings, and swaps. Public scepticism remains prevalent, yet the IMF continues to support Argentina.

Bangladesh's proactive measures and strong repayment record 

Bangladesh's interim government has demonstrated greater alacrity than the previous administration in adhering to IMF loan conditions – even at the risk of public discontent. It has increased gas prices for industries to eliminate energy subsidies, curtailed development expenditures, and initiated reductions in tax exemptions.

Although inflation remains elevated, improvements in export growth and remittances have positively impacted the balance of payments.

A matter of trust: Unlocking further financial support

Beyond these tangible indicators, Bangladesh possesses a strong reputation as a reliable borrower. Despite the temporary holdup in loan instalments, Bangladesh made a repayment of $18.2 million to the IMF in April. Bangladesh's current outstanding debt to the IMF stands at $1.98 billion. Conversely, Argentina made no repayments in April, the same month it secured its substantial bailout package. As of 2 May, the IMF's credit exposure to Argentina amounts to $40.2 billion – a significant 34% of the lender's total outstanding credit.

The stakes of delay: Potential setbacks for Bangladesh's stability

Bangladesh requires further external financing to bolster its foreign currency reserves and enhance their security. The successful disbursement of the remaining IMF instalments would signal the lender's confidence, which in turn would likely prompt the World Bank and other institutions to release their pledged or assured funds.

Any further delay in disbursing the remainder of the IMF loan package risks undermining the progress achieved thus far and derailing Bangladesh's efforts towards macroeconomic stability and fiscal discipline – the very principles that the global lender most emphatically champions.