Tough IMF Conditions Put Banks, Tax Reforms and Fuel Pricing to the Test

Bangladesh’s efforts to secure a $4.5–5 billion loan agreement with the International Monetary Fund (IMF) by December are putting the banking, revenue and energy sectors under mounting pressure, as the lender pushes for the withdrawal of tax exemptions within a year, additional duties on fuel sales and restructuring of financially weak banks. Economists, however, warn that fulfilling these conditions will be challenging.

Sources at the Finance Ministry said Bangladesh has sought around $4.5 billion, although the amount could increase to $5 billion during negotiations. Discussions are ongoing over disbursing the funds in six instalments between December 2026 and December 2029. However, the loan amount, conditions and disbursement schedule are yet to be finalised.

The IMF's positions became apparent during meetings between its visiting mission and various Bangladeshi stakeholders.

The delegation comprises Maxym Kryshko, the IMF's resident representative in Dhaka, and economists Ruifeng Zhang and Qiaoe Chen. Sebastian Eckardt, a World Bank official involved in Bangladesh's macroeconomic assessments, including joint World Bank-IMF debt sustainability analyses, is also part of the mission.

After meeting IMF Deputy Managing Director Nigel Clarke in Bangkok on 15 October, Finance Minister Amir Khosru Mahmud Chowdhury told journalists that the loan would come with conditions to be determined through negotiations.

He said the government agreed with the IMF's observations regarding the banking sector, the tax-to-GDP ratio and bank recapitalisation.

However, citing persistent inflation and sluggish investment, the government is advocating a gradual approach to implementing the proposed reforms.

Tax exemptions and VAT reforms

More than 500 goods and services currently enjoy VAT concessions or complete exemptions at different rates.

The National Board of Revenue (NBR) plans to gradually withdraw these benefits and introduce a uniform 15% VAT on most goods and services by 2030, while maintaining exemptions for essential commodities, education, healthcare and transport.

During discussions with NBR officials, the IMF reportedly called for the withdrawal of these exemptions within one year. The revenue authority, however, argues that such a rapid move could discourage investment and disrupt business planning.

Dr Zahid Hussain, former lead economist at the World Bank's Dhaka office, told the Daily Sun that tax expenditures account for approximately 6.8% of GDP, compared with actual tax revenue of around 6.4%.

He said rationalising tax exemptions and expanding the tax base were crucial to addressing the gap.

However, he stressed that improving revenue collection should not depend exclusively on increasing tax rates. Tackling tax evasion and strengthening administrative capacity were equally important.

Additional fuel duties and subsidy cuts

The IMF has also proposed imposing a fixed duty on every litre of fuel sold at the retail level, in addition to the existing taxes collected at the import stage.

It is simultaneously pushing for rationalisation of subsidies in the power, gas and agriculture sectors and continuation of the automatic fuel pricing mechanism.

Such measures could increase operating expenses across the transport, agriculture and industrial sectors, potentially adding to inflationary pressures.

Dr Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue (CPD), said subsidies needed to be reduced through a targeted approach. However, he warned that suddenly imposing additional fuel taxes would increase the financial burden on ordinary citizens and businesses.

CPD Distinguished Fellow Dr Fahmida Khatun also cautioned that increasing fuel prices amid already elevated inflation could further raise the cost of living.

Restructuring the banking sector

Another major IMF demand involves comprehensive asset quality reviews of banks, identifying their actual capital shortfalls and preparing individual restructuring plans for financially distressed institutions.

The proposals include categorising banks according to their financial health, reducing non-performing loans (NPLs), addressing capital deficiencies and considering mergers or liquidation where necessary.

According to Bangladesh Bank data, NPLs accounted for 32.26% of total outstanding loans in March 2026, while the banking sector's capital adequacy ratio fell to negative 2.64% at the end of December 2025.

Restructuring financially troubled banks is expected to require substantial public resources.

Bangladesh Bank Governor Mostaqur Rahman said at an event in October that the sector would require Tk60,000 crore annually from the national budget for five to eight years to recover from extensive financial looting and structural damage.

Revenue administration and other reforms

The IMF is also seeking a clear separation between revenue policy formulation and revenue collection.

The government has initiated a restructuring of the NBR by creating two separate divisions, although the process remains incomplete.

Other reform priorities include curbing tax evasion, digitising revenue administration, broadening the tax base and modernising the duty structure for tobacco products.

The lender is also calling for greater exchange rate flexibility, rebuilding foreign exchange reserves and allowing the dollar exchange rate to be determined by market demand and supply.

Additionally, it has emphasised the need for an effective bankruptcy law to facilitate the restructuring of loan-defaulting businesses and economically unviable enterprises.

Major hurdles to implementing reforms

Economists believe the government will face considerable difficulties in meeting the IMF's conditions, particularly in increasing revenue collection, financing bank restructuring and keeping inflation under control.

Dr Zahid Hussain said withdrawing tax exemptions and introducing additional fuel duties could raise costs for businesses and consumers. Meanwhile, using public funds to recapitalise banks could place further strain on the national budget.

He stressed that the government should move beyond making commitments merely to secure external financing and instead establish realistic implementation timelines and ensure accountability for reforms.

He also highlighted the importance of strengthening social safety net programmes to shield poor and low-income households from the adverse effects of economic reforms.

Bangladesh's previous IMF programme also saw several reform commitments miss their stipulated deadlines.

The country signed a $4.7 billion loan agreement with the IMF in January 2023. An additional $800 million subsequently increased the programme's total value to $5.5 billion.

However, commitments involving revenue collection, NBR restructuring, withdrawal of tax exemptions and exchange rate reforms were only partially implemented.