The Country’s Economy Under Pressure

The International Monetary Fund (IMF) believes that Bangladesh’s economy remains under pressure. In a meeting with Bangladesh Bank on Thursday (October 30), the IMF advised making interest rates more market-based.

At the same time, the IMF stated that maintaining a contractionary monetary policy is essential to bring inflation down to 5 percent. The organization also expressed concern over the use of foreign reserves to form the Export Development Fund (EDF) and the rising amount of non-performing loans (NPLs).
Under the conditions of the IMF’s $4.7 billion loan program, Bangladesh has not yet fully achieved its inflation control target. However, the IMF expressed satisfaction that the recent trend of inflation has been downward.

Bangladesh Bank informed the meeting that overall inflation declined to 8.36 percent in September. Although the IMF acknowledged this improvement, it emphasized that the contractionary monetary policy must continue to sustain this trend.

At the same time, the IMF inquired about Bangladesh Bank’s plans to ensure that prolonged contractionary policies do not hinder investment.

During the meeting, the IMF stated that to enhance the effectiveness of monetary policy and maintain control over inflation, the interest rate structure should be made more market-oriented. The IMF delegation gathered detailed information on Bangladesh Bank’s interest rate determination process, monetary policy framework, and liquidity management.

The IMF delegation expressed concern about the growing amount of non-performing loans in the country. According to the IMF’s conditions, the NPL ratio in state-owned banks should be brought down below 10 percent, but it has now exceeded 40 percent. The IMF expressed satisfaction when the actual picture of hidden NPLs came to light after the government change in August last year.

According to Bangladesh Bank data, as of the end of June, the total amount of defaulted loans in the country stood at approximately Tk 667,000 crore — an increase of about Tk 400,000 crore in just one year. The NPL ratio in private banks has also surpassed 10 percent, although the target was to keep it below 5 percent.

The IMF delegation raised questions about the formation of the Export Development Fund (EDF) from foreign reserves and various refinancing and pre-financing facilities. The organization also strongly objected to the central bank’s policy of providing liquidity support without collateral to weak banks under its “lender of last resort” mechanism.
Sources said that so far, Bangladesh Bank has provided about Tk 52,000 crore to several weak banks under special arrangements, even though those banks had no eligible bills or bonds.

These banks received the money only by issuing “promissory notes,” and none of them have repaid the funds yet. The IMF stated that such unsecured lending must be stopped immediately, as it poses a high risk to the financial system.
The IMF delegation expressed satisfaction with Bangladesh’s foreign exchange reserve situation. A Bangladesh Bank official stated that the current net reserve stands at $20.5 billion — higher than the IMF’s set targets of $18 billion for September and $19.9 billion for December. However, the IMF expressed dissatisfaction over the fiscal deficit and the weak tax-to-GDP ratio.
The IMF delegation was led by Chris Papageorgiou, Head of the Development Macroeconomics Division of the organization’s Research Department.
Bangladesh Bank was represented by Deputy Governor Dr. Habibur Rahman, along with Deputy Governor Nurun Nahar, Executive Director of the Research Department Dr. Ejazul Islam, and other senior officials.

Bangladesh Bank’s Assistant Spokesperson Shahriar Siddiqui said, “The IMF’s fifth review mission is part of its regular visit to collect data. They discussed in detail the steps taken to control inflation, interest rates, liquidity support, use of reserves, and the reduction of non-performing loans.”
After long negotiations in 2022, Bangladesh signed a $4.7 billion IMF loan agreement in January 2023, which was later increased to $5.5 billion. So far, Bangladesh has received $3.64 billion in five installments. However, uncertainty has arisen over the sixth tranche, which is scheduled to be released in December.

Source: Kaler Kantho
khaborwala/MU