$3.5b loan unlocked with shift to market-based exchange rate

Infographics: TBS

After months of negotiations with the International Monetary Fund (IMF) over exchange rate flexibility, Bangladesh has finally transitioned to a market-driven currency regime – a long-awaited shift that has unlocked $3.5 billion in foreign loans from multilateral lenders. The inflow, expected by June, will provide a crucial boost to the country's strained budget as the fiscal year draws to a close.

At a press briefing on Wednesday (14 May), Bangladesh Bank Governor Ahsan H Mansur confirmed that the IMF will release $1.3 billion – the fourth and fifth tranches of its $4.7 billion loan package – after the central bank agreed to adopt a market-based exchange rate, fulfilling a key demand from the Washington-based lender.

For months, the IMF had withheld these funds, insisting on genuine exchange rate flexibility beyond superficial corridor adjustments and the elimination of multiple exchange rate windows. With Bangladesh Bank's fresh commitment, the lender has now greenlit the disbursement.

The IMF, in a press release issued on Wednesday, stated, "IMF staff and Bangladesh authorities have reached a staff-level agreement on the policies needed to complete the combined third and fourth reviews under the Extended Credit Facility (ECF), Extended Fund Facility (EFF), and Resilience and Sustainability Facility (RSF).

"The staff-level agreement is subject to approval by the IMF Executive Board and contingent on the completion of prior actions related to tax revenue mobilization and full implementation of exchange rate reforms."

Bangladesh has already received $2.31 billion across three tranches under the IMF's $4.7 billion loan programme, approved in early 2023.

But the IMF is not the only financial player stepping in. Other global lenders – including the World Bank and the Asian Development Bank (ADB) – are expected to provide an additional $1.4 billion in budget support next month. In addition, the Economic Relations Division (ERD) is negotiating $800 million in funding from the Asian Infrastructure Investment Bank (AIIB) and Japan, which could be finalised before June.

Loan agreements totalling $1.2 billion have already been signed with the World Bank, ADB, and the OPEC Fund.

Shifting towards market-based exchange rate: Timing is key

This substantial injection of foreign funds offers more than just a fiscal lifeline – it also provides Bangladesh with the confidence to pursue a realistic exchange rate system that better reflects macroeconomic fundamentals, even if full flexibility remains politically sensitive.

Timing has worked in Bangladesh's favour. Remittance inflows have surged – $6 billion poured in during March and April alone, and bankers forecast another $3 billion in May ahead of Eid-ul-Adha.

With foreign reserves stabilising and the current account improving, the central bank believes the market is now better positioned to play a larger role in price discovery of the taka, while ensuring interventions during major forex payments to prevent excessive volatility.

Governor: Market-based rate to stay near current levels

During the press briefing, Bangladesh Bank Governor Ahsan H Mansur announced the official shift to a market-driven exchange rate from Wednesday, meeting the IMF's requirements.

"The available dollar liquidity suggests that the exchange rate will hover close to its current level," Mansur stated.

"This is an opportune time to implement a market-based exchange rate. Remittance inflows are strong, foreign reserves are stable, and the balance of payments has improved," he said.

With $3.5 billion expected from development partners by June, reserves will rise further, making the transition both timely and manageable, Mansur noted.

Experts: Time is ripe for a flexible exchange rate

Economic analysts, including Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), see the shift as a necessary move – beyond IMF mandates.

Speaking to TBS, Fahmida emphasised that a flexible exchange rate would curb opportunistic behaviour and reduce manipulation risks.

While peer economies such as India, Pakistan, Vietnam, China, and Indonesia have devalued their currencies in recent years, Bangladesh's taka has remained artificially appreciated, often benefiting select groups, she argued.

"A market-driven exchange rate will enhance investor confidence, improve export-import competitiveness, and provide businesses with clearer financial planning," she added.

Most importantly, Fahmida believes the move will help stabilise forex volatility, preventing arbitrary interventions in the currency market.

Major loan agreements secure foreign funding

The Bangladesh government is set to receive $1.4 billion in budget support from the World Bank and ADB, with agreements expected to be finalised by June.

According to ERD officials, negotiations with global lenders gained momentum after the IMF confirmed its latest loan disbursement.

On Wednesday, the ERD held negotiation meetings with the World Bank under the Resilience and Recovery Development Policy Credit-II program for a $500 million loan.

Earlier, on Tuesday, two separate talks with ADB resulted in commitments for:

• $500 million under the Banking Sector Reforms Subprogramme 1
• $400 million under the Climate Responsive Inclusive Development Program (CRID) – Subprogramme 2

Further funding may materialise from Japan and the AIIB within the current fiscal year. Negotiations are ongoing for:

• $418 million under Japan's Development Policy Loan for Economic Reform and Strengthening Climate Change Resilience
• $400 million from AIIB under the Climate Resilient Inclusive Development Program (Subprogramme 2)

A senior ERD official explained: "Multilateral lenders typically consult the IMF before approving loans. The IMF's macroeconomic diagnostics – such as debt levels and repayment capacity – serve as reference points for institutions like the World Bank when determining credit viability.

"Even bilateral lenders, including Japan, often follow this practice."