Why IMF nod matters in external financing

When a disease is diagnosed and the prescribed remedies are ignored, the condition can turn critical, requiring urgent intervention that is often more costly, more painful and even fatal. A similar situation may  unfold for Bangladesh following the International Monetary Fund's (IMF) reported refusal to release a loan tranche, citing failures to implement agreed reforms.

Agreed during the deposed Awami League government, the IMF's $5.5 billion loan programme continued through the interim administration and into the tenure of the new BNP government. 

However, key pledged reforms remained largely unmet, prompting the global lender to withhold the combined fifth and sixth tranches, originally expected by June, and instead asked Bangladesh to negotiate a fresh lending arrangement.

The IMF reportedly made it clear to Bangladesh's delegation, led by Finance Minister Amir Khosru Mahmud Chowdhury in Washington, that the country had not implemented agreed conditions related to a market-based exchange rate, phasing out energy subsidies, and raising revenue, an official told The Business Standard.

Of the remaining $1.86 billion under the programme until next January, Bangladesh had expected to receive $1.3 billion before the next fiscal year begins in July.

The IMF's decision at the Spring Meetings of the IMF and World Bank in Washington, DC, comes as a fresh blow for Bangladesh, which is also seeking $3.25 billion in additional budget support from development partners to address economic stress and energy shocks linked to the Middle East conflict.

Officials at the Economic Relations Division (ERD) said additional external assistance expected by June includes $1 billion each from the World Bank and the Asian Development Bank (ADB), $750 million from the Asian Infrastructure Investment Bank (AIIB), and $500 million from Japan.

Economists believe the IMF's refusal to release the pledged tranche could make it more difficult for Bangladesh to secure fresh financing from other multilateral and even bilateral lenders.

What went wrong

During the release of the last loan instalment in June last year, the IMF review mission report stated: "All end-June 2024 and end-December 2024 quantitative performance criteria (QPCs) were met. However, the indicative targets (ITs) on tax revenue floors have been repeatedly missed. Until June 2024, most structural benchmarks (SBs) had been largely implemented, with a few exceptions. Since July 2024, however, progress on several SBs has slowed considerably, requiring additional time for completion."

With support from development partners including the IMF and the World Bank, the interim government issued a Banking Resolution Ordinance to merge distressed banks. However, the BNP government later amended the law and passed a bill effectively allowing former owners to regain control. As a result, the major reforms in the banking sector that had been pursued over the past year have lost credibility with the IMF.

The IMF also pressed for amendments to the Bangladesh Bank Order to strengthen central bank independence. Although Bangladesh Bank drafted an ordinance, it was not enacted by the interim government and was returned shortly before the transfer of power.

Under the IMF programme, each tranche is tied to revenue floor and tax-to-GDP targets, which Bangladesh has consistently failed to meet.

Despite repeated commitments, subsidy cuts remain limited to export incentives. Plans to reduce electricity subsidies by lowering generation costs have not materialised, despite a pledged three-year roadmap and a 10% cost-cut target in the current budget.

Economists said electricity prices were initially adjusted monthly under IMF conditions, but adjustments stopped even as global prices rose after the Iran conflict.

The Awami League pledged post-2024 election subsidy cuts, while the interim government promised price hikes after the 2026 election. Neither has been implemented, drawing IMF concern.

The IMF has warned that Bangladesh's debt risk could rise from low to moderate, citing weak revenue performance and persistent subsidies, an assessment it had not previously made.

Analysts said an ordinance to split the National Board of Revenue has yet to be gazetted, while protests by officials have disrupted tax collection. The current government is now moving to amend the ordinance instead of implementing it.

Why Bangladesh badly needs additional support

Rising global prices of fuel, gas and fertiliser in the Middle East conflict have created significant pressure on government subsidy expenditure.

To address the situation, the Finance Division sent a letter to the Economic Relations Division (ERD), seeking urgent budget support from development partners.

The letter, issued on 12 April from the macroeconomic wing of the Finance Division, warns that subsidy pressure in the energy and agriculture sectors could reach around Tk38,000 crore in FY26 due to supply disruptions. It said this additional burden will place substantial strain on fiscal management.

It also noted that, beyond subsidy costs, higher global prices will require additional foreign exchange for importing fuel, gas and fertiliser, estimated at around $3.2 billion. The government believes urgent external financing is needed to control inflation, stabilise reserves and maintain overall economic stability. 

