Exchange rate, tax reforms hold key as IMF withholds $1.3b disbursement

Infographics: TBS

The International Monetary Fund (IMF) has concluded its two-week mission to Dhaka with a measured statement – neither approving the immediate release of funds nor closing the door entirely. Instead, it offers cautious optimism: Bangladesh still has a path forward, but time is running out.

The statement delivers a clear message that policymakers in Dhaka cannot ignore: the country has yet to meet all the conditions required to unlock the next disbursements, worth over 1.3 billion, under the 4.7 billion loan package agreed upon in early 2023.

 These are the fourth and fifth tranches, tied to critical reforms under the Extended Credit Facility, the Extended Fund Facility, and the Resilience and Sustainability Facility.

The first tranche of $476.2 million was disbursed in February 2023, followed by the second tranche of $681 million in December 2023, and the third tranche of $1.15 billion in June 2024.

Led by mission chief Chris Papageorgiou, the IMF team held extensive discussions in Dhaka from April 6 to 17, reviewing economic indicators, fiscal policies, and the stability of Bangladesh's financial sector.

Yet, the review did not yield immediate approval – at least, not yet.

In its closing statement, the IMF mission said:
"Discussions are continuing with the objective of reaching a staff-level agreement in the near term – including during the April 2025 IMF-World Bank Spring Meetings in Washington, DC."

"We reaffirm our commitment to support Bangladesh and its people during this challenging period," the statement added.

The wording is significant. A staff-level agreement is essential for securing IMF board approval and fund disbursement. Without it, Bangladesh remains in limbo. While the mention of the Spring Meetings provides a tentative timeline, it also underscores the urgency for swift and meaningful reforms.

Insiders in the finance ministry and the central bank say the sticking points are the usual suspects – exchange rate management, tax reform, subsidy rationalisation, and banking sector transparency. While the government has made progress, it has not yet satisfied the IMF's requirements.

Key takeaways from the IMF's review

At a press conference at the Bangladesh Bank headquarters today (17 April), IMF mission chief Chris Papageorgiou said discussions are ongoing regarding full exchange rate flexibility.

He acknowledged the government's concerns about timing and potential market volatility but emphasized the need for decisive action.

"These are the kind of difficult discussions we're having, but we're on a very good path and hope to reach a staff-level agreement soon," Papageorgiou said.

He added, "We've agreed with the authorities to continue the discussion beyond Dhaka on Monday, which marks the start of our Spring Meetings in Washington."

Highlighting progress, he said, "A lot of progress has been made in three key areas – two of which are priority issues: revenue mobilisation and exchange rate flexibility. The third, while not a strict priority for this review, is the banking sector, which remains a crucial focus for the country and for future assessments. So, alongside the two core priorities, discussions on the banking sector are also continuing."

The IMF mission also praised the BB Governor, Ahsan H Mansur, for maintaining a tight monetary policy to curb inflation and stabilise the foreign exchange reserve.

Papageorgiou said, "We see that reserves have stabilised, and we commend the authorities for that, as reserves had been on a steady decline for two years, which was concerning."

"Now, reserves are at least stable, though we haven't seen an accumulation of them. We expect that with more flexibility, accumulation will occur in the near term," he said.

On interest rates, he deferred to the central bank's judgment: "We leave the decision on the policy rate entirely to the governor."

"We fully endorse the tightening stance, meaning we want to ensure inflation comes down in a timely manner. So far, inflation has been very persistent, even stubborn, compared to other regions. We commend the governor for maintaining this approach," he added.

Papageorgiou said, "Looking ahead, as we expect inflation to ease, perhaps next year, the governor will need to consider what to do with the policy rate. For now, the policy rate will remain at 10% until we see clear signs of inflation moderating."

Regarding the new loan classification rule, the IMF mission said that the non-performing loans (NPLs) were not caused by the reclassification, but rather exposed as a legacy issue. The authorities must now strike the right balance between achieving policy goals and minimising unintended consequences.

On Bangladesh's stolen asset recovery efforts, Papageorgiou said, "At this point, we would just say that the authorities are making good progress in coordinating domestic and international efforts to freeze, confiscate, and recover stolen assets."

A senior executive of the central bank said the IMF mission concluded its review without reaching a staff-level agreement this time, putting Bangladesh a step behind in securing the next loan tranches. Notably, even after the third review's approval, the fourth tranche was not immediately released.

Economic challenges ahead

The IMF mission chief noted that Bangladesh's economy continues to face significant headwinds amid global uncertainty.

GDP growth fell to 3.3% year-on-year in the first half of FY25, down from 5.1% in the same period of FY24, reflecting disruptions from political unrest, a tighter policy mix, and increased uncertainty that dampened investment.

After peaking at a decade-high of 11.7% in July 2024, headline inflation eased to 9.4% in March 2025 but remains well above the Bangladesh Bank's target range of 5–6%, he added.

Revenue and reform 

Chris Papageorgiou said a comprehensive strategy to boost revenue and reform expenditures is crucial for supporting increased social spending and infrastructure investment. 

Bangladesh's persistently low tax-to-GDP ratio underscores the pressing need for tax reforms aimed at building a more equitable, transparent and streamlined system – one that ensures sustainable revenue growth, reduces widespread tax exemptions, improves compliance, and distinctly separates tax policy from administration, he said.

"Thorough and well-sequenced financial sector reforms are essential for maintaining stability. Legal reforms should align with international standards, and the authorities must move quickly to operationalise new frameworks that enable orderly bank restructuring while protecting small depositors," Papageorgiou said.  

According to the IMF mission, effective asset quality reviews (AQRs) strengthened risk-based supervision, and improved governance and transparency will be critical to restoring confidence and supporting the sector's health. 

Simultaneously, institutional reforms to enhance Bangladesh Bank's independence and governance will be critical for maintaining long-term macroeconomic and financial stability and for the successful implementation of financial sector reforms.

Sustaining the pace of structural reforms is crucial for tackling the country's economic challenges.

Improving governance and increasing transparency will play a vital role in creating a more favourable investment environment, boosting foreign direct investment (FDI), and expanding export sectors beyond ready-made garments. 

Progress in AML/CFT (Anti-Money Laundering/Combating the Financing of Terrorism) risk assessments and enhancements in data quality are equally important, according to the IMF.