IMF loan is not Sri Lanka syndrome or Pakistan paradox for Bangladesh

0

It is undeniable that the economy of Bangladesh is under stress, but it is not in a critical situation. Bangladesh is no exception to the global economic turmoil that has been caused by everything from the COVID pandemic to the recent invasion of Ukraine. Despite being the 41st largest economy in the world with a GDP of $416 billion and one of the fastest growing economies, Bangladesh’s balance of payments and current account deficit have been hampered by the tension in the world and rising food and fuel prices.

The Bangladeshi government has put in place nationwide austerity measures to limit the flow of foreign exchange reserves, which have already had a good impact on the economy.

Due to Sri Lanka’s delay in applying for a loan, they suffered a significant loss; Pakistan did this after a serious problem started. Bangladesh is therefore taking a calculated and precautionary approach to availing IMF and World Bank loans to ease pressure on its foreign exchange reserves in light of a possible future global crisis.

Bangladesh Bank, the country’s central bank. introduced a policy that the import of luxury and non-essential items requires a margin of at least 75%, provisional figures from BB show that the number of new LC (letter of credit) openings decreased by 31% in July, leading to a reduction in the pressure of payments on imports.

Remittances rose 12% to $2.09 billion in July, the first month of the new 2022-23 fiscal year, from $1.83 billion in July of the 2021-22 fiscal year. According to BB officials, the government’s policy of increasing monetary incentives for remittance senders has caused an increase in remittance inflows. In July, Bangladesh’s foreign exchange reserves stood at $40 billion. Honorable Prime Minister Sheikh Hasina has asserted that his country’s current foreign exchange reserves could cover 6-9 months of imports.

To reduce fuel import expenses, the Bangladeshi government is prioritizing industrial zones for planned load shedding. Bangladesh now has sufficient fuel supplies, so there is no need to worry, according to the chairman of the state-owned Bangladesh Petroleum Corporation (BPC). Import schedules have also been established for the next six months.

Due to volatility in the European market, the main export destination for Bangladeshi garments, the government plans to diversify the export basket with export destinations.

Despite all the pre-planned successes in combating the global negative waves towards the economy, Bangladesh’s recent request for a $4.5 billion IMF loan has raised eyebrows among critics citing the syndrome. of Sri Lanka and the paradox of Pakistan.

There is no point in pitting Bangladesh’s economy against those of Sri Lanka or Pakistan, two of its South Asian neighbours. Sri Lanka, a struggling South Asian neighbor of Bangladesh, is in desperate need of an IMF loan to survive due to depleted foreign exchange reserves ($1.92 billion) and soaring inflation (60.08%). Pakistan, another neighbor, is also experiencing an economy under high pressure with depleted foreign exchange reserves ($8.57 billion) and brutal inflation (24.93%).

But many wonder why Bangladesh, like Pakistan and Sri Lanka, is seeking an IMF loan when it has $39.79 billion in foreign exchange reserves and an inflation rate of 7.48 percent. . Officials say Bangladesh is considering an IMF loan as a preventative measure rather than putting pressure on the economy. AHM Mustafa Kamal, Bangladesh’s finance minister, said the country had asked the IMF to enter into a formal negotiation to receive balance-of-payments loans and budget support, despite the fact that its macroeconomic situation was not “not in crisis”. The amount of assistance will be discussed as part of program design. Bangladesh is not in crisis, and since its external debt is only about 14% of GDP, it is “quite different from many countries in the region”, according to Rahul Anand, division chief in the Asia and Pacific Department of the IMF.

“The main reason for applying for a loan from the IMF is to create a buffer in foreign exchange reserves,” said Zahid Husain, a former senior economist at the World Bank in Dhaka. “IMF support takes the form of balance of payments support and possibly also fiscal support, which will increase foreign exchange reserves that are not tied to any specific expenditure.”

If the government pays attention to the necessary reforms, IMF budget support will be available before the country slips into a crisis, according to Ahsan H. Mansur, a former IMF official and executive director of the Policy Research Institute. Once the crisis begins, he said, it will be difficult to get help.

Officials from the Economic Relations and Finance Division said the government would borrow money from the IMF’s Extended Credit Facility, Extended Financing Facility and Resilience and Sustainability Facility. On the loan obtained through the Extended Credit Facility, there are no charges of any kind, not even interest. Bangladesh will have a grace period of 5.5 years to repay this loan over a period of 10 years. Two other packages have interest rates ranging from 1.54% to 1.794%.

Bangladesh is seeking a zero interest loan of over $1 billion from the World Bank in addition to the IMF as part of a sound policy. To help lower-middle-income countries like Bangladesh cope with pandemic shocks, the World Bank has for the first time opened the interest-free short-term lending window. As part of the 20th International Development Association Replenishment (IDA20), the largest financing package to date totaling $93 billion, the lending window will be available for three years, from July 2022 to June 2025 Twelve years are allotted for repayment, including a six-year grace period. An IDA member country will be able to borrow up to 25% of the funds from the IDA20 package in the form of short-term loans.

Bangladesh has started working to get the interest-free loan as soon as possible because the IDA20 package will come into force in July and the country will leave the list of least developed countries in 2026. If the loan is guaranteed and used in the initial phase , there will be a chance to receive more of the fund which will remain unused so as not to be taken by other IDA members.

Bangladesh has a Ba3 credit rating and has never missed a payment on an international obligation. Due to Sri Lanka’s delay in applying for a loan, they suffered a significant loss; Pakistan did this after a serious problem started. Bangladesh is therefore taking a calculated and precautionary approach to availing IMF and World Bank loans to ease pressure on its foreign exchange reserves in light of a possible future global crisis.

Share.

About Author

Comments are closed.