Press Release No. 08/70

Press Release No. 08/70

The Executive Board of the International Monetary Fund (IMF) today approved SDR 133 million (about US$217.7 million) in emergency assistance to Bangladesh to assist the government's efforts to deal with the impact of severe damage from a November 2007 cyclone that had followed severe monsoon-related flooding.

Cyclone Sidr and two preceding floods resulted in at least 4,400 deaths and disrupted the lives of millions of people in one of the poorest and most vulnerable regions of the country. Total damage, mainly to agriculture, housing and infrastructure, is estimated at US$2.7 billion, or 3.7% of Bangladesh's GDP. The IMF's emergency assistance will support Bangladesh's international reserve position that has been put under pressure in the face of a sharp rise in disaster-related imports, including large volumes of food.

The IMF provides emergency assistance to member countries hit by natural disasters to help them meet immediate balance of payments financing needs, and to maintain or restore macroeconomic stability. Emergency assistance is repaid in eight equal quarterly installments over 3¼ to 5 years from the disbursement date. In line with the Executive Board's decision to subsidize emergency assistance for PRGF-eligible countries hit by natural disaster, the rate of charge on the assistance will be subsidized to 0.5 percent per annum, subject to resource availability (See Public Information Notice No. 05/8).

At the conclusion of the Executive Board's discussion on Bangladesh, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, said:

"We extend our deepest sympathy to the people of Bangladesh. The destruction, suffering, and loss of life caused by the floods of July-September and the cyclone of November 15 were devastating. It will take years to repair the physical damage, while the human loss is irretrievable.

"The government, with the support of the international community, responded swiftly to the catastrophe. The authorities allocated food to expand the Vulnerable Group Feeding Program and provide for open market sales of rice. Budgetary funds have been allocated to augment social safety nets and to fund additional subsidies for fertilizer and fuel. Increased revenue collections, the reallocation of funds within the budget, and additional donor assistance have kept the budgetary impact of the disaster response within the parameters of the FY2008 budget.

"Damage to the agricultural sector will reduce economic growth in FY2008. The balance of payments has been adversely affected by the disasters, largely owing to a substantial rise in food imports, which has led to some pressure on international reserves. Support from the international community, including emergency assistance from the IMF, will therefore be crucial for financing needed imports while allowing international reserves to remain at about three months of import coverage. Ensuring that pledged aid commitments from donors are effectively mobilized and efficiently used will be crucial for the ultimate success of the recovery and reconstruction program.

"As relief and reconstruction efforts proceed, the limits to implementation capacity and potential inflationary pressures will be an important consideration. In this regard, it is reassuring that the authorities intend to contain domestic financing of the government to budgeted levels. Looking forward, a recovery in agricultural production, reconstruction activity, and an improved business climate should allow growth to recover in FY2009 to Bangladesh's medium-term potential growth path.

"The government is also working with stakeholders and donors to further improve the institutional setting for disaster management by developing a specific Disaster Response Fund, exploring other means of financial support, and establishing a dialogue with all development partners on a risk mitigation agenda related to global climate change.

"The government has indicated their intention to maintain macroeconomic stability and pursue important reforms in the areas of revenue administration and policy, expenditure management, energy pricing, and state-bank reform," Mr. Kato said.