IMF approves $4.7b loan for Bangladesh

The International Monetary Fund approved a $4.7 billion loan for Bangladesh to support the country's economic policies in a development that is expected to calm the jitters surrounding the health of the Bangladesh economy.

The decision came in the meeting of IMF's executive board on January 30.

"Many doubted that the IMF might not give us this loan. They thought that the fundamentals of our economy were weak, so the IMF would refrain from lending to us. This loan approval proves that our economy is standing on a solid foundation and our fundamentals better than many other countries," said Finance Minister AHM Mustafa Kamal in his immediate reaction to the loan approval.

This would be Bangladesh's 13th loan from the lender, with the previous package taken in 2012.

The first instalment of $447.8 million would come in February, followed by six equal instalments of $708.7 million.

The interest rate would be about 2.2 percent. Of the $4.7 billion, $1.3 billion can be repaid over a 20-year horizon with a grace period of ten years. The remaining amount must be paid back within ten years; the grace period for a portion of the sum is 3.5 years and for another portion 5.5 years.

Earlier in November last year, the two parties reached a preliminary agreement on the loan programme, which would span over 42 months.

The government has agreed to time-bound conditions, including some key structural reforms stalled for years, that would preserve macroeconomic stability and support strong, inclusive and green growth while protecting the vulnerable.

The specifics of the loan programme could not be immediately obtained.

Raising the tax-GDP ratio, implementing the VAT law, setting up an asset management company to dispose of soured loans, bringing down the banking sector's default loans to within 10 percent and raising the capital adequacy ratio to the BASEL 3 requirement of 12.5 percent, are among the reforms agreed upon.

Periodically adjusting the fuel price, implementing the climate-related proposals made in the budget and at various international conferences and increasing remittance receipts through formal channels are also on the task list.

Increasing social spending and better targeted social safety net programmes, increased exchange rate flexibility, developing the capital and bond market, expanding and diversifying exports and modernising the monetary policy framework and reporting on net foreign reserves are the other agreed reforms.

The government has already started implementing some of the reforms such as raising the fuel and power prices and the central bank is aiming to move towards a market-based, flexible and unified exchange rate regime (within a 2 percent variation) by the end of this fiscal year.

And yesterday, Bangladesh Bank Governor Abdur Rouf Talukder said the $7 billion Export Development Fund has been trimmed by $1 billion already and will be reduced further.

The EDF is made from foreign currency reserves and is not immediately usable, so the IMF said it should be excluded when reporting on the reserve position or wound down.

Talukder also said no new funds would be created from the foreign currency reserves.

The IMF staff mission insisted on reporting on gross reserves as per the lender's balance of payments and investment position manual (BPM6), which is followed faithfully by central banks around the world. But Bangladesh's central bank is yet to adopt it.

As per BPM6, gross reserves are reserve assets that "must be readily available in the most unconditional form"; it should be "liquid in that the asset can be bought, sold and liquidated for foreign currency (cash) with minimum cost and time, and without unduly affecting the value of the asset".

But the central bank includes various funds created from foreign currency reserves in its gross computation.

The mission also called for reporting on net reserves as gross reserves can provide a misleading view of the size of the country's precautionary buffers available to meet potential foreign exchange liquidity needs in adverse circumstances.