No unified VAT, policy rate cut for now: Dhaka tells IMF

In a sign of growing policy assertiveness, Bangladesh has politely but firmly declined to provide a timeline to the International Monetary Fund (IMF) on when it plans to cut the policy interest rate or implement a unified Value Added Tax (VAT) rate.

The message came during a set of meetings held today between a visiting IMF delegation and key economic policymakers – Finance Adviser Dr Salehuddin Ahmed and Bangladesh Bank Governor Dr Ahsan H Mansur.

Speaking to reporters after the meeting, Salehuddin said, "The IMF pushed us to implement the unified VAT rate, but we've told them we can't do it now. We'll do it gradually."

The statement reflects a cautious balancing act: on the one hand, maintaining reform commitments under the IMF's $4.7 billion loan programme; on the other, managing domestic realities that make sweeping changes politically and economically sensitive.

According to officials familiar with the discussions, no specific timeline was offered on the question of interest rate cuts either. The central bank only recently adopted a market-based interest rate regime and appears to be in no hurry to reverse course until inflationary pressures ease.

What Cenbank told IMF

The IMF delegation inquired about when the Bangladesh Bank plans to reduce its policy rate. Governor Mansur told them that the central bank would consider lowering the policy rate once inflation in the country falls to 8%, BB spokesperson Arif Hossain Khan confirmed.

The IMF team pointed out that their own projections indicate that the inflation will come down to 8.2% by this June, he said.

"The IMF delegation communicated concern about the country's revenue collection situation. Also, they expressed satisfaction with Bangladesh Bank's ongoing reform initiatives," said the spokesperson.

He added that the IMF team held separate meetings in the afternoon with various departments of Bangladesh Bank. One of these meetings focused on the liquidity situation in banks.

"The delegation specifically inquired about the liquidity crisis affecting 12 banks. The governor informed them that after providing liquidity support, only five banks are currently facing liquidity issues – the rest have largely recovered," he continued.

"When asked about the mechanism of liquidity support, the governor said it was provided through Promissory Notes. The IMF delegation appeared to be dissatisfied with this method," he said.

A promissory note is a financial instrument that contains a written promise by one party to pay another party a definite sum of money.

When asked by the IMF team if the banks currently facing a liquidity crisis have stopped issuing loans, the governor responded that these banks have indeed stopped issuing regular loans, but they are still offering small loans to the SME and agricultural sectors using various refinancing schemes of the central bank.

The spokesperson noted that the IMF team did not discuss non-performing loans (NPLs), foreign reserves, or the exchange rate with the governor.

Before meeting the governor, the delegation held a meeting with Finance Adviser Salehuddin Ahmed in the morning.

Issues IMF discussed with Finance Adviser

Salehuddin Ahmed said the IMF believes Bangladesh's economy is stable and moving in the right direction.

He, however, noted that the IMF has raised concerns over a number of issues including the need to increase foreign currency reserves, stabilise the exchange rate, and reduce the budget deficit.

"They think Bangladesh's economy is stable and on the right track," said Salehuddin while speaking to reporters at the Secretariat following the meeting.

He said the IMF is also concerned about the country's low tax-to-GDP ratio and high number of zero tax returns.

"According to the IMF, millions of people file zero returns in Bangladesh. Our tax-to-GDP ratio is 7.5%, while Nepal's is 12-13% and India's is 17-18%. We informed them of the steps we're taking to improve the situation," Salehuddin said.

The IMF also raised concerns over NPL recovery and the implementation of a unified exchange rate, he added.

Asked about the next instalment of the IMF loan, Salehuddin said, "We have shown our good intentions by taking steps such as improving revenue collection and leaving the exchange rate to be determined by the market. Now it's time for the IMF to show theirs."

The adviser said discussions on these matters will continue between the IMF and institutions such as the NBR and the Bangladesh Bank.