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REJAUL KARIM BYRON and AHSAN HABIB
Bangladesh and Sri Lanka have received loan payouts from the International Monetary Fund, strengthening their buffers against risks to foreign exchange reserves.
The IMF said its executive board completed the first review of Sri Lanka’s rescue package, known as the extended fund facility, and released the second tranche of $337 million.
This development revived the IMF’s $2.9 billion bailout for Sri Lanka as the island nation reached a debt structure plan with its largest official lender – China.
“Macroeconomic policy reforms are starting to bear fruit and the economy is showing tentative signs of stabilisation, with rapid disinflation, significant revenue-based fiscal adjustment, and reserves build-up,” Kenji Okamura, deputy managing director of the IMF, said in a statement yesterday after the approval of the loan instalment.
The country of 22 million people defaulted on its $46 billion external debt last year after running out of foreign currencies to import food and fuel.
Dhaka lent $200 million to Colombo when the economic crisis unfolded. The nation has paid off the entire amount as reserves improved.
For its part, Bangladesh secured the final approval for the second tranche of $689 million of a $4.7 billion loan from the IMF, propping up the dwindling reserves – at least for now.
Both packages approved by the IMF’s executive board on December 12 came ahead of the South Asian countries’ national elections next year. Sri Lanka managed to raise revenue and rebuild reserve buffers, while Bangladesh is still struggling to meet both criteria.
Bangladesh’s economy has been buffeted by multiple shocks. Spillovers from Russia’s war in Ukraine and global monetary tightening have interrupted a strong post-pandemic recovery. Due to strict import compression, the current account deficit narrowed considerably.
However, an unprecedented reversal of the financial account, driven by global uncertainties and inadequate policy response, has kept reserves and the taka under pressure.
Zahid Hussain, a former lead economist of the World Bank’s Dhaka office, said Sri Lanka’s inflation has been tamed and foreign exchange reserve is also rising as it raised the benchmark interest rate and made it flexible.
The country ended 2022 with an inflation rate of 54 percent. It is estimated at 4.8 percent for 2023. The reserve improved from $1.8 billion last year to an estimated $3.8 billion in 2023.
“To control the inflationary pressure, Sri Lanka has taken stronger steps whereas Bangladesh is moving slowly,” Hussain said.
Once, Sri Lanka used to manage the exchange rate. Later, it left it to the market. Subsequently, the exchange rate has returned to normalcy.
The nation has also addressed the weaknesses in the financial sector. On the other hand, Bangladesh has framed rules for the sector but the implementation will start from March 2025 although the banking and the non-banking sectors are already in bad shape owing to scams, spooking depositors’ confidence.
“Why is this wait to implement it?” asked Hussain.