The International Monetary Fund (IMF) has decided to prolong its discussions with Bangladesh, aiming to reach a staff-level agreement for the next tranche of its $4.7 billion support package. While such vigilance from a global lender is expected, the IMF’s tightening of conditions comes at a curious juncture — precisely when Bangladesh’s macroeconomic stress is beginning to moderately ease after two particularly turbulent years.
The macroeconomic pressures that gripped the economy in FY23 and much of FY24 were formidable: a steep decline in foreign exchange reserves, double-digit inflation, and mounting vulnerabilities in the banking sector. Yet, the economic situation today, though still fragile, exhibits visible signs of stabilisation. Inflation, which peaked at 11.7 percent in July 2024, has eased to 9.4 percent by March 2025. Foreign reserves, once caught in a dangerous free fall, are now stabilising. Banking sector reforms, though incomplete, have made incremental progress in tightening regulatory supervision and containing the haemorrhage that previously plagued the sector. In short, the worst of the crisis appears to have been arrested.
For all latest news, follow The Daily Star’s Google News channel. It is in this context that the IMF’s insistence on greater fiscal consolidation, a more aggressively flexible exchange rate, and even tighter monetary conditions raises legitimate concern. While such reforms are necessary in theory, excessive rigidity, especially when some economic indicators are improving, risks stifling the very recovery that these programmes are supposed to nurture.
The central problem is the IMF’s apparent reliance on standardised prescriptions without sufficiently adapting to the evolving realities on the ground. Bangladesh’s economy is not overheating today; it is struggling to regain its growth momentum, with GDP growth slowing to 3.3 percent in the first half of FY25 — a sharp drop from 5.1 percent in the previous year. Consequently, demands for aggressive fiscal tightening could inadvertently deepen the slowdown by depressing both public and private investment at a time when investor confidence is already shaken. Furthermore, the IMF’s dual demands, monetary tightening to control inflation and simultaneous currency flexibility to manage external balances, may lead to conflicting policy signals. A looser exchange rate regime could increase imported inflation at a juncture when price stability remains fragile, which could force the Bangladesh Bank to tighten money supply, further weakening the investment climate. Bangladesh needs a calibrated, sequenced reform plan, not a battery of measures that pull in opposite directions.
The risk is that the current IMF posture could dampen reform momentum at a crucial moment. Bangladeshi economy has made difficult but important moves in recent months: a more market-driven exchange rate system has been partially introduced, steps have been taken to enhance to strengthen regulatory oversight of the banking sector, and governance reforms, though slow, are underway. Overburdening the system with rigid conditions could exhaust the political and institutional bandwidth needed to drive meaningful reforms forward.
Indeed, history teaches us that successful economic reforms, especially in developing economies, are rarely born out of rigidity. They require flexibility, political accommodation, and a sense of timing. Bangladesh’s economic policymakers need breathing space to consolidate early gains, restore confidence among businesses, and continue reforms without feeling trapped between conflicting demands. The IMF’s role should be to act as a partner, nudging reforms forward, offering technical assistance, and providing fiscal and monetary flexibility where suitable. Not to become an enforcer of overly tight prescriptions that could derail a fragile recovery. Bangladesh has shown resilience time and again; with the right balance of support and reform, it can regain its growth trajectory. But for that, pragmatism, not rigidity, must influence our decisions.
The author is the principal economist at the Policy Research Institute of Bangladesh and can be reached at [email protected].