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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

Bangladesh is implementing an automatic fuel oil pricing system aligned with the international market effective from March 2024 to comply with the International Monetary Fund’s loan conditions.

The draft formula for this system will be finalised by 12 December coinciding with the next IMF board meeting, an Energy Division official told The Business Standard. The meeting is expected to approve the release of the second tranche of the $4.7 billion loan for Bangladesh.

The Bangladesh Petroleum Corporation (BPC) will then put the process in effect after Prime Minister Sheikh Hasina’s approval.

A senior official at the BPC, the government agency responsible for managing fuel oil, confirmed that all preparations for the automatic pricing system are complete.

He added that following the prime minister’s approval, it will be implemented under the new government formed after the 7 January general elections.

Fuel oil prices in the international market have fluctuated significantly in recent months. Prices dipped slightly recently but rose steadily through August, September and October.

Bangladesh’s fuel prices were last adjusted on 30 August 2022, despite the subsequent volatility in the international market and the depreciation of the taka against the dollar.

The government initially planned to implement the automatic pricing system on 1 September this year. However, this was postponed due to the national elections and the uncertain international market conditions. As a result, the BPC incurred a loss of around Tk1,100 crore from July to October.

Cost will be on the day’s exchange rate

Energy Division officials explained that the import cost of fuel oils will be calculated based on the exchange rate on the day of payment. Additionally, the final price will include customs tax, dealer commission, potential BPC development costs, operating expenses, transportation charges, and a small profit margin. Prices will be adjusted monthly to reflect these factors.

Officials also clarified that the formula is based on the import parity price of refined fuel oils. This means that domestic fuel oil prices will fluctuate in line with the international market price of refined oils, considering that 70% of Bangladesh’s fuel oil imports are already refined.

India’s fuel oil prices are also factored into the formula to deter fuel oil smuggling across the border. By aligning Bangladesh’s fuel oil prices with India’s market prices, the government aims to eliminate the incentive.

Energy Division officials further explained that the added profit margin in the consumer fuel price reflects the government’s plans for establishing private sector refineries and fuel oil marketing.

This initiative aims to create a competitive market for fuel oil and eventually offer consistent prices across both the public and private sectors.

Once the private sector establishes refineries and fuel oil marketing companies, fuel oil will be sold at the same price across both the public and private sectors throughout the country.

This unified pricing will be determined by incorporating a profit margin for private companies during the pricing process. Consequently, the government will also benefit from a more efficient and competitive fuel market, officials said.

On 30 August last year, the government fixed fuel prices at Tk109 per litre of diesel and kerosene, Tk125 per litre of petrol, and Tk130 per litre of octane in an executive order.

After that, the price of fuel oils fluctuated in the international market, but the government did not change the price.

However, the Bangladesh Energy Regulatory Commission (Berc) has of late been fixing the price of liquefied petroleum gas (LPG) at the consumer level as per the announced consumer price of Saudi Aramco.

source: tbsnews.net

International Monetary Fund fuel oil pricing automatic