Finance ministry officials said continued volatility in global energy markets could further increase fiscal pressure in the coming months, making timely international support a key priority.

Describing years of alleged capital flight as having left the banking system "fragile" and the private sector struggling with liquidity shortages, 

Finance Minister Amir Khosru Mahmud Chowdhury in an interview in Washington also stated about the fiscal stress. He said Bangladesh needs some form of financial "cushion" for the next two years to address capital gaps in banks and the private sector, according to a bdnews24.com report.

In a televised interview during an Atlantic Council special programme on the IMF-World Bank Spring Meetings, Khosru said the message being conveyed to the IMF and World Bank is that business activity must be revived first, after which the focus can shift to increasing the tax-to-GDP ratio, as this will take time.

Why IMF's nod matters

Officials at the ERD said several meetings have already been held with the Japan International Cooperation Agency (Jica) on budget support. Although the agency has agreed in principle to provide support, it has indicated that the final decision will depend on the IMF's report in June.

ERD officials also said Bangladesh has begun discussions with South Korea and European Union member countries to secure budget support.

When development partners consider budget support, their first step is to assess whether the macroeconomic framework is stable and sustainable, said Zahid Hussain, former lead economist at the World Bank's Dhaka office.

"They do not conduct this assessment independently; they rely on the IMF. If the IMF says the programme is on track, they proceed. If the IMF is dissatisfied, it becomes extremely difficult for their management to justify new budget support," he added.

For an ailing economy, the IMF often acts as a last resort for bailout-style budget support. Such assistance typically comes with tough reform conditions, which are crucial for macroeconomic stability but carry political costs. Governments agree to these terms in exchange for funding and come under continuous IMF scrutiny.

Under its $7 billion bailout programme, the IMF imposed 11 new conditions on Pakistan, including increased transparency in bureaucracy and liberalisation of the sugar market. It also asked the government to publish an anti-corruption action plan covering 10 state institutions and to study remittance costs.

To access $700 million under its programme to address oil price shocks from the Middle East conflict, Sri Lanka had to agree to further raise electricity tariffs and revise reserve targets to accommodate higher fuel import costs.

In October last year, after the IMF delayed the December tranche at its Washington meeting, both the interim government's finance adviser and the Bangladesh Bank governor repeatedly said that Bangladesh did not need IMF loans.

However, the new government now considers it essential to secure the IMF tranche by June.

Economists said Bangladesh's current foreign exchange reserves are sufficient to cover higher fuel import costs, meaning the absence of the remaining IMF funds would not immediately create a balance of payments crisis. However, they cautioned that the government may struggle to secure budget support from other agencies if the IMF programme remains stalled.

Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), said the government urgently needs funds and should therefore intensify efforts to secure loans from the World Bank, ADB, AIIB and other institutions, while also continuing negotiations with the IMF to release the remaining tranches of the ongoing programme.

IMF keeps eye on next budget

Before releasing funds under the ongoing loan agreement, the IMF will closely examine the first budget of the BNP government, according to a key source from the delegation visiting Washington now. 

Starting from the next fiscal year, if the government takes politically difficult steps such as broadly withdrawing tax exemptions, increasing revenue collection, and reducing subsidies through fuel and electricity price adjustments, the lender may release the remaining $1.86 billion under the programme.

Analysts said Bangladesh's bargaining power in negotiations with the IMF has weakened over time, as the country has repeatedly made commitments on reform implementation but failed to deliver. However, they also believe it will not be possible to implement all pending IMF conditions in a single budget.

"It is not possible to withdraw all subsidies within a year, but diversified measures can be taken to increase revenue, including curbing tax evasion," said Fahmida Khatun. "The BNP government must show genuine commitment to implementing key conditions, begin with one or two major reforms, and assure the IMF that these will continue in the future."

Towfiqul Islam Khan, additional director at the Centre for Policy Dialogue (CPD), said Bangladesh had submitted several reform plans on paper to the IMF over time, but failed to implement them.

"Trying to implement everything at once would create pressure on the economy. Since Bangladesh has repeatedly made commitments without full implementation, its bargaining power has weakened," he said.

"At this stage, negotiations with the IMF must continue, but not only through the bureaucracy. It should be a national-level, collective effort involving all stakeholders," he added.