IMF: Lending to Weak Banks Under Promissory Notes Will Increase Financial Sector Risks

Staff Correspondent

The International Monetary Fund (IMF) has objected to Bangladesh Bank’s lending to weak banks against ‘demand promissory notes’, saying such a lending policy could hamper efforts to control inflation and increase risks in the financial sector.

Currently, the amount of loans given by the central bank to weak banks against only promissory notes, without any securities, stands at around Tk 34,000 crore.

The IMF delegation is currently in Dhaka as part of a review of progress in meeting conditions before the release of the sixth tranche under the IMF loan program. They held a meeting with the Finance Ministry and Bangladesh Bank on Wednesday. The meeting was attended by the Deputy Governor and Executive Directors of Bangladesh Bank.

According to sources at the meeting, the IMF delegation said that Bangladesh Bank is working to control inflation, but it is against the rules to provide loans to weak banks only against promissory notes instead of government securities. This may increase the supply of money in the market and create inflationary pressure. Besides, there is uncertainty in the repayment of loans by these banks.

The IMF delegation is not only assessing the implementation of the loan program conditions, but also assessing the overall economic situation of Bangladesh as part of the organization’s Article Four review. During the two-week visit, the team will meet with various government departments to gather economic information and participate in policy discussions. At the end of the visit, they will release an assessment report on Bangladesh’s economic stability and sustainable development.

The mission is being led by Chris Papageorgiou, Head of the Development Macroeconomics Division of the IMF’s Research Department. On the first day of the visit, the delegation met with Finance Secretary Dr. Md. Khairuzzaman Majumder and outlined the objectives and plans of the visit.

They also held a meeting with the Macroeconomic and Budget Branch of the Finance Department to discuss various financial challenges including shortfall in tax revenue collection, failure to achieve development expenditure targets, and reduction in subsidies.

The Finance Department claims that development spending has decreased due to political changes and project revisions, but the situation is gradually returning to normal.

It is worth noting that, according to Article Four of the IMF, the economic policies and conditions of member countries are regularly assessed. The IMF last published such a report on Bangladesh in 2023, which also influenced the decision-making of other development cooperation organizations.