Is the IMF loan programme still worth it for Bangladesh?

Speculation is mounting that Bangladesh may walk away from the ongoing $4.7 billion IMF loan programme, amid growing frustration with the lender's tough reform demands.

Finance Adviser Dr Salehuddin Ahmed recently said that the country will not accept all IMF conditions — particularly a fully market-driven exchange rate — as doing so could trigger a crisis akin to Sri Lanka or Pakistan. "We will make decisions based on our own judgment," he told reporters, signalling that the government is prepared to chart its own course, even if it means forfeiting future disbursements from the IMF

The programme is now stuck in negotiations. The core issue here is about the final three payments of the six-part loan. The first three tranches have already been disbursed, with a total of $2.3 billion received by Bangladesh. 

However, future disbursements are now uncertain, as talks remain stalled over core issues like exchange rate liberalisation and subsidy reductions.

The failure to secure IMF backing could undermine investor confidence. "It will send a signal to the financial markets that the IMF programme has stalled, which would imply that there is something not right with the macroeconomic framework of Bangladesh," said Dr Zahid Hussain, former lead economist at the World Bank Dhaka office.

The uncertainty landscape

Bangladesh's economy has been under stress in recent years, with declining foreign reserves, inflation, and global economic headwinds creating new challenges.

To stabilise the economy and boost its reserve position, the country turned to the IMF in early 2023. But as the demands for reforms pile up, the government finds itself facing a dilemma — should it continue complying with the IMF's terms, or should it chart an independent course?

According to Dr Zahid Hussain, former lead economist at the World Bank Dhaka office, the purpose of the IMF programme must not be misunderstood. 

"It is not quite accurate to describe the elements involved as conditions; rather, they are reforms. The purpose of reforms is, in fact, to strengthen the economy," he explained.

The ongoing discussions, however, reveal how difficult these reforms can be in practice. A key point of contention is the exchange rate policy. Bangladesh currently maintains a semi-fixed exchange rate, allowing the taka to fluctuate within a narrow band. 

The IMF, on the other hand, is pushing for full liberalisation — a move that policymakers fear could create volatility and deplete reserves.

The implications of the IMF loan extend beyond just the disbursement from one institution. A halt in IMF support could trigger a domino effect. 

Dr Hussain noted that roughly $1 billion in additional support from the World Bank and Asian Development Bank (ADB) is linked to continued IMF backing. 

"These funds would have directly contributed to the foreign reserves and could have been received within a couple of months — but without the IMF disbursement, that would not happen," he said.

Such a shortfall could have direct fiscal consequences. The government might have to scale back the budget or seek additional borrowing from the domestic market, potentially crowding out private investment.

More critically, the failure to secure IMF backing could undermine investor confidence.

"It will send a signal to the financial markets that the IMF programme has stalled, which would imply that there is something not right with the macroeconomic framework of Bangladesh,"  Dr Hussain warned. 

Credit rating agencies, trade financiers, and foreign investors closely monitor IMF engagement as a barometer of economic stability. 

"When credit rating agencies prepare their reports and develop their outlook narratives, it will be seen as highly significant if they note that an ongoing IMF programme failed to disburse," he added.

A balancing act

The government's position is not without logic. In the view of some economists, the size of the IMF loan, though symbolic, may not be large enough to determine the trajectory of the entire economy.

Dr Sayema Haque Bidisha, professor of Economics at Dhaka University, explained: "The remaining amount of the IMF loan is not particularly large. In that context, it is unlikely to have a significant impact on the overall economy of the country."

She also noted that the situation regarding foreign reserves has improved recently, aided by a better inflow of remittances. 

"Taking that context into account, one can say that since the foreign reserves are in a relatively healthier state, and the loan amount is not very substantial, I do not think the absence of this loan would cause any major disruption to the economy," Dr Bidisha said.

But she cautioned against ignoring the symbolic and strategic value of the IMF programme. "The IMF's willingness to offer the loan is a positive signal for the overall investment climate, particularly in terms of foreign investment." 

Domestic considerations

The political context also cannot be ignored. The interim government, in place since August last year, must tread carefully. A perception of giving in too easily to foreign institutions can be politically costly. 

At the same time, the government is under pressure to keep the economy steady without creating further hardship for citizens, particularly in sensitive areas such as agricultural subsidies and energy pricing.

Agricultural economists called for increased allocations for the sector. They urged the government to reduce VAT on poultry feed and offer better incentives to farmers — a clear indication that slashing subsidies would be politically unpopular.

Meanwhile, the Finance Ministry is proceeding with plans for the next fiscal year's budget, despite the uncertain support from development partners. 

Finance Adviser Dr Salehuddin Ahmed said that the country would present a realistic budget even without IMF or ADB assistance. "Bangladesh has been doing reasonably well without IMF budgetary support." 

But this stance is not without risk. Dr Hussain emphasised that beyond the funds themselves, the IMF programme plays a critical role in pushing forward structural reforms. 

"It creates momentum for reforms that might otherwise slow down. The programme has a defined timeline — for instance, banking sector reforms must be completed within a particular period," he explained. 

Without this external push, many necessary reforms could be delayed or abandoned.

What's next?

As the next meeting with IMF officials is scheduled for 19 May, there is still hope for a breakthrough. Both sides seem interested in continuing the engagement, but the window for compromise is narrowing.

Bangladesh has also requested a $1 billion stability fund from the IMF to cushion any adverse effects from a liberalised exchange rate. Whether that request is accepted may determine the future course of the loan programme.

For now, Dhaka's stance is that the country values support but not at any cost that would harm the economy. As Dr Bidisha believes, "If the loan is granted, it would undoubtedly be a positive sign. However, even if it is not, there is no reason to panic."