Bangladesh requests loan from IMF; economists say "reforms in financial sector" needed

Bangladesh has formally requested for a USD 4.5 billion loan from the Washington-based multilateral lender IMF to combat the ongoing financial crisis in the country, according to a media report.

The country on Sunday asked for the loan from the International Monetary Fund in view of rapidly declining foreign exchange (Forex) reserves, Dhaka Tribune reported.

In a letter to IMF Managing Director Kristalina Georgieva, according to sources, the government sought the loan as a balance of payment and budget support as well as to mitigate the effects of climate change on Bangladesh.

According to Finance Ministry officials, USD 1.5 billion of the USD 4.5 billion, which the country has sought to mitigate the on-going crisis, would most likely be interest-free and the remaining amount would come at an interest less than 2 per cent.

An IMF mission is expected to visit Bangladesh in September to negotiate the terms and conditions for the loan, the report said.

A deal is expected to be locked by December, and to be placed before the global lender's board meeting in January, the officials added.

Renowned economist Debapriya Bhattacharya, however, said Bangladesh will have to go through several conditions to get a loan from the multilateral lender, which puts harsh conditions in front of the borrower country to get the loan.

"Right now, we have a large trade deficit. At the same time, remittances are also on the decline. There is great pressure on the exchange rate,'' the economist explained.

He also added that imports were getting difficult owing to the lack of foreign exchange, and ''going to the IMF is logical and the right move at this time of crisis''.

''Sri Lanka's delay in doing so caused them a huge loss," Bhattacharya added.

The economist said the IMF money would mainly be used to meet the large deficit in foreign transactions at the moment, and to stabilise the exchange rate of Taka against the dollar by selling dollars.

"However, before receiving this money, the government has to take several steps to show they are responsible in the eyes of the IMF. This is what we call pre-action. Also, they have to take some steps before releasing each installment," he said.

Asked about the possible reform and IMF conditions, Debapriya said: ''The exchange rate of Taka should be floating and based on the market. The incentives given by the government to the foreign currency now may need to be adjusted. Monetary policy should be harmonized with fiscal policy." "In that case, a level has to be specified in the subsidy in order to control the expenditure. Besides, the role of the central bank should also be strengthened. And in that case, there may be conditions for the recovery of defaulted loans," he added.

He explained the IMF was saying what independent economists had been telling the government for a long time, but no action was taken so far.

''Even now, if these reform measures are taken, it will be good for our economy." He warned that it was not good for the political situation in the country, especially on the eve of elections, to resort to such controls.

Earlier last week, a visiting IMF delegation in a discussion with Bangladesh Bank officials expressed concern over the weakness of the country's banking system and the high rate of non-performing loans (NPLs).

"The IMF has recommended removing the interest rate caps on lending and borrowing. Apart from a market-based floating exchange rate of Taka or foreign currency exchange rate system, the organisation has also suggested resetting the methodology on foreign currency reserves," a senior Finance Ministry official said.

In South Asia, Sri Lanka, facing its worst economic crisis in seven decades, is currently in negotiations for an IMF bailout.

The island nation ran out of foreign currency to import, even its most vital essentials, triggering long queues at petrol stations, food shortages and lengthy power cuts.

Pakistan, whose foreign exchange reserves are rapidly depleting, reached an agreement with the IMF earlier this month to pave the way for the release of an additional USD 1.2 billion in loans and unlock more funding.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)