IMF cautions against unsecured liquidity support to weak banks

The International Monetary Fund has cautioned against unsecured liquidity injections into weak banks in Bangladesh and urged full implementation of exchange rate reforms.

The Fund highlighted the urgent need for a credible banking sector reform strategy consistent with international standards to restore stability.

“Such a strategy should include estimates of undercapitalisation, define fiscal support, and outline legally robust restructuring and resolution plans,” it said.

The Washington-based multilateral agency made the observation in a statement issued yesterday after its executive board completed the Article IV Consultation for Bangladesh last week as part of a review of the progress in implementing the conditions it tied with the $5.5 billion loans to Bangladesh.

The IMF encouraged the authorities to conduct asset quality reviews for all systemic and state-owned banks, advance risk-based supervision, and strengthen governance and balance sheet transparency.

It said maintaining a tight policy mix is necessary to keep rebuilding foreign exchange reserves and reducing inflation. The Fund stressed the importance of full and consistent implementation of the exchange rate reform and greater exchange rate flexibility, while cautioning against unsecured liquidity injections into weak banks.

“Monetary policy should remain appropriately tight until inflation is firmly on a downward path,” it said, noting that inflation remains elevated despite a slight moderation.

The IMF said headline inflation fell from double-digit levels in early FY25 but remained elevated at 8.2 percent in October.

Inflation is projected to remain elevated at 8.9 percent in FY26 before subsiding to around 6 percent in FY27. “Risks to the outlook are tilted to the downside, mainly from delayed or inadequate policy action and reversals of exchange rate reform and fiscal discipline.”

“The economy continues to face mounting macro-financial challenges from weak tax revenue and financial sector vulnerabilities, with significant downside risks stemming from delays in the implementation of bold fiscal and financial reforms,” the IMF said, projecting Bangladesh’s economic growth at 4.7 percent for FY26.

It said the economy is expected to recover gradually over the medium term, with growth projected to accelerate to around 6 percent over the medium term.

Policies should focus on safeguarding fiscal sustainability and strengthening macro-financial stability, while implementing comprehensive structural reforms over the medium term to strengthen governance, create jobs, and promote economic diversification, it said.

The IMF acknowledged the interim authorities’ efforts to stabilise the economy following the 2024 uprising and in the run-up to the upcoming national elections.

It, however, noted that Bangladesh faces mounting macroeconomic and financial challenges, as weak revenue mobilisation, banking sector vulnerabilities, incomplete implementation of the new exchange rate framework, and elevated inflation continue to weigh on macroeconomic stability and growth prospects.

The lender observed an uneven programme performance and emphasised that decisive and sustained policy actions and bold reforms are needed to restore macroeconomic and financial stability and support the country’s long-term development goals.

“The new administration’s full ownership of the programme will be critical, supported by early and active engagement with staff and efforts to secure stakeholder buy-in.”

Directors stressed the need for ambitious fiscal reforms and encouraged the authorities to undertake bold tax policy reforms, simplify the tax system, and strengthen tax administration and compliance to mobilise revenue, it added.

The Fund suggested rationalising subsidies, prioritising growth-enhancing investments, enhancing social safety nets, and improving public financial and investment management to support inclusive development and growth.

“Strengthening the financial viability of energy SOEs will also be important.”