BB resolves exchange rate dispute with IMF, expects next tranche in June

The Bangladesh Bank has finally reached an agreement with the International Monetary Fund (IMF) on implementing greater exchange rate flexibility – a key condition for the $4.7 billion loan package – clearing the way for the release of a nearly $1.3 billion tranche in June.

After a series of meetings with Bangladesh Bank Governor Ahsan H Mansur, the Washington-based lender agreed to release the loan tranche, and the decision will get final approval in the IMF board meeting due in June, a senior central bank official told TBS.

The Bangladesh Bank will hold a press conference at its headquarters tomorrow, with the governor joining virtually from Dubai. Spokesperson Arif Hossain Khan said a positive development regarding the IMF loan will be announced at the event.

The central bank is likely to disclose the strategy of implementing greater exchange rate flexibility in the press conference.

Bangladesh has received three tranches ($2.3 billion) of the $4.7 billion loan approved in 2023, but the fourth instalment, due in June last year, was withheld due to disagreement over exchange rate flexibility and tax-GDP ratio.

Meanwhile, the government has dissolved the National Board of Revenue (NBR) early Tuesday and replaced it with two new divisions under the finance ministry, in a move to modernise tax administration and boost revenue collection, according to the IMF recommendation.

The IMF has long urged reforms to increase Bangladesh's tax-to-GDP ratio, one of the lowest in Asia.

Earlier, an IMF staff mission led by Chris Papageorgiou visited Dhaka on 6-17 April to conduct a combined third and fourth review of Bangladesh's economic reform programme under the Extended Fund Facility, Extended Credit Facility, and the Resilience and Sustainability Facility.

However, the mission did not reach an agreement with the Bangladesh Bank on issues related to the exchange rate and the tax-to-GDP ratio. Later, the Bangladesh Bank governor held a series of meetings with the lender during the IMF-World Bank Spring Meetings in Washington, DC, as well as follow-up Zoom meetings from Dhaka.

Eventually, the Bangladesh Bank and the IMF mutually agreed to implement greater exchange rate flexibility gradually, rather than all at once, according to a senior central bank official.

Money market responds

Though the Bangladesh Bank did not announce the loan confirmation formally, the money market already responded to the expectation of a positive outcome.

The yield rate of a 5-year bond declined to above 11% from 12.39% on Tuesday, hoping that the IMF loan will reduce the liquidity pressure in the market.

The liquidity requirement for the government through bills and bonds will decline after receiving the IMF loans. It is because the government will convert the foreign loan into local liquidity, said a senior Bangladesh Bank executive.

The dollar price also increased slightly by Tk0.30 on Tuesday from the expectation that exchange rate flexibility will push up the dollar price at least temporarily.

The remittance rate increased to Tk122.50 maximum on the day from Tk122.20 earlier, according to banking sector insiders.

The slight increase in dollar price was not because of demand but due to the expectation ahead of implementing exchange rate flexibility, said a head of treasury of a private commercial bank.

The official said the forex market will experience a slight jerking in dollar price due to the implementation of flexibility, but it will be stable soon due to dollar availability in the market amid high remittance inflow.

Bankers are expecting that remittances will cross $3 billion ahead of Eid-ul-Adha, seeing the current inflow trend, he added.

Expected impact on macroeconomic stability

While talking with TBS, the senior executive said although the loan amount is not significant, staying with the IMF programme will give a positive impression to the global rating agencies. It will also help Bangladesh improve its rating status and boost the confidence of foreign investors.

Two global rating agencies, Moody's and Fitch, downgraded the country rating last year, citing external vulnerability risk as one of the key factors. 

Bangladesh will receive loans from the World Bank and the Asian Development Bank (ADB) along with an IMF loan, which will help to rebuild the foreign exchange reserves, he added.

Bangladesh is expecting to secure $1.4 billion in budget support from the World Bank and ADB if the IMF loan is confirmed, he added.

At present, the country's foreign exchange reserve has remained above $20 billion for the last few months, when the exchange rate remained stable at Tk122.

The release of the IMF loan will also improve foreign payment capacity for the government, said the executive, adding that the inflow of foreign loans will reduce the borrowing cost for the government due to available local currency liquidity.