Injection of $1.31b funds is stopgap relief for falling forex reserves, economists say

A sum US$1.31 billion Bangladesh is getting this month from several external sources is seen by economists as a stopgap relief till the polls for the country's depleting foreign-exchange reserves.

The amount includes $689 million worth of the second tranche of the International Monetary Fund (IMF) loan approved Tuesday by the board of the Washington-based Fund while $400 million will be forthcoming from the Manila-based Asian Development Bank or ADB.

In their critical appreciation the economists alert the third tranche of the IMF loan is bound by 'hard terms'.

Terming the second tranche a 'stopping gap' for the depleting reserves, they say this is just a short-term remedy--there is no long-term solution yet.

They look on to the next IMF mission expected to visit end of March next for assessing Bangladesh's economy before recommending release of the third tranche of the total $4.7 billion worth of loan. This will require Bangladesh to conduct several tough economic reforms, including market-based exchange rate.

"I think this is a very short-term implication for the economy," says Dr Ahsan H. Mansur, executive director of the Policy Research Institute of Bangladesh (PRI).

"Such financial support will last until the post-national election and then the reserves will start depleting," notes Dr Mansur, who had once served the IMF.

Dr Zahid Hussain, an independent economist, who had served the World Bank, told the FE that the $1.3 billion would last at best six weeks.

He mentions that Bangladesh spends on average $1.0 billion from reserves, and that the economy will have to reach $24 billion worth of reserves by the end of next June.

As such, the country needs at least $5.0 billion in addition to regular outflow for the reserves. "Will it be easy?" He posed the question.

Dr Hussain notes that the IMF is still releasing the conditions for the third installment of the loan.

"I think the conditions for the next tranche will be hard to implement for the economy."

The just-released amount is part of a $4.7-billion loan the IMF agreed in a package deal after long-drawn negotiations, and each tranche is released after review of progress in economic reforms as per lending terms.

Spokesperson for Bangladesh Bank Md Mezbaul Haque apprised journalists of the incoming funds at a press briefing held Wednesday at the central bank.

The IMF credit may get in the forex reserves within December 15 (Friday), said Mr Mezbaul Haque, who is Executive Director of the Bangladesh Bank.

Besides, he said, the country is going to receive $400 million from the Asian Development Bank next week.

Another $90 million is expected from South Korea and an additional $130 million from other sources, the BB spokesperson said.

Now the gross foreign-exchange reserves stand at $24.66 billion, while the figure in calculation as per the BPM6 is $19.13 billion, he said, while hinting that the inflow of remittance is "very much encouraging" this month of December.

"We have some expenditure from the reserves, but inflow will be bigger," the central banker told the media on a note of optimism about the reserves position, to dispel critical views.

He mentions that there will be an ACU payment against import bills in January where around $1.0 billion will be spent.

"The overall status of the reserves will be good."

At the time of giving the all-clear, the IMF executive board called Bangladesh authority for "a calibrated monetary policy tightening, supported by a neutral fiscal stance, and for greater exchange-rate flexibility to restore near-term macroeconomic stability and bolster external resilience".

Of the $689.8 million, nearly $468.3 million is being given under ECF/EFF arrangement and $221.5 million under RSF arrangement.

The ECF/EFF and RSF arrangements totaling $4.7 billion for Bangladesh were approved by the executive board on January 30, 2023, and the first tranche of $476 million was made available in February.

"The ECF/EFF arrangement has helped preserve macroeconomic stability and prevent disruptive adjustments to protect the vulnerable while laying the foundations for strong, inclusive, and environmentally sustainable growth," the IMF says in a release issued early Wednesday.

The concurrent RSF arrangement has supplemented the resources made available under the ECF/EFF to expand the fiscal space to finance climate-investment priorities identified in the authorities' plans, help catalyze additional financing, and build resilience against long-term climate risks.

"Bangladesh economy has been buffeted by multiple shocks," the lender says, adding that the spillovers from Russia's war in Ukraine and global monetary tightening have interrupted a strong post-pandemic recovery, with real GDP growth slowing to 6.0 per cent in FY23 and headline inflation reaching a decade high of 9.9 per cent year on year in August 2023.

Due to strict import compression, the current-account (CA) deficit narrowed considerably (¾ per cent of GDP in FY23 compared to 4.1 per cent of GDP in FY22).

"However, an unprecedented reversal of financial account, driven by global uncertainties and inadequate policy response, has kept FX (forex) reserves and the Taka under pressure," the lender says.

Antoinette Sayeh, Deputy Managing Director and Acting Chair of the IMF executive board, said Bangladesh's economy is navigating multifaceted economic challenges. "Despite a difficult external environment, program performance has been broadly on track, reflecting the authorities' strong commitment."

She suggests that near-term policies should continue to focus on containing inflation and rebuilding external resilience.

"Raising tax revenues and rationalizing expenditures will allow increasing social, developmental, and climate-related spending," the deputy managing director said.

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