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Bangladesh Gets $987 Million Loan from IMF

Waiting for gas in Dhaka, Bangladesh. Demand for oil has added to balance of payments pressures (photo: Georges Gobet/Newscom)

EXTENDED CREDIT FACILITY

Bangladesh Gets $987 Million Loan from IMF

IMF Survey online

April 11, 2012

  • Largest ever loan under Extended Credit Facility
  • Bangladesh benefits from concessional lending reforms
  • Loan to help country overcome economic pressures, strengthen growth prospects

The International Monetary Fund has approved a loan to Bangladesh worth almost one billion dollars under its Extended Credit Facility, to help the country overcome macroeconomic pressures and build a reserve buffer.

The amount represents the largest loan ever offered to a member country under the IMF’s reformed concessional lending architecture, and is to be staggered across seven equal installments, with a disbursement of $141 million to be made available immediately.

“With steady but forceful action, the authorities’ program is expected to reduce imbalances and catalyze additional support from development partners, putting Bangladesh’s balance of payments on a sustainable path over the medium term,” said Naoyuki Shinohara, Deputy Managing Director of the IMF, following approval for the loan at a meeting of the Fund’s Executive Board.

Over the last year and a half, Bangladesh has faced mounting balance of payments pressures and declining foreign exchange reserves mainly due to increased demand for oil imports. Its balance of payments went into deficit last year and it is confronting similar pressures in the current fiscal year, with global headwinds and firming oil prices now adding to these pressures.

The IMF expects the country’s GDP growth to slow in 2012, while inflation, which moderated recently, still remains high.

Largest loan under ECF

The near billion dollar loan is to be made under the IMF’s Extended Credit Facility designed to give low-income countries access to financing in the face of balance of payments pressures.

Bangladesh is benefiting from reforms to the IMF’s concessional financing, which effectively doubled access to financial resources for many low income countries. Under these reforms, the Extended Credit Facility replaced the Poverty Reduction and Growth Facility as the IMF's main tool for medium-term financial support for low-income countries.

As well as currently carrying a zero percent interest rate, the Extended Credit Facility provides a higher level of access to financing, more concessional terms, increased flexibility in its use, and more focused and streamlined conditionality.

The reform process

As part of the loan agreement, the Bangladeshi authorities agreed to create fiscal space by increasing tax revenues and containing subsidy costs, reinvigorate the financial sector through strengthened governance and oversight, and take other reforms aimed at catalyzing additional resources. This will allow increased spending on social welfare and development, more resources to tackle power shortages and the infrastructure deficit, and stimulate export-orientated investment and jobs growth.

In the process, the authorities aim to restore macroeconomic stability and strengthen the country’s external position, as well as promote higher, more inclusive growth.

The country’s economic outlook will depend on the pace of policy adjustments and implementation of those structural reforms, says the IMF. Assuming stable domestic economic conditions, more effective use of its resources, and also an improved global economy, the IMF expects the country’s growth to rebound in FY2013.

Inflation is expected to decline to single digits by the end of this year through restrained fiscal and monetary policies. The overall balance of payments is also projected to return to surplus next year through a combination of policy tightening, increased exchange rate flexibility, and supportive global conditions, allowing Bangladesh to begin rebuilding reserves.

Risks remain

But, the IMF warns, risks remain. Given heightened inflation and reserves, policy buffers remain limited in the face of any adverse shocks. Prolonged delays in adjusting fuel, electricity, and fertilizer prices and unanticipated increased in import-related costs could also exert additional pressure on the fiscal and external positions, cautions the IMF, also pointing to the need for more effective safety nets.