Bangladesh to get $1.5b from WB this month

The World Bank’s board is set to approve $1.5 billion in budget support under three loan programmes for Bangladesh this month, a development that will bring much relief to the strained government finances amid the Middle East war.

Of this, about $800 million will be repurposed from existing project loans under the Rapid Response Option (RRO) window, $300 million for fertiliser imports and food assistance, and $400 million for banking sector reforms.

The breakthrough came after multiple rounds of talks in both Washington DC and Dhaka, The Daily Star has learnt from officials involved with the negotiations.

Bangladesh will need an additional $2.61 billion to pay the elevated energy and fertiliser import bills for the last quarter of fiscal 2025-26 because of the Iran war that began on February 28, according to a finance ministry impact analysis.

Subsequently, in April, the finance ministry sought urgent budget support from the WB and other donor agencies due to rising expenses for LNG, fuel and fertiliser imports following the Iran war, and the Washington-based multilateral lender is providing support as part of that request.

Any member state of the WB can restructure or repurpose up to 10 percent of its ongoing portfolio in the event of an unexpected natural or man-made emergency under the RRO window. Bangladesh applied to the WB on April 5 to receive assistance through the RRO.

Assistance under the RRO can be accessed in two ways. One is through the creation of a Contingent Emergency Response Project (CERP), which allows financing of emergency expenses such as food and other essential imports.

Bangladesh is set to repurpose $785 million from 12 projects through this CERP mechanism, which will be taken as budget support. Another $300 million will be taken as budget support to ensure food security.

And $400 million will be taken under the Financial Sector Support Programme for banking sector reforms. As part of the conditions, the government has agreed to scrap the much-criticised Bank Resolution Act, 2026.

The WB has also advised stricter enforcement of related-party lending rules, full supervisory powers for the BB and corporate governance aligned with international norms.

Relevant draft amendments prepared during the interim government were shelved due to opposition from bank owners, The Daily Star has learnt from finance ministry officials involved with the proceedings.

The Financial Institutions Division has now sent them back to the BB for review and consultation.

The other reforms include amending the Deposit Protection Act, enacting laws on distressed asset management and insolvency, and licensing small companies to recover bad loans under the BB regulation.

Two new laws, the Distressed Asset Management Act (DAMA) and the Insolvency and Bankruptcy Act, will be enacted.

Under DAMA, small companies will be licensed to recover bad loans with legal authority similar to banks, regulated by the BB.

The law will establish a framework for recovery, management, securitisation and trading of defaulted loans.

The World Bank Group’s International Finance Corporation will provide technical support.

The Insolvency and Bankruptcy Act will align with international best practices to strengthen insolvent banks and financial institutions.

State-owned banks will also undergo asset quality reviews (AQR).

The interim government conducted AQR in nine private banks, after which five were merged into Sommilito Islami Bank.

The WB’s programme documents noted structural weaknesses, including poor corporate governance, regulatory capture and politically influenced related-party lending.

Loopholes in definitions allowed complex inter-family relationships to obscure the scale of related-party lending, leading to fraudulent and willful defaults, and embezzlement by banks’ shareholders and management.

“A few big business groups siphoned off billions of dollars from the banking sector. In addition, the lack of proper enforcement and regulatory forbearance has exacerbated the problems, encouraging risky behavior, impacting market discipline and delaying necessary reforms,” the WB said.

State-owned banks are the most vulnerable, holding 27 percent of total assets, over $50 billion or 12 percent of GDP. Three state-owned commercial banks are systemically important.

In this context, the Financial Sector Support Project II is seen as critical for stabilising the sector.

It aims to strengthen deposit protection, improve supervisory capacity, and support resolution and restructuring, including reforms of state-owned banks.

“These interventions will address longstanding issues, improve authorities’ preparedness for and management of the current banking sector turmoil, paving the way for resolution and restructuring of weaker banks, including possible recapitalisation of the reformed SOBs.”

The programme is expected to restore stability, strengthen intermediation, and support long-term growth, the WB said.