Bangladesh’s participation in the 2026 IMF-World Bank Spring Meetings, held earlier this month, presents a case study of a well-known problem in development finance: the conflict between external conditionality and local ownership of policies. Although the immediate narrative focuses on delayed funding and diplomatic manoeuvring, the more fundamental challenge is one of institutional design: how can a lower-middle-income country reconcile its need for credibility, sovereignty, and reform sequencing in a challenging international macroeconomic environment?
To begin with, the case for Bangladesh per the fundamentals of open-economy macroeconomics is obvious. As an energy importer, the country is exposed to various external shocks, especially commodity prices and geopolitical risks affecting the functionality of global supply chains. In such a situation, external disequilibria become a structural feature rather than a cyclical phenomenon.
The IMF’s relatively pessimistic assessment of global economy, defined by moderate growth, elevated inflation, and geopolitical risks, accentuates Bangladesh’s vulnerability. In this regard, the country faces a classic trilemma of economic policy, meaning it cannot simultaneously achieve exchange rate stability, monetary independence, and foreign capital inflows. The delayed devaluation of the exchange rate, which has been discussed in policy negotiations, is an illustration of this trilemma.
IMF conditionality and the credibility problem
The conditionality for the next tranche of the $5.5 billion IMF loan is not merely an isolated administrative consequence but an indication of a broader credibility problem. As in any principal-agent relationship, where the former expects certain conditions to be met by the latter, the IMF (principal) needs a commitment on the part of the Bangladesh government (agent) in terms of revenue generation and other measures, including subsidy rationalisation and fiscal discipline.
From the perspective of fiscal contract theory, fiscal capacity would be guaranteed in a credible social contract, where the benefits of tax collection are obvious for taxpayers. However, a credible social contract cannot develop under the circumstances of persistent tax exemptions, as seen in Bangladesh. As a result, the lack of endogenous revenue—money generated within the economy—forces the country to continue relying on international assistance and the accompanying conditionality.
Furthermore, the change in the government raises questions related to dynamic inconsistency, an economic concept describing a situation in which a decision-maker’s preferences change over time, making earlier choices inconsistent with later ones. Since the new government was not responsible for developing the initial IMF package, dynamic consistency implies that renegotiations would require a credible substitute, complete with benchmarks and deadlines, thus providing for additional delays for both parties involved.
The key issue here is whether Bangladesh should stick to the existing programme, or bargain for a more appropriate one from the perspective of its politics.
From the perspective of political economy analysis, ownership of a reform programme is absolutely necessary for its success. Experience shows that foreign-imposed reforms tend to fail if local interests are not committed to them. Sometimes, a harsher new programme may improve compliance if the interests of all political forces involved are aligned.
However, a new agreement could involve greater scrutiny and more severe structural targets, thus leaving Bangladesh with less flexibility for policymaking. Ideally, it is important to start with the signalling approach, showing intentions to pursue reforms through early visible steps, especially in terms of revenue administration and energy prices.
The financial sector: Institutional weaknesses and reform sequencing
Given the presence of non-performing loans (NPLs), there is another classical problem associated with the financial sector that relates to the weaknesses of governance and moral hazard.
The problems associated with the banking sector can be explained through the soft budget constraint approach—the tendency of social welfare-minded governments to bail out failing banks. When institutions expect certain implicit guarantees, excessive riskiness arises and the asset quality worsens. Hence, it is important to implement reforms at the legislative level and to have effective tools of enforcement. Importantly, foreign organisations require having a plan to address the issue, rather than solving it immediately, as this task is impossible. It shows the significance of sequencing reform measures.
The World Bank: Complementarities and strategic conformity
Unlike the IMF, which concentrates on macroeconomic stability, the World Bank works in the domain of development financing, funding long-term projects. This recent involvement shows the possibility of programmatic conformity to the national goals, especially those of the current government’s manifesto.
A strategic opportunity exists here. According to the theory of development finance, complementarities between public expenditure and institution-building are very significant. Aligning itself with the developmental activities of the World Bank can be useful for Bangladesh, as this will enable the use of concessional finance and increase the country’s growth capacity. Notably, the recommendation to diversify finance through capital market instruments such as bonds and sukuk (Shariah-compliant financial instruments) is interesting since, from a portfolio management point of view, the use of one instrument makes the system more vulnerable.
Recent improvements in forex reserves, inflation, and stability in monetary policy are positive signals. Yet, analytically, these are not sufficient indicators of stability. IMF’s emphasis on revenue indicates that the focus is more on fundamentals than on signals. This is because macroeconomic stability entails a combination of policies that must complement each other. Without sufficient fiscal capacity, monetary tightening will be incapable of stabilising the macroeconomy, especially during adverse external conditions.
Negotiation strategy: From reactive to strategic engagement
Bangladesh has always been reactive during its dealings with various multilateral bodies, responding to conditions rather than influencing them. The current approach suggests moving away from the reactive stance towards strategic negotiation.
From a game theory point of view, it marks a transition from the passive to the strategic equilibrium point. By offering comprehensive reform strategies, complete with institution-specific roles and schedules, the country can bring about a change in the bargaining scenario.
In addition to finance, programmes (such as that of the IMF) have an important signalling function. Within international capital markets, programmes provide signals of policy commitment, thus decreasing risk. This means that the lack of a functioning programme will have spillover effects and may constrain the country from accessing further financial assistance, both bilaterally and multilaterally.
The function of signalling may be understood from the perspective of reputation theory. Countries that comply with programmes build up reputation capital, which decreases the cost of borrowing and provides access to more funds. Non-compliance has the reverse effect.
In evaluating the results of the Spring Meetings, one should not simply focus on potential financial benefits. Instead, they serve as an indicator of Bangladesh’s governance capacity to craft and implement meaningful reforms when exposed to international public opinion.
In order to advance, the following steps are necessary: i) implementing credible fiscal reform by improving tax administration to increase revenue-generating capacity; ii) reforming the financial sector by dealing with governance shortcomings and implementing effective measures to ensure accountability; and iii) effectively utilising development partnerships by making use of complementarities between IMF stabilisation programmes and World Bank development finance.
However, the problem at hand is not technical but institutional. The effectiveness of Bangladesh’s interactions with the IMF and World Bank will hinge on the ability to convert policy promises into credible actions. In that regard, the upcoming period may be viewed not so much as a negotiation process but as a test of governance capacity.
Dr M Kabir Hassan is professor of finance and Moffett chair at the University of New Orleans in the US.
Views expressed in this article are the author's own.
Follow The Daily Star Opinion on Facebook for the latest opinions, commentaries, and analyses by experts and professionals. To contribute your article or letter to The Daily Star Opinion, see our guidelines for submission.
