Budget support from WB, ADB: $1.1b loan likely by December

The World Bank and the Asian Development Bank are preparing to submit proposals to their boards for $1.1 billion in budget support for Bangladesh, finance ministry officials have said.

Discussions about the loans to expedite reforms and ease pressure on the country's foreign exchange reserves have already been completed, according to the officials.

Through these proposals, Bangladesh expects $500 million from the World Bank and $600 million from the ADB.

The World Bank's loan proposals are likely to be presented to its board in the first and second halves of December.

The ADB's loan may come under the Strengthening Economic Management and Governance Programme.

Initially, the ADB had intended to offer this loan to support Bangladesh's preparations for graduation from the Least Developed Country category.

However, the interim government is considering delaying the graduation from LDC by a few more years, Finance Adviser Salehuddin Ahmed indicated a few days back.

On November 11, Salehuddin told journalists that Bangladesh might require additional time to finalise its decision on the 2026 LDC graduation target.

So, the ADB is now providing the loan under the new programme to support the interim government's reform initiatives.

According to the finance ministry officials, the government must fulfil several reform conditions under this loan programme.

The conditions mostly focus on fiscal management and enhanced revenue mobilisation.

Among the conditions, the government has to strengthen tax compliance and reform the VAT system, mostly through automation.

Different measures must also be taken to increase non-tax revenue.

Other conditions include making the existing e-TDS (Electronic Tax Deducted at Source) system more effective, regularly evaluating the performance of state-owned enterprises, and taking steps to improve the services provided by the Bangladesh Investment Development Authority.

The World Bank is providing the budget support under the Second Green and Climate Resilient Development Credit programme.

This loan is being provided in three phases, with the first phase disbursed in March last year.

The programme includes several climate-related conditions, many of which, according to the finance ministry officials, have already been fulfilled.

Development partners, including the World Bank, consider Bangladesh highly vulnerable to the adverse impacts of climate change.

To mitigate climate risks, the World Bank has imposed several conditions, such as increasing specific budget allocations to address climate-related risks.

According to a 2023 World Bank report, Bangladesh's climate-related budget allocation is only 7.5 percent of the total national outlay.

Besides increasing this allocation,  as per a condition under the loan programme, Bangladesh will need to ensure proper utilisation and monitoring of the funds to check that they are used appropriately.

The WB report also thinks that environmental pollution and the depletion of natural resources in Bangladesh are largely the results of poor environmental governance.

To address these issues, the World Bank has imposed conditions to mitigate adverse impacts on the environment by implementing strict regulatory measures.

The interim government, which inherited high inflation and dwindling foreign currency reserves upon taking power, sought budget support from multilateral and bilateral development partners to stabilise the economy and bolster the dollar reserves.

Traditionally, development partners provide project-based loans, which are disbursed in phases contingent on project implementation progress.

In contrast, budget support loans are programme-based and conditional, disbursed immediately after approval, which relieves pressure from the foreign currency reserves.

Thomas Helbling, deputy director for the Asia Pacific Department of the IMF, was recently asked whether it is right for the interim government to seek budgetary support from development partners and what effects it may have on the economy.

Economic unrest and subsequent disruptions also caused disruptions on the balance of payments side, particularly for external financing, he said at a press conference in Tokyo on November 1.

"So, the budget loans provide some breathing space. They also provide the interim government with an opportunity to formulate policy reforms and gain time."

A top official of the Bangladesh Bank said they were taking the government's move to seek budget support as a positive one.

He hoped that they would get more budget support from different development partners in the coming months of the current fiscal year.