IMF warns of macro-financial risks in Bangladesh despite stability amid weak revenue, high inflation
IMF projects inflation to remain at 8.8% in FY26 before declining to 5.5% in FY27
Highlights:
- IMF flags weak tax revenue, high inflation, banking vulnerabilities
- Inflation at 8.2% in October, remains elevated
- Urges bold policies to address fiscal, financial sector risks
- Stresses need for tax reforms to generate sufficient revenues
- Calls for continued climate resilience and governance improvements
- Underscores need for curb youth unemployment
- Suggests promoting economic diversification
Bangladesh has made progress in maintaining macroeconomic stability and advancing reforms, but its economy continues to face mounting macro-financial challenges stemming from weak tax revenue, financial sector vulnerabilities, and elevated inflation, the International Monetary Fund (IMF) said yesterday.
"Bold policies to address fiscal and financial sector challenges are critical to restore strong and inclusive growth, while safeguarding fiscal sustainability and macro-financial stability," the IMF said in a press statement issued by Chris Papageorgiou, who led the latest 13-day review mission in Bangladesh.
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"Downside risks remain significant, particularly if policy responses are delayed or inadequate," the specialised UN agency further noted.
The observations came during an online press briefing ahead of the IMF delegation's departure after completing discussions on economic and financial policies in the context of the 2025 Article IV consultation and the fifth review of the IMF's Extended Credit Facility (ECF), Extended Fund Facility (EFF), and Resilience and Sustainability Facility (RSF).
The delegation arrived in Dhaka on 29 October and departed yesterday.
Over the medium term, the IMF underscored the need for comprehensive structural reforms to strengthen governance, curb youth unemployment, and promote economic diversification to unlock Bangladesh's growth potential and achieve more inclusive development.
Papageorgiou said, "Bangladesh's GDP growth in FY25 decelerated to 3.7% from 4.2% in FY24, reflecting production delays during the uprising, a tighter policy mix, and heightened uncertainty. Headline inflation fell from double-digit levels in early FY2025 but remained elevated at 8.2% (y-o-y) in October."
He noted that while the authorities have made "notable progress in maintaining macroeconomic stability", the country continues to face significant challenges.
"To ease external imbalances and contain inflation, the authorities tightened both fiscal and monetary policies. Importantly, foreign exchange reserves have begun to rebuild following the exchange rate reform launched in May. However, the economy continues to face significant macro-financial challenges stemming from weak tax revenue and undercapitalisation in the financial sector," he said.
Calls for stronger tax, banking reforms
According to the IMF, addressing these challenges will require reforming the tax system to build a simple and fairer taxation environment and tackling financial sector vulnerabilities.
With steadfast implementation, the Fund projects GDP growth to accelerate to nearly 5% in FY26 and FY27, while inflation is expected to remain elevated at 8.8% in FY26 before declining to 5.5% in FY27.
The lending body warned, "Delayed or inadequate policy action in addressing fiscal and banking challenges would weaken growth, raise inflation, and increase risks to macro-financial stability."
It stressed the need for ambitious tax reforms to generate sufficient revenue for social spending and infrastructure investment.
"Potential options include eliminating reduced VAT rates and removing exemptions – except for essential goods and services – and increasing the minimum turnover tax rate for all corporations," the statement said, adding these reforms would need to be complemented by continuous efforts to strengthen tax administration.
Improving public financial and investment management and containing subsidies to a fiscally sustainable level will further support the reallocation of resources, including to broaden social safety net coverage, and the reforms could also provide the government with much-needed fiscal space to support the financial sector, it added.
Action on weak banks
The IMF official also called for a credible, government-wide strategy to address weak banks, including estimates of system-wide undercapitalisation, fiscal support needs, and legally sound restructuring and resolution options.
In addition, the IMF recommended that Asset Quality Reviews need to be expanded to all systemically important and state-owned banks.
"Continued efforts are needed to improve banks' governance and balance sheet transparency, strengthen the financial safety net, and improve frameworks for recovering non-performing loans," it said.
"Any approach to dealing with weak banks should ensure healthy balance sheets, sustained profitability, and adequate liquidity without prolonged reliance on forbearance measures," the Fund added.
Inflation, exchange rate management
The IMF urged the authorities to maintain tight monetary policy until inflation falls within the target range of 5-6%. "The slow decline in inflation warrants maintaining tight monetary conditions until inflation returns to the target range," the statement read.
It also emphasised the need to fully implement the new exchange rate regime by allowing greater flexibility and improving monetary policy effectiveness. It advised authorities to continue phasing out non-standard monetary and quasi-fiscal operations.
On structural reforms, the IMF noted progress in strengthening governance of the central bank and fiscal institutions but said continued efforts are needed to combat corruption, enhance anti-money laundering and counterterrorism financing (AML/CFT) measures, and promote job creation and export diversification.
The Fund also highlighted the importance of climate resilience and financing, commending Bangladesh's progress under the RSF in making infrastructure more resilient to climate shocks and improving climate risk management in the financial sector.
"Nonetheless, further efforts are needed to rapidly scale up resources and close the climate financing gap," it said.
"Discussions on the fifth review of the IMF-supported programme will continue in the period ahead. The Fund remains a committed partner to Bangladesh in the quest for sustained macroeconomic stabilisation and strong growth that benefits all its people," the statement added.
The IMF mission arrived in Dhaka on 29 October to assess whether Bangladesh has met the lender's conditions, though the fifth tranche of the $5.5 billion loan has not yet been released during the tenure of the interim government.
During its stay, the delegation held meetings with various departments of the Bangladesh Bank. IMF officials inquired about the shortfall in revenue collection compared to the targets set under Bangladesh's loan programme.
They also sought clarification on whether the government plans to increase domestic and foreign borrowing to bridge the revenue gap.
Meeting with BNP-Jamaat
The IMF team also met with leaders of both BNP and Jamaat to understand their reform agendas, views, and economic plans.
The discussions focused on how the transition process and election will take place, the parties' (BNP-Jamaat) priorities, and how they plan to implement them.
The parties expressed very positive opinions about continuing the IMF loan programme, Papageorgiou said during the online press briefing.
The IMF said it will conduct a review and decide on the next installment – $5.5 billion loan – by the end of May next year after an elected government assumes office.
Ahead of that, a high-level IMF delegation will visit Dhaka to hold detailed discussions with the new government on its reform agenda. He further stressed that the new administration must prioritise revenue sector reform and banking sector reform to ensure economic stability.
The delegation met with BNP leaders on 9 November and Jamaat on 12 November.
