IMF clears loan, finally

Dhaka, Apr 12 strapped Bangladesh will get about $1 billion in extended credit facility from IMF after swallowing a not-so-sweet reform prescription from the global lender.

The IMF executive board approved the three-year ECF of SDR 639.96 million (about $987 million) and it would immediately disburse $141 million, says a media statement of the IMF Thursday.

In an instant reaction the central bank governor Atiur Rahman described IMF's credit approval as a welcome development for Bangladesh.

"Other donors will now show positive attitude towards Bangladesh after IMF's credit approval. As a result, it will have a positive impact on foreign investment," Bangladesh Bank governor Atiur Rahman said.

"Using the loan, the balance of payment problem can be handled, which would advance Bangladesh in international credit rating, and promote country's image in the international arena."

Bangladesh has been negotiating with IMF for over a year to get the loan under the ECF arrangement to cope with the on-going balance of payments problem that stood at negative $978 million in Jul-Nov period of the current fiscal.

It was negative $584 million at the same period of the last fiscal.

Even after a series of power price hikes as prescribed by it, the IMF sounded far from happy over the pace of such action.

"Prolonged delays in adjusting fuel, electricity, and fertilizer prices and unanticipated increases in import-related costs could exert additional pressure on the fiscal and external positions," the IMF said.

The ECF arrangement is designed to helping efforts to "restore macroeconomic stability, strengthen the external position, and engender higher, more inclusive growth".

After the board's discussion of Bangladesh, Naoyuki Shinohara, Deputy Managing Director and acting Chair, said: "Macroeconomic pressures have intensified in Bangladesh since late 2010 due to a negative terms-of-trade shock, rising oil and infrastructure-related imports, and accommodative policies."

"During the programme period," the IMF statement said, "Bangladesh is committed to taking actions to create fiscal space, reinvigorate the financial sector, and catalyse additional resources, in order to boost social- and development-related spending, tackle power shortages and the infrastructure deficit, and stimulate export-oriented investment and job growth.

"Bangladesh will undertake reform programmes in four major areas to ensure macroeconomic stability, external viability, and sustained growth.

"The reform areas are fiscal policy, monetary and exchange rate policy, financial sector and trade and investment."

Bangladesh, according to the IMF, has been facing macroeconomic pressures over the past 18 months when balance of payments went into a deficit in the last fiscal and reserves declined significantly owing mainly to increased demand for oil imports.

The IMF projected that GDP growth is expected to slow to 5.5 percent in the current fiscal.

"Fiscal strains have emerged due to rising subsidy costs, mainly on account of higher fuel consumption while headline inflation, while moderating recently, remains at an elevated level, with nonfood inflation the main driver."

Growth rebound expected

The IMF projected that from the next fiscal, growth is likely to rebound, assuming stable domestic economic conditions; more effective resource usage, notably development partner support; and improved global economic conditions.

It, however, said the near- to medium-term outlook "hinges on timely progress on policy adjustments and structural reforms envisaged under the government's programme".

"Inflation is expected to decline to single digits by end 2012 through appropriately restrained fiscal and monetary policies and, over time, by a further easing of supply constraints."

"The overall BOP is projected to return to a surplus in FY13 through a combination of policy tightening measures, exchange rate flexibility, and more supportive global conditions.

"Reserves are programmed to rise, reaching nearly three months of import cover by FY15.

Risks

While the delays in "adjusting" the utility prices and "unanticipated increases in import costs" put pressure on the fiscal and external positions, the IMF sees better days ahead.

"Bangladesh's medium-term prospects are broadly favorable, but still subject to risks. Policy buffers are limited in the event of adverse real shocks, given heightened inflation and reserve losses," it said.

Adjustments and reforms also require strengthened implementation capacity, it added.

Naoyuki Shinohara said more recently, a weakening in external demand and a surge in oil prices have further weakened Bangladesh's balance of payments and added to fiscal and inflationary pressures.

Bangladesh is focusing on policy adjustments and structural reforms aimed at restoring macroeconomic stability, strengthening the external position, and promoting higher, more inclusive growth.

"The authorities are committed to these objectives and stand ready to take additional measures, as appropriate, to ensure the success of the programme."

Bangladesh earlier took US$590 million under poverty reduction growth facility approved in 2003.