Rising energy and food prices, sparked by the Russia-Ukraine war, and shrinking forex reserves have hit Bangladesh.
The International Monetary Fund (IMF) has provisionally agreed to provide a $4.5bn support programme to Bangladesh, with the country’s finance minister saying the deal would help prevent economic instability escalating into a crisis.
Bangladesh’s $416bn economy has been one of the world’s fastest growing for years. But rising energy and food prices, sparked by Russia’s invasion of Ukraine, along with shrinking foreign exchange reserves, have swelled its import bill and current account deficit.
On Wednesday, it became the third South Asian nation to secure a “staff-level agreement” with the IMF for loans this year after Pakistan and Sri Lanka.
“The heat of the global economy has affected our economy to some extent,” Finance Minister AHM Mustafa Kamal told reporters after the IMF announcement. “We requested the IMF loan as a precautionary measure to ensure that this instability does not escalate into a crisis.”
“Bangladesh’s robust economic recovery from the pandemic has been interrupted by Russia’s war in Ukraine, leading to a sharp widening of the current account deficit, a rapid decline of foreign exchange reserves, rising inflation and slowing growth,” said Rahul Anand, who led a visiting IMF staff mission.
The group arrived in Bangladesh late last month to iron out provisions for providing the loan to the South Asian nation of more than 160 million people.
IMF said a “staff-level agreement” had been reached for a 42-month arrangement, including about $3.2bn from its Extended Credit Facility (ECF) and Extended Fund Facility (EFF), plus about $1.3bn from its new Resilience and Sustainability Facility (RSF).
“The objectives of Bangladesh’s new Fund-supported program are to preserve macroeconomic stability and support strong, inclusive, and green growth, while protecting the vulnerable,” the lender said in a statement.
A staff-level agreement is typically subject to approval by IMF management and consideration by its executive board, which is expected in the coming weeks.
Bracing for a slowdown
Bangladesh’s economic mainstay is the export-oriented garment industry, which is bracing for a slowdown as big customers like Walmart are saddled with excess stocks as inflation forces people to prioritise their spending.
The country’s foreign exchange reserves had dwindled to $35.74bn by November 2 from $46.49bn a year ago, central bank data showed.
The IMF said Bangladesh has put together a programme to foster growth that includes measures to contain inflation and strengthen the financial sector.
Finance Minister Kamal said the IMF team agreed with the government’s economic reforms. Earlier, in August, Bangladesh hiked fuel prices by about 50 percent in a move to trim its subsidy burden, but government officials denied at the time that this was a prerequisite for the IMF loan.
Funds will be disbursed in seven tranches, Kamal said, adding that the first instalment will be available in February 2023.