IMF’S $4.5B loan: Govt now has cold feet
The government is stalling on taking the $4.5 billion loan from the International Monetary Fund to ease the pressure on the foreign currency reserves after seeing the conditions that would be attached.
"At this moment, we will not take it," Finance Minister AHM Mustafa Kamal told the media yesterday after a meeting of the cabinet committee on purchase.
A delegation from the IMF is in the capital on a nine-day tour and has held talks with the National Board of Revenue and the finance division's teams on subsidy and debt management among others regarding the loan.
The mission would be wrapping up its agenda today with a meeting with the Bangladesh Bank and Kamal.
"Neither did we get a formal offer, nor did we place a formal proposal for the loan. If there is a need, we will take the loan, and we will take it in a way that safeguards our interests," he said.
One of the conditions that would be attached to the loan is the withdrawal of subsidies on fuel, electricity and fertilisers.
In the budget for this fiscal year, Tk 82,745 crore has been earmarked for subsidy, which is 23.8 percent more than what was spent on the overhead in the just-concluded fiscal year. This is the highest amount that the government would be spending on subsidies yet.
Achieving fiscal balance would be tricky if such levels of subsidy are extended, the IMF mission said.
Subsidy benefits all regardless of their income status, so the IMF instead recommended targeted aid for the poor and the middle-income people.
While the government is willing to adjust the prices for fuel and electricity, it is not willing to withdraw the subsidy on fertilisers, whose prices in the global market have escalated for the Russia-Ukraine war.
The elevated price level in Bangladesh is thanks to rising food prices and taking the subsidy on fertilisers would send the food prices through the roof.
In June, inflation raced to a nine-year high of 7.56 percent; food inflation was a staggering 8.37 percent and in rural areas, 8.93 percent.
"We will never take up any deal that will not be in the best interests of our countrymen," Kamal said.
The government is hopeful that the raft of austerity measures taken in recent weeks would ease the pressure on the country's strained foreign exchange reserves.
As of July 13, foreign reserves stood at $39.8 billion, sufficient to cover import bills for just about five months.
The IMF mission has been briefed on the measures and they endorsed the move, said a finance ministry official involved with the proceedings on the condition of anonymity.
"We have taken those measures thinking six months ahead. The situation is comfortable for us at present."
However, given the protracted nature of Russia-Ukraine was taken on, there is bound to be more volatility in the global economy and further pressure on Bangladesh's foreign currency reserves.
So the IMF mission has said that there might be a need for budget support of the sort the Washington-based multilateral lender is offering: $1.5 billion interest-free and $3 billion at less than 2 percent interest.
"This round of talks can be viewed as preliminary work for the loan if the need arises in future," the finance ministry official added.
Meanwhile, the IMF mission has expressed reservations about the BB's method of calculating foreign currency reserves.
The BB reports on gross reserves -- and includes local investment exposure. The IMF prescribes reporting net reserves.
Going by IMF's method, Bangladesh's actual reserves at present would be about $7 billion less.
The central bank, however, is defiant and maintains that there should be no distinction between local and foreign investment exposure.
"We will continue to calculate the reserves in the manner that we have been doing," Kamal said.
The IMF mission also recommended the NBR come up with a robust revenue action plan with reduced exemptions and more autonomy to buy the government more fiscal space.
While Bangladesh's external debt situation is at ease, the IMF mission prescribed more caution while taking on more bilateral loans and providing guarantees to state-owned enterprises' loans.
"It is a consultative committee and the IMF's advice is always helpful," Kamal added.