After Sri Lanka and Pakistan, Now Bangladesh Lines Up For IMF Bailout

Economy

After Sri Lanka and Pakistan, Now Bangladesh Lines Up For IMF Bailout

An IMF delegation is expected to visit Dhaka in September to discuss the terms and conditions. After the collapse of the Sri Lankan economy, attention has turned to the state of affairs in other South Asian countries such as Pakistan, Bhutan and Bangladesh. All three countries have either curtailed imports or are planning to do so, to salvage their fast-depleting foreign exchange reserves and avoid a Lanka-like forex crisis. The deteriorating situation of Bangladesh comes as a surprise, even as the country was celebrated for beating India in per capita income. The country will graduate to a developing country by 2026. Bangladesh is now beseeching the IMF for a US$ 4.5 billion bailout package to tide over its deepening economic crisis. It has also knocked the doors of the World Bank and Asian Development Bank seeking immediate relief of US$ 1 billion from each. So, what went wrong? Bangladesh’s US$ 416 billion economy is heavily dependent on its garment industry which survives on exports mostly to Europe, the US and Latin American countries. However, the Ukraine war pushed up the prices of everything. On the other hand, demand also dwindled as retailers in the US and European markets — the biggest customers of Bangladesh’s garment products — started holding or cancelling orders due to disruptions and uncertainties. According to the latest available data, Bangladesh’s foreign exchange reserves stand at US$ 39.67 billion as of July 20, which is sufficient for just four months’ worth of imports — slightly higher than the IMF’s recommended three-month cover. Just for comparison, the forex reserves were US$ 45.5 billion in the year-ago period. The country is reeling under inflation, too. In June, price rise hit a nine-month high of 7.56%, taking the average inflation for 2021-22 to 6.15%, overshooting the revised annual target of 5.9%. Bangladesh’s imports stood at US$ 81.5 billion between July 2021 and May 2022, up 40% from a year earlier, according to Bangladesh Bank data. As a result, the current account deficit — the shortfall between exports and imports — widened over six times to US$ 17.2 billion in the first 11 months of fiscal 2021-22. While the Bangladesh finance minister A H M Mustafa Kamal is confident that the IMF aid will help the country avoid a crisis, such bailouts always come with strings attached. The Washington-based multilateral lender is known to put stringent conditions for its loans. According to a report in The Daily Start newspaper, the conditions could include withdrawal of energy subsidies, implementing a fuel pricing mechanism, removing interest rate caps on lending and borrowing, resetting the mechanism to calculate foreign currency reserves, taking steps to increase revenue base, and strengthening corporate governance in the banking sector. Of these, removing energy subsidies for consumers will be a major challenge for the government as it could trigger public anger. Negations on this clause is likely to drag the process. Obtaining IMF loans is a long process. An IMF delegation is expected to visit Dhaka in September to discuss the terms and conditions. By December, the deal is expected to be locked in for placing at the IMF’s board meeting in January. The question is, will Dhaka be able to manage things till then.