Forex reserves, revenue measures lacking

The International Monetary Fund staff mission yesterday expressed reservations about the likelihood of Bangladesh meeting the minimum reserve requirements for the second tranche of the $4.7 billion loan.

As per the terms agreed with the Washington-based multilateral lender for the loan programme, the country would maintain a minimum net international reserves (NIR) of $22.95 billion at the end of March and $24.46 billion at June's end.

So far, the government has failed to meet the floor set for March, which was meant to give an indication of how the authorities are faring with the programme objectives. The NIR was less than $22 billion.

While March's target is not mandatory for the release of the second instalment of about $476.27 million, June's target is. In fact, it is one of the three mandatory conditions.

Instead of building a buffer, the reserves continue to drain from the Bangladesh Bank's coffers despite the strict import control measures taken, said the IMF staff mission, The Daily Star has learnt from officials involved with the proceedings.

The 13-day staff visit, led by Bangladesh Mission Chief Rahul Anand, to discuss recent macroeconomic developments and implementation of the IMF-supported programme wrapped up yesterday.

"However, persistent inflationary pressures, elevated volatility of global financial conditions and slowdown in major advanced trading partners continue to weigh on growth, foreign currency reserves and the Taka," Anand said in a statement.

When the 42-month loan programme was approved by the IMF executive board, the official gross reserves, as per BB's methodology, stood at $32.2 billion. On May 2, it was $30.99 billion.

After the $1.12 billion payment to the Asian Clearing Union today for import for the months of March and April from the South Asia region, reserves will come down to less than $30 billion.

This means NIR would be even less.

NIR is calculated as gross international reserves (GIR) minus short-term foreign currency drains. Short-term foreign currency drains include impending import bills and loan repayments.

The GIR as per the BB's methodology on March 30 were $31.14 billion, while going by the IMF's methodology, it is in the neighbourhood of $24 billion.

As per the IMF's methodology, GIR calculation does not include the various funds that the Bangladesh Bank has formed from the reserves as well as the loan guarantees provided for Biman, the currency swap with Sri Lanka, the loan to Payra Port Authority, deposits with the Islamic Development Bank and the below-investment-grade securities. At present, these account for about $6.7 billion.

The BB team though expressed hope that come the end of June, the NIR would be within touching distance of the IMF set floor.

The forthcoming budget support of about $2 billion along with the project aid mobilised will shore up reserves in the coming days.

The central bank also plans on slashing the existing $5 billion Export Development Fund even more.

"We have some time in hand before June 30 -- the initiatives we are taking now will get us close to the mark," Md Mezbaul Haque, BB spokesman, told The Daily Star.

When asked if the BB's failure to meet the reserves requirement could lead to a halt in the IMF programme mid-way, he said: "There are 50 conditions. I don't think the programme will be stalled if we miss one condition."

Meanwhile, the IMF mission also expressed reservations about the National Board of Revenue's tax revenue measures yielding an additional 0.5 percent of GDP in the next fiscal year's budget.

This is one of the eight reform actions agreed along with six specific, measurable conditions for June.

The staff mission was unconvinced by the simulations presented by the NBR during their meeting.

Subsequently, after wrapping up their official engagements for the day, the IMF team went back to the NBR headquarters in the evening yesterday for a second crack at evaluating the NBR simulations.

In their meeting with the finance division, the IMF staff team raised the topic of increased subsidy allocation in the revised budget and in the next budget too.

In the original budget for this fiscal year, Tk 81,000 crore was kept for subsidy expenditure; it was topped up by Tk 21,000 in the revised budget.

In fiscal 2023-24, subsidy expenses would take up Tk 100,134 crore.

In response, the finance ministry officials said the need for more subsidy arose this fiscal year as the government is clearing the arrears.

There would be another tariff hike of 5 percent by June, so there would not be any need for more electricity subsidy this fiscal year.

About the next fiscal year's higher allocation, they said that the amount was just earmarked and might not be spent eventually.

Besides, the government is planning on rolling out a periodic formula-based price adjustment mechanism for petroleum products in the last quarter of 2023, as per the commitment made under the loan programme. So the need for subsidy would be less then, they added.

"We also took stock of the progress made toward meeting key commitments under the Fund-supported programme. This will be formally assessed in the first review of the Extended Credit Facility (ECF)/Extended Fund Facility (EFF)/Resilience and Sustainability Facility (RSF) arrangements, which is expected to be undertaken later this year," Anand said.

The staff mission would next call in October for the first review of the programme that would decide whether the next instalment is authorised. The review would be based on the numbers on June 30.