IMF issues stern warning as economy in deep crisis

Staff Correspondent

Bangladesh’s economy is now facing a deep crisis and uncertainty. The International Monetary Fund (IMF) said in a meeting with Bangladesh Bank on Thursday that the country’s economy is still under severe stress and the government faces tough challenges to restore stability. The IMF fears that inflation could spiral out of control.

The organization has made it clear that contractionary monetary policy must be implemented more strictly to reduce inflation to 5 percent. The IMF has warned that if this policy is weak, inflation could spiral out of control. It has also urged Bangladesh Bank to make interest rates fully market-based, as it has described the current interest rate policy of the banking sector as “opaque and ineffective.”

The IMF delegation has described the abnormally high rate of non-performing loans in Bangladesh as the biggest risk to the economy. Non-performing loans in public banks have now exceeded 40 percent, almost four times the organization’s limit. In the past one year, the amount of non-performing loans in the country has increased by about four lakh crore taka to 6 lakh 67 thousand crore taka – which has created a terrible pressure on the country’s banking system.

The IMF said that the actual amount of defaulted loans in public banks was hidden for so long, and even after it was revealed, no effective action was taken. The default rate in private banks has also exceeded 10 percent, where the maximum requirement was 5 percent.

The IMF has strongly objected to the creation of the Export Development Fund (EDF) from the reserves and providing unsecured liquidity support to weak banks. The organization said that this ‘unsecured lending’ policy of Bangladesh Bank is very dangerous for the financial system.

Sources say that so far, about 52,000 crore taka has been given to a few weak banks – which did not have any government bonds or applicable collateral. These banks took money only by showing ‘promissory notes’, and no one has been able to return that money yet.

The IMF said that while Bangladesh’s reserves have improved somewhat, the revenue deficit and weak tax-to-GDP ratio have weakened the country’s economic foundation. Despite the size of the economy, revenue collection is worrisomely low.

Bangladesh Bank said its net foreign exchange reserves currently stand at $20.5 billion, slightly above the IMF’s target. But the agency warned that maintaining these reserves will be difficult in the long term if fiscal deficits, import costs and debt servicing pressures continue to mount.

Bangladesh has yet to meet all conditions under the IMF’s $4.7 billion loan program, putting the sixth tranche, which was due to be released in December, in doubt. The IMF has hinted at the possibility of releasing the next installment in March-April, citing doubts about economic reforms and transparency.

Chris Papageorgiou, who led the IMF delegation, said Bangladesh has shown some progress, but is still far behind on the path of real reforms. Failure to bring banking sector risks under control will permanently damage the economy.

According to analysts, inflation, bad loans, pressure on reserves and a weak fiscal structure have put Bangladesh’s economy in deep turmoil. The question now before the government is whether it can handle this crisis. The IMF has made it clear that the next tranche will not come without reforms, and if reforms are delayed, there is a risk of a complete collapse of economic stability.