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Dhaka: At a time when Bangladesh is in serious financial stress amid rising costs of energy import and a historic revenue shortfall, the International Monetary Fund has suspended its existing $5.5 billion loan programme, declining to release the next tranche of $1.3 billion by June.

This is the first shock that the new Bangladesh government will need to deal with, just two months since it inherited an ailing economy and vulnerable financial sector from the deposed Sheikh Hasina government. 

The IMF’s move also comes at a time when the Bangladesh government has been aggressively looking for additional financial support of at least $3.25 billion from the IMF, World Bank and other development partners to meet rising fuel import costs following higher international oil prices triggered by the US-Israel war on Iran that started on February 28.

The IMF took the decision to pause the loan during the Spring Meetings of the IMF and World Bank in Washington, D.C. in April. It could have a wider impact and may result in development partners growing hesitant to release financial support that they had already promised. This, in turn, is likely to trigger a foreign exchange reserve erosion. 

The country’s foreign exchange reserve is already under pressure amid higher global prices as the government estimates that it will require an additional $3.2 billion foreign exchange for importing fuel, gas and fertilizer. 

Moreover, the rising energy import cost has resulted in additional subsidy costs of over $3 billion just for energy and fertilizer. 

The additional subsidy pressure comes at the time when revenue collection has hit a historic deficit of approximately Tk 98,000 crore – equivalent to over $8 billion – against target in the first nine months of the current fiscal year of 2025-26, surpassing the total shortfall recorded in any previous full financial year.

In this situation, the government is highly dependent on banks as borrowing has grown by 33.57% in February, exceeding the monetary target of 21.6% set for the entire FY26 by the Bangladesh Bank. 

Now, the high dependence on domestic sources to cope with this additional financial burden will create devaluation pressure, fueling inflation, which already remained high above 9%, further.

Why is the IMF unhappy with Bangladesh?

Bangladesh had signed the $4.7-billion loan agreement with the IMF in 2023 during the tenure of ousted prime minister Sheikh Hasina. The size of the programme was later increased by $800 million during the interim government period, taking the total to $5.5 billion.

The IMF declined to continue the existing loan programme citing failures to implement major reforms including revenue reform, banking reform, withdrawal of electricity and fuel subsidies and a market-based exchange rate, which had been agreed upon. 

As part of the reforms made by the interim government, Bangladesh Bank with the technical assistance of the IMF drafted an amendment of the original Bangladesh Bank order, strengthening central bank independence and brought a Bank Resolution Ordinance to merge distressed banks. 

The draft amendment of the Bangladesh Bank Order brought major changes in government and deputy government appointments in a bid to shield the regulator from political interference.

According to the draft amendment, the president will appoint the governor and deputy governors of the bank, and the governor’s post will be upgraded from the status of a secretary to that of a minister.

The draft also seeks to reduce state control over the central bank’s board. While the current board includes three government representatives, the final draft proposes retaining only one, ensuring that the institution makes financial decisions based on economic necessity rather than political convenience.

Though the Bangladesh Bank board cleared the amended ordinance, it was not enacted by the interim government. The new government has also not made any moves to go ahead with it. 

IMF has long been dogged in its pursuit to get the Bangladesh Bank Order ordinance implemented so as to empower the regulator and had included it as a major condition under the loan programme. 

Another major reform brought through the Bank Resolution Ordinance was the merging of five banks during the interim government’s rule. However, the BNP government later amended the law and passed a bill effectively allowing the former owners to regain control. 

Also read: After 18 Months of Strain, Dhaka and Delhi Eye a Cautious Reset, But Youth Anger Looms

The latest amendment by the BNP government annoyed the IMF as it paved the way to reinstate the S Alam group which owns four out of five merged banks. 

The amendment specifically impacts the ongoing merger of five distressed institutions – First Security Islamic Bank, Social Islamic Bank, Union Bank, Global Islamic Bank, and Exim Bank – which had been consolidated into the Sammilito Islami Bank under the previous interim government’s reforms.

Out of five, four including First Security Islamic Bank, Social Islamic Bank, Union Bank and Global Islamic Bank were previously controlled by Mohammed Saiful Alam, chairman of the S Alam group. The Bank Company Act does not allow an individual to hold directorship in more than one bank.

S Alam group is blamed for laundering billions of dollars from the banking sector during the Hasina regime and owns a total of five Islamic banks including the largest commercial Islami bank.

The Bangladesh Bank, during the interim government’s time, had freed all five banks from the S Alam grip by dissolving their boards and ceasing shares.

However, the latest amendment allows the group to recapture banks as the Bank Resolution has introduced the option for former owners to come back on board by paying at least 7.5% of the total capital loss, liabilities and taxes determined by the government or the central bank.

Saiful Alam has been living abroad ever since the government filed a total of 27 cases in Bangladeshi courts against S Alam Group, with charge sheets submitted in three of them.

The group has defaulted loans of at least $10 billion in different banks in Bangladesh but some of the business of this group had started to resume after the BNP government came into power.

This was also discussed in parliament recently when Cumilla-4 lawmaker Hasnat Abdullah asked in the parliament, “On what grounds were the commercial operations of S Alam Group, which were halted due to corruption and loan default realities, resumed?”

It is in this context that the BNP government has lost its credibility to the IMF.

Expansion of subsidies through additional spending on social safety nets by introducing family cards and farmers cards has also displeased the IMF, according to Bangladesh Bank officials who attended the spring meeting in DC.

When the government is already under huge financial pressure amid rising energy subsidies, the BNP government has kept expanding the social safety net and provided Tk 20,000 crore – equivalent to $2 billion – from the budget for merged banks. This has created fiscal pressure which may result in a huge deficit ahead of the announcement of the upcoming budget for the next fiscal year. 

© The Wire