IMF projects Bangladesh GDP growth at 3.8% for FY25

The International Monetary Fund (IMF) on Wednesday projected Bangladesh’s real Gross Domestic Product (GDP) growth at 3.8% for the fiscal year (FY) 2025, citing output losses caused by public uprisings, floods and tighter policies.

According to an IMF press statement, the global lender anticipates a recovery, with GDP growth rebounding to 6.7% in FY2026 as policies are expected to ease.

The inflation is anticipated to remain around 11 percent (annual average year-on-year) in FY2025 before declining to 5 percent in FY2026, supported by tighter policies and easing supply pressures.

However, the outlook remains highly uncertain, with risks skewed to the downside, it said.

An IMF staff team led by Chris Papageorgiou visited Dhaka during 3-18 December 2024 to discuss economic and financial policies in the context of the third review of the IMF supported Extended Credit Facility (ECF), Extended Fund Facility (EFF) and Resilience and Sustainability Facility (RSF).

At the end of the visit, Papageorgiou on Wednesday issued the following statement:

“We are pleased to announce that the IMF team reached a staff-level agreement with the Bangladesh authorities on the policies needed to complete the third review under the ECF, EFF, and RSF arrangements. The IMF’s Executive Board will consider completion of the review based on the implementation by the authorities of prior actions.”

The timely formation of an interim government has fostered a gradual return to economic normalcy.

However, economic activity has slowed significantly, and inflation remains elevated. Capital outflows, particularly from the banking sector, have pressured foreign exchange reserves.

Additionally, tax revenues have declined, while spending pressures have increased. These challenges are further exacerbated by stress in parts of the financial sector.

Amid significant macroeconomic challenges, the authorities requested an augmentation of SDR 567.2 million (approximately $750 million) in IMF financial support to Bangladesh under the ECF and EFF arrangements, he said.

This increase would bring the total financial assistance under the ECF and EFF arrangements to SDR 3,035.7 million (about $4 billion), alongside concurrent RSF arrangements of SDR 1 billion (about $1.3 billion).

Upon completion of the third review, SDR 491.9 million (about US$645 million) will be made available, comprising SDR 325.2 million (about $426 million) under the ECF and EFF and SDR 166.7 million (about $219 million) under the RSF, he said.

To address the emerging external financing gap and persistently high inflation, near-term policy tightening is crucial.

Fiscal consolidation should prioritize the swift implementation of additional revenue measures, such as removing tax exemptions, while restraining non-essential spending.

Coupled with monetary tightening, greater exchange rate flexibility and safeguarding foreign exchange reserve buffers will strengthen the economy's resilience to external shocks.

Bangladesh’s low tax-to-GDP ratio calls for urgent tax reforms to establish a fairer, more transparent system and sustainably increase revenue, focusing on rationalizing exemptions, improving compliance and separating tax policy from administration.

A comprehensive strategy is also needed to curb subsidy spending and address arrears in the electricity and fertilizer sectors.

Addressing vulnerabilities in the banking sector is essential. Immediate priorities include accurately assessing non-performing loans, ensuring the effective implementation of existing regulations, and formulating a roadmap for financial sector restructuring.

Key actions involve conducting an asset quality review and adopting a recovery and resolution framework aligned with global standards.

Simultaneously, the authorities should advance risk-based supervision, while legal reforms are needed to strengthen corporate governance and regulatory frameworks. Institutional reforms to enhance Bangladesh Bank’s independence and governance will be critical for the successful implementation of financial sector reforms.

Enhancing governance, along with greater transparency, is critical to improving the investment climate, attracting foreign direct investment, and diversifying exports beyond the ready-made garment sector.

Building resilience to climate change is vital to reduce macroeconomic and fiscal vulnerabilities. Strengthening institutional capacity and optimizing spending efficiency will aid in achieving climate goals.

The government should focus on implementing climate-sensitive fiscal reforms and investing in sustainable, resilient infrastructure.

Furthermore, robust management of climate-related risks will reinforce the stability of the financial sector.

The IMF staff team is grateful to the Bangladesh authorities and other stakeholders for their hospitality and candid discussions.

The team held meetings with Finance Advisor Saleh Uddin Ahmed, Bangladesh Bank Governor Ahsan Mansur, Finance Secretary Md Khairuzzaman Mozumder, Chairman National Board of Revenue Md AR Khan, and other senior officials.

The team also met representatives from the private sector, bilateral donors, and development partners.