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Reforms needed for third tranche of IMF loan

Published : Wednesday, 27 December, 2023 at 12:00 AM  Count : 730

Reforms needed for third tranche of IMF loan

Reforms needed for third tranche of IMF loan

International Monetary Fund (IMF) approved on January 30, 2023, an amount of theamount of loan equivalent to SDR 2.5 billion (231.4 percent of quota) under the 42-month Extended Credit Facility (ECF) and Extended Fund Facility (EFF) and special drawing rights (SDR) 1 billion (93.8 percent of quota) under the Resilience and Sustainability Facility (RSF).This credit line to provide affordable long-term financing to countries undertaking reforms to reduce risks to prospective balance of payments stability, including those related to climate change and pandemic preparedness.

Bangladesh got second tranche despite it could not comply with two conditions for second tranche of loan disbursement to fulfil by December 2023. One of the two conditions was to maintain a minimum net international reserves (NIR) of $24.46 billion at the end of June the NIR was around US$15 billion. The other was to ensure a minimum tax revenue to collect at least Tk 345,630 crore in tax revenue in 2022-23. It was missed by about Tk 17,946 crore as collections slowed down as a result of the import curbs put in place to preserve the strained dollar stockpile.

IMF decide on disbursement of loan on their staff Report. The staffs prepare iton the basis of article IV focused on: (i) multi-pronged policy reforms to create additional fiscal space for social and developmental spending; (ii) modernization of monetary, fiscal, and financial frameworks to build macroeconomic and financial resilience; (iii) structural reform priorities to promote strong, inclusive and sustainable growth; and (iv) climate policy reforms to strengthen climate resilience.

Bangladesh successfully met two out of three performance criteria and three out of four indicative targets were successfully completed. Of the seven structural benchmarks (SB) under the ECF/EFF, six were met. However, due to procedural reasons, the Finance Companies Act was submitted and passed by Parliament with delay. The climate policy reforms, supported by the RSF, are off to a good start, with the completion of a reform measure (RM) for the first review, and notable progress being made on the remaining RMs.

The IMF report after board of Directors approved second installment of loan, said that the overall balance of payments (BOP) has deteriorated, given an unprecedented reversal of the financial account leading to forex shortages. The report is the first review of the loan programme and the Article IV consultations and unlocked disbursements of $689 million in the second tranche.

IMF has accepted the shortfall of commitments considering ongoing external pressures, the end-September 2023 performance criteria (PC) on met international reserve (NIR)of FE was missed. In this regard, the authorities are committed to urgently adopt corrective policy actions that entail further monetary tightening, supported by neutral fiscal policy stance, and greater exchange rate flexibility. The Bangladesh authorities have requested IMF Capacity Development (CD) to perform value-added tax (VAT) and income tax diagnostics including tax expenditure assessments that will support end-June 2024 revenue mobilization Structural Benchmarks (SBs). The authorities are reportedly making progress toward other program targets and reform commitments for future reviews.

The Bangladesh authorities agreed to reforms and some of those are to stand ready to further tighten monetary and fiscal policies as necessary. They acknowledged the need for greater exchange rate flexibility and stressed that the transition of exchange rate regime should be gradual and non-disruptive, in which they have sought IMF technical assistance(TA) to support the transitional arrangement.

IMF cautioned that with LDC graduation, Bangladesh will gradually lose access to concessional financing and preferential trade treatments, which have played a key role in boosting export competitiveness. IMF observed that to achieve these development objectives, reform priorities need to focus on increasing the budget envelope for social spending and public investment through greater domestic revenue mobilization and spending efficiency, modernizing policy frameworks, strengthening financial sector, and expediting macro-structural reforms to jumpstart investment and support private sector development.

It is important to reduce budget subsidies by adjusting domestic electricity, gas and fuel prices more regularly to reflect global price movements.The Bangladesh authorities reaffirmed their commitment to adopt a formula-based pricing mechanism for petroleum products by end-December 2023 and to implement it no later than March 2024.

IMF suggested that the Bankruptcy (Amendment) Act 2020 and the Money Loan Court (Amendment) Act 2003 and the Negotiable Instrument (Amendment) Act 2020 should be submitted to Parliament as agreed under the program. The successful implementation of these reforms will not only modernize the financial sector but also enhance creditors rights, fortify the insolvency framework, and facilitate loan recovery. IMF highlighted the importance of specific regulatory relaxations, such as the provision for immediate curing of NPLs following rescheduling, as measures intended to provide essential support to viable businesses facing temporary disruptions.

IMF suggested to expedite long-standing reforms to help Bangladesh reach upper middle-income status. The report emphasized that liberalizing trade, enhancing the investment climate and governance, upskilling the labor force, and increasing female labor force participation are crucial to attract more FDI, diversify exports, and boost growth potential. Given Bangladeshs high vulnerability to natural disasters and climate change. Bangladesh should form the policy and implement policies as committed to IMF.

The writer is a Non-Government Adviser, Bangladesh Competition Commission

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