Bangladesh has formally requested the International Monetary Fund (IMF) for a $4.5 billion loan after its foreign reserves dropped to $39.7 billion earlier this month, with authorities saying this is enough for just five months worth of imports.
According to sources cited by the Dhaka Tribune, Finance Minister AHM Mustafa Kamal made the request for balance of payment and budget support in a letter to IMF Managing Director Kristalina Georgieva on Sunday.
The loan will be deployed to combat the effects of climate change and help stabilise the Bangladeshi taka, which has dropped by around 20% against the US dollar in the past three months.
ICYMI: Bangladesh has sought a US$4.5bn IMF bailout. The Russia-Ukraine war is the key trigger. But the situation has been deteriorating for long. Dhaka's economic success has an ugly political underbelly, & it's worth watching this space (esp. if public protests break out). pic.twitter.com/VaPiPgtohH
— Avinash Paliwal (@PaliwalAvi) July 26, 2022
Finance ministry officials explained that $1.5 billion of the package would be an interest-free loan, while the remaining funds will be secured at an interest rate of less than 2%. Talks on the details of the loan will begin in September. Officials expect the programme’s details to be finalised by December, after which the organisation will deliberate on the terms during a meeting in January.
The IMF is likely to push for austerity measures to ensure that Bangladesh meets several conditions to bridge the gap in its trade deficit and address the issue of low remittances, which have caused foreign exchange reserves to drop. The money-lending organisation could also compel Bangladesh to reduce expenditure and withdraw subsidies.
In the current fiscal year, which ended on June 30, remittances from overseas dropped by 5% to $1.84 billion. Furthermore, inflation in June reached a nine-month high of 7.56%, much higher than the revised target of 5.9%.
"The flood water kept rising. It was everywhere."
— World Food Programme (@WFP) July 22, 2022
Komola's home region in #Bangladesh has seen the highest rainfall in 100 years - and dangerous flash floods.
They took her home and almost took her family.
This is their story, on the front lines of the climate crisis.
🧵1/5 pic.twitter.com/xvIsnNg9vV
IMF sources told bdnews24.com on Tuesday that Bangladeshi authorities have expressed an interest in securing funds from the Resilience and Sustainability Trust, which allows special drawing rights to be redirected to vulnerable countries seeking long-term financial resources to combat climate change and future pandemics. They mentioned that the IMF is “ready to extend financial assistance” to the country.
In fact, an IMF delegation visited Bangladesh last week to meet with local bank officials, and expressed concern about the country’s banking system and its high rate of non-performing loans. In the meeting, the organisation recommended the removal of caps on interest rates for lending and borrowing. IMF officials also advised that Bangladesh overhaul its foreign reserve policy.
However, Bangladeshi Finance Minister AHM Mustafa Kamal denied the claims, saying the country did not need IMF funds. “Neither had we placed any proposal to IMF for a loan, nor IMF made an offer to us,” he asserted, just days prior to filing a formal request for bailout funds. He also disagreed with the Bangladesh Bureau of Statistics report that recorded inflation at 7.5%.
Finance minister AHM Mustafa Kamal said there is no necessity of foreign loan at this moment and if any necessity arises loan will be taken from International Monetary Fund (IMF). https://t.co/oFlcQKtnwB
— Prothom Alo (@ProthomAlo) July 20, 2022
Experts believe that the country’s decision to approach the IMF had become inevitable in light of its depleting foreign reserves. The COVID-19 pandemic and the Russia-Ukraine have both exacerbated the country’s economic situation. Against this backdrop, the central bank has discouraged luxury and high-cost imports.
Experts have warned that any delay in seeking assistance could pluge the country into a Sri Lanka-like crisis. Apart from Sri Lanka, Pakistan, too, has approached the IMF and secured a release of $1.2 billion in loans to combat its depleting foreign exchange reserves.