Home Finance IMF injected cash into Bangladesh, Sri Lanka. Are the two economies diverging?

IMF injected cash into Bangladesh, Sri Lanka. Are the two economies diverging?

by fstcap

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.

In a positive development, the interest rate is now allowed to move higher as the central bank moved away from the ceiling in July – three years after the ceiling was introduced. Government borrowing has also fallen.

“Whether the fall in government borrowing will sustain or not is a different discussion, but this is good signal to fight inflation,” Hussain said.

However, not much has been done to make the exchange rate flexible though it is needed for Bangladesh to ease the pressure on the reserves.

The reserve stood at $33.4 billion in 2021-22 and it is estimated at $24.3 billion in 2023-24.

The inflation rate was 9 percent in FY22 and the IMF expects it to fall to 7.9 percent in FY24.

But it would rely on the outcomes of the reform agenda.

Hussain said Sri Lanka has taken strong steps through the monetary policy to tackle inflation whereas Bangladesh is already late and still has not done enough.

He alleged that when it comes to exchange rate management, Bangladesh is moving in the opposite direction by allowing the Bafeda (Bangladesh Foreign Exchange Dealers’ Association) and the ABB (Association of Bankers, Bangladesh) to fix rates.

“This system is not working at all.”

“As a result, a chaotic exchange rate prevails. There is no level-playing field. Everyone is reporting at an official rate but the real rate is much higher and there is no discipline.”

Prof Selim Raihan, executive director of the South Asian Network on Economic Modeling, said the Sri Lankan economy bounced back mainly because of its reform initiatives initiated by its central bank’s governor.

“The governor was not politically motivated and he took policy measures professionally and effectively. As a result, the economy rebounded dramatically though it is not out of the woods yet.”

On the other hand, Prof Raihan says, there is no visible sign of a revival in Bangladesh since the government is dilly-dallying in bringing about reforms.

No reforms are visible in the banking and revenue sectors and in stopping hundi and capital flight, which are also blamed for the current economic woes.

“It is being said that reforms will accelerate after the election, but there is no way to make any more delays,” Raihan added.

source: thedailystar.net


IMF two countries cash injected economics foreign exchange

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