Reserves can hit $24.3b this fiscal year

Bangladesh's gross foreign reserves can top up to $24.3 billion by the end of the fiscal year if greater exchange rate flexibility is allowed and a tighter monetary policy is pursued, the IMF said.

As of December 6, gross foreign reserves stood at $19.1 billion, as per the latest published data from the Bangladesh Bank.

A calibrated monetary policy tightening, supported by a neutral fiscal stance, and greater exchange rate flexibility would alleviate foreign exchange pressures and rebuild buffers, said Antoinette Sayeh, deputy managing director of IMF.

"Gradually transitioning to a more flexible exchange rate regime and strengthening FX reserve management would enhance external resilience," she said in an IMF press statement yesterday.

If the measures are carried out sincerely, gross foreign reserves are projected to hit $30.6 billion at the end of the next fiscal year and $39.2 billion in fiscal 2025-26.

"Near-term policies should continue to focus on containing inflation and rebuilding external resilience," said Sayeh, who is also the acting chair of the IMF executive board that authorised the second tranche of $689 million of the $4.7 billion loan yesterday.

The approval for the second tranche came despite the government's inability to meet two of the six conditions: minimum net international reserves and tax collection.

"Bangladesh's economy is navigating multi-faceted economic challenges. Despite a difficult external environment, programme performance has been broadly on track, reflecting the authorities' strong commitment," she said.

Ongoing reforms to modernise the monetary policy framework will improve policy transmission and foster macroeconomic stability, she said in the press statement.

Subsequently, inflation is expected to decelerate to 7.2 percent at the end of the fiscal year. Inflation is projected to average 7.9 percent in fiscal 2023-24, which is above the government's inflation target of 7.5 percent for the year.

The IMF board also emphasised the need for creating fiscal space for social spending and growth-enhancing investment.

They stressed the need to raise tax revenues by implementing concerted tax policy and administration measures. Directors also called for rationalising subsidies, improving expenditure efficiency, and better managing fiscal risks.

"Continued efforts to enhance public financial and investment management are needed to increase spending efficiency and mitigate fiscal risks," Sayeh said.

If the IMF-prescribed tax reforms are implemented, Bangladesh's tax-GDP ratio is expected to edge up to 7.9 percent in fiscal 2023-24 from 7.4 percent at the end of the last fiscal year. Then next fiscal year, the ratio is projected to hit 8.4 percent.

The IMF board underscored that advancing financial sector reforms remains important to meet growing financing needs and support growth, which is projected to be 6 percent this fiscal year and 6.6 percent next fiscal year.

The government has revised down the growth projection for this fiscal year to 6.5 percent from 7.5 percent originally.

The IMF board also called for liberalising trade and enhancing the investment climate and governance, both of which will help bolster export diversification and foreign direct investment.

If executed, Bangladesh's financial account balance, which includes FDI, is expected to turn a corner this fiscal year: it will swing to surplus from deficit at the end of last fiscal year, shows IMF's projections.

Typically, a deficit in the financial account means more investments are flying out of the country than coming in and is a major factor behind the running down of foreign exchange reserves.

In the first four months of the fiscal year, the deficit in the financial account stood at $3.96 billion, in contrast to $1.27 billion a year earlier, as per the latest data from the central bank.

The current account deficit -- which occurs when a nation sends more money abroad than it receives -- is projected to widen further this fiscal year and progressively more in the succeeding years.

The deficit in the trade balance -- which occurs when the country is importing more goods and services than it is exporting -- will improve slightly this year and then worsen in the next two fiscal years, as per the IMF's projections.

The public sector debt-GDP ratio is projected to surpass the psychological 40 percent-mark from this fiscal year onwards: it will hop to 41.4 percent in fiscal 2023-24 from 39.8 percent at the end of June last year.

The external debt-GDP ratio is projected to climb to 18.1 percent this fiscal year from 17.7 percent.

Economists though emphasied on reforms if the projections laid out by the IMF in the statement are to be met.

Some assumptions might have played a role behind the optimistic projections for foreign currency reserves, said Zahid Hussain, a former lead economist of the World Bank's Dhaka office.

"The IMF might have thought that once the election is over, some of the export proceeds that have not been brought into the country owing to the political uncertainty will flow in. This may add $5 billion to the reserves."

About $12 billion of the export proceeds of fiscal 2022-23 are yet to be brought into the country, according to the BB.

Another $1.5 billion might come from multilateral partners such as the IMF, the World Bank and the Asian Development Bank.

"However, some of the assumptions might not be translated into reality. So, ultimately, we will have to address policy reforms to overcome the current economic challenge."

Otherwise, achieving the projected numbers for reserves will be difficult, Hussain added.

The IMF has attached some major reforms with the third and fourth instalments of the loan, said Ahsan H Mansur, executive director of the Policy Research Institute.

"It will be tough to pass the review for the instalments if the conditions are not met," said Mansur, also a former economist of the IMF.

"The IMF's recommendations should be viewed as something necessary for the economy," said Selim Raihan, executive director of the South Asian Network on Economic Modelling.

If the recommendations are accepted positively, reforms will be meaningful.

"Otherwise, I am worried that there might be half-hearted and incomplete efforts. If the reform process is done unwillingly, influential quarters that have prevented the government from bringing about changes will exert their pressure. Then, we will not get the expected outcomes."

A strong political will is imperative, added Raihan, also a professor at the University of Dhaka's economics department.