Govt to scrap AL-era IMF loan deal, seek new $5b package

The BNP government has decided to opt out of the existing loan agreement signed between the International Monetary Fund and the erstwhile Awami League administration, amid mounting differences over structural reforms tied to the current facility.

Instead, the government is planning to secure a fresh loan package worth $5 billion with a maturity period of three to four years to effectively manage the ongoing liquidity crisis. High-level sources within the finance ministry have confirmed the strategic shift to the media.

A senior official from the finance ministry, speaking on condition of anonymity, told The Business Standard that a high-profile virtual meeting was held on 21 May between a Bangladeshi delegation led by Finance Minister Amir Khosru Mahmud Chowdhury and an IMF team headed by its Deputy Managing Director Nigel Clarke.

Infographic: TBS

During the digital meet, the Bangladeshi delegation formally floated a proposal to withdraw from the ongoing credit facility while simultaneously pitching a baseline framework to initiate a brand-new loan programme under modified terms.

According to insiders, the decision to exit the current package stems from a prolonged gridlock over structural conditionalities.

TBS phoned the finance minister and the secretary for comment, but received no response.

Sluggish progress

The government has decided to pull out of the programme primarily due to its own reluctance to implement reforms in the banking and revenue sectors, alongside difficulties in formulating effective strategies to scale down state subsidies, they said.

This policy friction follows developments from last April, when the IMF executive board meeting in Washington expressed deep dissatisfaction regarding Bangladesh's sluggish progress in meeting the prescribed loan conditions.

Citing frustration over non-compliance, the global lender signalled its reluctance to release subsequent loan tranches under the existing framework, advising the government instead to sign a fresh treaty bound by a new set of conditionalities.

During the 21 May meeting, the Bangladeshi delegation informed the IMF management that the state no longer wishes to continue with the current credit programme.

The two sides also held preliminary discussions regarding the potential structure, timeline, and financial volume of the proposed alternative loan package.

Additionally, the IMF leadership has reportedly given its policy a nod in principle to the fresh proposal.

IMF mission likely in July or August

High-level sources within the finance ministry confirmed that an IMF mission will visit Dhaka in July or August to finalise the specific volume, timeline, and terms of the new programme.

This decision to seek a new credit framework matches the public stance taken by the finance minister during a recent discussion organised by Bonik Barta, where he declared that the conditionalities attached to the IMF deal are not suitable for Bangladesh's economy or its people.

The minister asserted that as an elected government accountable to the public, the current administration cannot comply with donor demands that run counter to public interest or the BNP's election manifesto.

The roots of the current policy gridlock trace back to the initial $4.7 billion loan agreement secured by the then Awami League government in January 2023, which was designed to be released in seven tranches over a multi-year period.

Although the package size was later expanded to $5.5 billion – $3.64 billion has already been disbursed – the remaining $1.86 billion fell into uncertainty following the political transition after the July uprising in August 2024.

The release of the fifth tranche, originally slated for December 2025, was deferred by the IMF pending the conclusion of the general elections.

During the subsequent IMF-World Bank Spring Meetings in Washington this past April, the global lender explicitly informed the newly elected Bangladeshi administration that further disbursements would be withheld unless satisfactory progress was achieved in structural reforms, creating the current impasse over the remaining $1.3 billion instalment to be paid over the fifth and sixth instalments.

Reform disputes

The primary battlegrounds between the government and the IMF involve sweeping overhauls in the revenue and financial sectors.

The global lender has been putting mounting pressure on Dhaka to implement a uniform 15% VAT rate, reduce corporate taxes, eliminate widespread tax exemptions, and introduce a market-based foreign exchange rate system.

Furthermore, the IMF has strongly recommended replacing universal state subsidies on electricity and fertiliser with targeted cash transfers for vulnerable groups, arguing that universal subsidies create unsustainable long-term fiscal pressure.

Senior officials within the Finance Division, however, indicated that the current administration is highly reluctant to execute such stringent austerity measures, which they believe could trigger public discontent.

A senior Finance Division official said there is dissatisfaction among development partners with the new government's stance on banking and revenue sector reforms; they see it as a backward step in financial sector reforms, especially after the amendment of the Bank Resolution Act, 2026.

Significant friction has also emerged over institutional governance.

The finance minister has openly criticised the interim government's ordinance that split the National Board of Revenue into separate policy and execution divisions, labelling the reform half-baked and confirming that the incumbent elected government has moved to repeal the measure.

Conversely, the IMF is demanding that a formal law validating the split be implemented by next month.

Similarly, in the banking sector, the lender has raised serious concerns over a new amendment introduced by the current government to the bank resolution framework.

This "controversial" clause allows former owners of weak, involuntary merged banks to regain administrative control – a move that international development partners have criticised as a regressive step in financial sector transparency.

IMF ties still seen as critical

Despite the sharp rhetorical resistance from political leadership, financial bureaucrats maintain that sustaining an active partnership with the IMF remains absolutely vital for national economic stability.

Officials from the finance ministry acknowledged that an active IMF programme serves as an "essential institutional seal of approval" that signals economic predictability to international investors and bilateral donors.

According to government estimates, Bangladesh requires approximately $3 billion to $4 billion in external budget assistance annually over the coming years to execute its large-scale national budget and fulfil its electoral pledges.

Securing at least $1 billion annually from a newly negotiated IMF programme is being viewed as the critical catalyst required to smoothly unlock parallel budgetary support from the World Bank, the Asian Development Bank, and other global development partners, say ministry officials.