The International Monetary Fund (IMF) by mandate provides fiscal support to distressed economies for fiscal deficit management subject to financial and economic reforms with no exception in Bangladesh. There was good example of it in early 80's and 90' in Bangladesh. Off late, IMF has reached a staff-level agreement with Bangladesh on the combined third and fourth reviews of the country's reform program, paving the way for the release of approximately $1.3 billion in financial assistance. This development comes at a critical juncture as Bangladesh prepares its upcoming budget of around Tk. 790 billion amid significant economic challenges and mounting external financing requirements. The agreement represents a crucial milestone in Bangladesh's ongoing engagement with the IMF under the $4.7 billion loan program initiated in 2023, of which three tranches totaling approximately $2.3 billion was disbursed. The package was dealt to off-set our fiscal challenge.
Our economy is badly shaken with various local and external economic and non-economic shocks including export ban, reciprocal US tariff and inflationary stress along with political instability which aggravates the entire macroeconomic gamut.Against this harsh backdrop, the IMF has imposed several key conditions that will directly impact Bangladesh's upcoming budget formulation. Central to these conditions is the implementation of a flexible interest rate and exchange rate regime, moving away from fixed or band rates. Bangladesh Bank has confirmed that the country is transitioning toward a fully market-based interest rate system, allowing banks to determine rate based on demand and supply factors. This shift from the previous 9 percent cap for lending and 6 percent for deposits represents a fundamental change in monetary policy approach.
The IMF conditions will have profound implications for Bangladesh's upcoming budget.The national budget has a critical role in addressing all fiscal and monetary reform issues. First, the requirement for fiscal consolidation means the government must prioritize swift implementation of tax policy reforms while containing non-essential expenditure. This will likely result in a more conservative budget with reduced spending in certain sectors, as the government aims to address the mounting external financing gap and ensure a continued decline in inflation. The IMF's "near-term policy tightening" suggests that the budget must demonstrate a clear commitment to austerity measures, potentially affecting development projects and public sector investments.But, many sectors and avenues of economy require huge budget indicating budget deficit to the large extent.
The IMF conditions will have profound implications for Bangladesh's
upcoming budget.The national budget has a critical role in addressing
all fiscal and monetary reform issues. First, the requirement for fiscal
consolidation means the government must prioritize swift implementation
of tax policy reforms while containing non-essential expenditure.
Adding to the complexity, the budget deficit, which has been a persistent concern, must be reduced significantly as per IMF requirements. This is particularly crucial as higher deficits would necessitate greater reliance on external loans, including from the IMF itself. The government faces the challenging task of balancing deficit reduction with maintaining essential public services and investment in critical infrastructure. The IMF has specifically called for "fiscal consolidation through reduction of the budget deficit," suggesting that the upcoming budget should target a deficit below 5% of GDP, compared to the current level of approximately 6.5%. It is worth mentioning that the given prescriptions of IMF are apparently game-changing and useful for the economy but their impacts and hurts are unavoidable. If we review the experience of IMF's financial agenda in neighbouring economies, their suggestions trigger some socioeconomic hiccups and takes time for bringing effects. Therefore, we need some precautions in place to lower the unlikely effects.
To respond effectively, the budget should emphasize strategic reforms backed by clear performance indicators, program-based budgeting, and contingency planning for revenue shortfalls and market shocks. Priority areas include expanding the tax base, improving governance, and ensuring transparency in financial sector reforms. Additionally, austerity in public expenditure management is very critical to ensure public governance and cost management which in turn can rationalise the budget size.Ultimately, the budget must strike a delicate balance between key IMF conditions and safeguarding national interests. Policymakers must maintain constructive engagement with the IMF while asserting domestic development prioritiesto stabilize the economy featured by sustainable recovery and holistic development ahead.
The writer is an macroeconomic analyst & policy researcher
