Pressure on foreign exchange reserves: the government is considering a loan of up to $4.5 billion from the IMF

As a precautionary measure, Bangladesh has started talks with the International Monetary Fund to take out a loan of $4-4.5 million to shore up shaky foreign exchange reserves.

Foreign exchange reserves stood at $41.7 billion yesterday, enough to cover about five months of import bills. As a general rule, the World Bank and IMF prescribe three months’ import cover, but in times of economic uncertainty they advise keeping sufficient reserves to cover imports for 8-9 months.

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Following next week’s payment of $2 billion to the Asian Clearing Union – the system through which payments for trade made with Bhutan, Iran, India, Nepal, the Maldives, Nepal, Pakistan and Sri Lanka are settled – Bangladesh’s foreign exchange reserves could fall below $40 billion, meaning import cover will be even thinner.

Going forward, even if imports contract slowly, high levels of inflation around the world mean that the chances of a slowdown in remittances and export orders, two sources of foreign exchange for Bangladesh , are high.

Subsequently, the loan option is being considered, said a finance ministry official involved in the process.

“There’s nothing to panic about – we’re just on the safe side,” he told the Daily Star.

Earlier in October last year, the Washington-based lender offered Bangladesh $3 billion as the country’s share in the newly issued $650 billion Special Drawing Rights (SDR) allocation for its 190 member countries to shape an economic recovery after the downturn of the pandemic.

Invented in 1969 and originally pegged to gold, SDRs are a unit created by the IMF that can sit in the reserves of member countries. They give governments vital leeway to redeploy funds or exchange their actions for currencies, including dollars.

The government did not take the SDR at the time because the country had already received large sums of budget support from multilateral lenders to combat the effects of the pandemic.

In addition, foreign exchange reserves amounted to $46 billion.

The situation deteriorated with Russia’s invasion of Ukraine in February, which sent commodity prices skyrocketing on the world market and severely depleted Bangladesh’s foreign currency reserves.

This prompted the government to take a series of measures to control foreign exchange outflows, including import restrictions.

The Bangladesh Bank has also floated the taka to limit the need to sell dollars to maintain exchange rate stability.

These measures are expected to ease pressure on reserves, but the government is not leaving that to chance.

The government opened talks with the IMF this month, the finance ministry official said, adding that an IMF mission is due to visit Dhaka next month for further talks.

The government’s decision to grant the loan depends on the conditions provided by the IMF.

“The last time the IMF offered a loan, it came with a staggering 33 conditions and not all of them were acceptable to the government.”

The conditions include cuts in interest rates on savings certificates, the removal of the unconditional possibility of legalizing untaxed money, the relaxation of the exchange policy and the reduction of the intervention of the BB on the foreign exchange market.

The state of the Russian-Ukrainian war and the amount needed to fight inflation in the country will also be considered when appealing for the IMF loan, the finance ministry official said.

If the government takes out the loan, it will bear interest of less than 2% and a repayment period of 14 years.

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