Forex volatility a barrier to Bangladesh’s macroeconomic stability: IMF  

The International Monetary Fund (IMF) believes that the ongoing volatility in foreign exchange rates and fears of dwindling Bangladeshi exports in the wake of global economic slowdowns due to the Ukraine-Russia war are the main barriers to the country's macroeconomic stability.  

A visiting delegation of the global lender has given its opinion in favour of lifting the existing 6% and 9% interest rate caps on deposit and lending and recommended reforms to reduce defaulted loans and remove weaknesses in the banking sector.

The IMF mission led by Rahul Anand, division chief in the IMF's Asia and Pacific Department, had shared their views on Bangladesh's economy in separate meetings with the top executives of the finance and commerce ministries and the central bank on Sunday, according to officials present in the meetings.  

An additional secretary to the Finance Division told The Business Standard, "We presented various information on the macroeconomic stability of Bangladesh to the mission officials. In it, mission officials expressed concerns over the dwindling foreign exchange reserves of Bangladesh and the volatility of foreign currency exchange rates."
 
Finance ministry officials told the IMF that several initiatives have been taken to discourage imports of all but essential commodities to maintain foreign exchange reserves at satisfactory levels, the benefits of which have already begun to reap.

"Import growth slowed to 15% last May. As a result, while the average import growth was around 45% in the previous 10 months of the last fiscal year, it came down to 38% at the end of May. Import growth will slow further in June. As a result, import growth in the last financial year will come down to around 30%," the Finance Division told the IMF mission.

Owing to inflation, domestic demand is shrinking and import spending is also falling. At the same time, the Finance Division told the IMF mission that if the proposed $4.5 billion budget support from the IMF is received, the reserves will reach a satisfactory level and the interbank exchange rate will also stabilise.

Bangladesh's foreign exchange reserves are now below $40 billion. To increase this, the finance ministry has started the process of taking emergency budget support of $4.5 billion from the IMF. 

The Finance Division will send a formal letter to the country representative of the IMF this week to lend this amount of money to spend on "development and social protection of the SME sector".

Asked whether the IMF made any recommendation to withdraw subsidy as a condition for giving this loan, the additional secretary of the finance division replied in the negative, adding that withdrawal of subsidies at a time of rising inflation would push the situation beyond control.

"All indices of our macroeconomic situation are relatively good. However, due to pressure on reserves to meet high fuel and fertiliser import costs, there is instability in the foreign exchange rate. The mission emphasised on stabilising it," he said.

The use of LNG in power generation has been reduced to maintain the foreign exchange reserves while reliance has been increased on coal. The next decision on load shedding will be taken in September after observing the international situation for the next month, he said.

The IMF officials also said the European Union was increasing its dependence on coal after failing to meet their demand for Russian gas. As a result, the price of coal in the international market was also likely to increase.

Meanwhile, in a separate meeting with Commerce Secretary Tapan Kanti Ghosh, the IMF expressed its fear of a decline in Bangladesh's export earnings in the current fiscal year.

The mission wanted to know what action the government will take if Bangladesh's export income decreases due to the recession in Europe and North America, a fallout of the war waged by Russia.

In response, the commerce secretary said Bangladesh's garment exports did not decrease during the global economic recession in 2007-2008 as the country exported low-cost garments.

He said although the purchasing power of European and American buyers has decreased, the demand for this type of clothing has not.

Bangladesh is giving importance to the diversification of its export basket and export market to deal with the impact of the recession, he said, adding the mission was told that the country was looking towards the Latin American and Asian markets.

At the same time, various steps are being taken to increase exports of light engineering, leather and leather goods, and agri products, Tapan told the IMF delegation.

The IMF also sought information on what the government should do to counter the potential negative impacts on exports after LDC graduation in 2026, to which commerce ministry officials highlighted the initiative to sign free trade agreements with various countries and regions.

In another separate meeting with Bangladesh Bank Governor Abdur Rouf Talukder, the IMF is said to have stressed on lifting the interest rate cap and maintaining satisfactory reserves, as well as keeping the exchange rate stable.

The IMF also sought information about the steps Bangladesh Bank has taken to control inflation and keep reserves stable.

Bangladesh Bank spokesperson and Executive Director Md Sirajul Islam told TBS that IMF mission chief Rahul Anand had a meeting with the governor. Four deputy governors, the head of Bangladesh Financial Intelligence Unit and senior officials of the central bank were present at the meeting.
 
He said various issues, including GDP growth, balance of payment and cash flow were discussed at the meeting, adding the macroeconomic and monetary policy of the country were also brought up.

Besides, Bangladesh's financial policy and exchange rate stability were also discussed.

Apart from the governor, the IMF officials also held meetings with senior officials of the Monetary Policy Department and the Forex Reserve and Treasury Management Department of the Bangladesh Bank.