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Norway has been requested by IMF to provide balance of payment (BOP) support to Bangladesh, which is facing a critical reduction in its foreign exchange reserves. This report, which has been commissioned by NORAD, analyses whether Norway should provide such support. It is argued that BOP support and budget support have similar macroeconomic impacts although the conditionalities put forward by the donor may differ in the two cases. There are severe imbalances in Bangladesh' external as well as internal accounts. We are arguing in this paper that external conditions are the main explanatory factors for the current crisis. Foreign reserves have been halved since 1995 and now cover only six weeks of imports. The growth rate in exports has declined from 27 % in 2000 to a negative growth of 11% in 2001. We expect the crisis to be more than temporary, partly because exports of garments will face additional structural problems when the Multifibre Agreement is phased out in 2004. Bangladesh will therefore not move easily out of its present distress, and is in strong need of foreign exchange including BOP support.We find that the reform programme and its conditionalities put forward by IMF in Bangladesh - at least those that we are informed about - make sense. The IMF nevertheless needs to give a better justification for why a system of flexible exchange rate is seen as a prerequisite for providing a loan. While we find several arguments in favour of a fixed exchange rate in Bangladesh. Since, the negotiation currently has broken down, Norway should not at the present stage not provide BOP support. After completing an interim poverty reduction strategy in the near future, bargaining for a loan package will be recommenced. The report discusses conditions that NORAD should apply for providing balance of payment support in the future. We are emphasising the importance of a well-developed poverty reduction programme and co-operating donor partners.

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