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The country has secured a preliminary agreement for a $4.5 billion loan that will be extended by the International Monetary Fund (IMF) over the next three years.
Implementation Main Challenge
However, the availability of the loan depends on the implementation of economic policies put forward under the preliminary agreement. This is where the government is facing challenges. The loan deal will dwarf the independent power of decisions making of the government ahead of the next general election. It may have to take unpopular decisions to appease the Washington-based multilateral lender. The government has to seek IMF assistance to tackle the foreign currency shortage and meet the high import costs of essential commodities like fuel oils, fertiliser and food items. A surge in demand for imports after Covid-19 and the price hike of essentials due to the Russia-Ukraine war have led to a sharp widening of the current account deficit, a rapid decline of foreign exchange reserves, rising inflation and slow growth.
Dollar Shortage
Besides the exogenous shocks, the flawed economic policies maintained by the incumbent political regime through the generation of costly power to benefit vested groups have compounded the country’s macroeconomic situation. Wastage of public funds through the implementation of unnecessary development projects and data distortions to hide the actual condition are not less appalling. The dollar crisis has become worsened. The central bank has injected about $5.47 billion to banks since July of the current financial year to mitigate the shortage of foreign currency, but there are no signs of stability in the forex market. Economists noted that the IMF loan was inadequate for the country to overcome its current predicament.
Stopping Capital Flight
Stopping capital flight, containing revenue leakage, shunning unnecessary development projects and closing down costly rental power plants are necessary to tackle the current pressure on the macroeconomy, they noted. Bangladesh suffered ‘value gap’ to the tune of $7.53 billion on average annually from 2008 to 2017 in its exports and imports due to misinvoicing, a major way of capital flight and duty evasion, according to the report ‘Trade-Related Illicit Financial Flows from 135 Developing Countries: 2008-2017’ released by the Washington-based think tank Global Financial Integrity in March 2020.
IMF Loan Helps Little
Former Bangladesh Bank governor Saleduddin Ahmed, however, stated that the IMF loan to be disbursed in seven tranches over the next three years would give some assistance to the country’s balance of payment which is now under huge pressure due to a shortage of foreign currencies, mainly the US dollar. The first tranche worth about $447.48 million to be available in February would hardly meet the country’s requirement. The remaining six tranches each with $659.18 million will be disbursed in an interval of six months, he said. However, none of the tranches will be condition-free. The government has to implement IMF suggestions to release the fund since the preliminary agreement has been made at the staff level. Approval from the IMF Executive Board is a must for the disbursement of each tranche, according to former IMF official Ahsan H Mansur, now the executive director of the Policy Research Institute.
Clues For Reform
The IMF, according to a press release, has agreed to support the country’s economic policies with a 42-month arrangement of about $3.2 billion in loans under the Extended Credit Facility and the Extended Fund Facility as well as about $1.3 billion loan under the Resilience and Sustainability Facility. The loan will bear over two per cent interest rate on average and it would be paid back within 20 years while the first 10 years would be grace under the agreed policies that include the generation of additional fiscal space by mobilising higher revenue through rationalisation of expenditure. Containing inflation and modernising the monetary framework are other major policies to stabilise macro economy and buffer external shocks. The IMF wanted the government to strengthen the financial sector by reducing its vulnerabilities, bolstering oversight, and ensuring governance and regulatory framework.
Actual Conditions To Be Difficult
Such an IMF statement can only give a general idea about its recommendations for reform in different areas. The actual conditions will emerge with the passage of time. One such condition is the introduction of a net calculation method instead of the gross one on the foreign currency reserve by the Bangladesh Bank. BB officials have already agreed to implement the condition that will deplete the forex reserve further. BB governor Abdur Rauf Talukder said around $8 billion will be excluded once the net-based calculation is introduced. Under the new calculation, the country’s forex reserves will stand at about $26 billion as it now hovers at about $34 billion from $48 billion recorded in August 2021. The IMF has already calculated that the country’s actual forex reserves would be able to meet the import coverage of only three and a half months if net-based calculation is considered.
Possible Conditions
Over-optimistic finance minister AHM Mustafa Kamal will not like such IMF conditions as it will erase around $8 billion from the reserve overnight when he used to like to compare the country’s economic progress with that of Singapore and Canada. Removal of the interest rate cap, a brainchild of the current finance minister, has also been suggested by the IMF. The IMF also wanted the abolishment of tax waivers given to many sectors so that the tax-GDP ratio, hovering below 10 per cent, can be lifted to 14 per cent, one of the benchmarks for the developing country. The current government will not want to withdraw the duty waiver enjoyed by members of parliament for purchasing cars once in five-year tenure. Or will the government lift tax breaks enjoyed by private power producers? The government paid around Tk 80,000 over the past decade to private power producers as a capacity charge, an infamous provision that enabled the private power producers to earn money from the government even after not producing power. The most challenging condition may come from the IMF on corruption.
Situation Gets Tricky
The IMF has often acted as a tool for changing regimes across the world. The IMF, established by Westerners, seldom criticises the US and its allies. But it rebuked Liz Truss for her plans to cut taxes. Many believe that rebuke by the IMF accelerated the UK prime minister’s resignation after just 45 days in power. Many said that the deliberate delay of the IMF on loan commitment to bankrupt Sri Lanka brought about changes in the regime of the powerful Rajapaksa dynasty. IMF is also said to be the main architect for the downfall of Suharto, the longest-serving Indonesian president with 31 years between 1967 and 1998.
