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The government has received $476 million as the first tranche of a new loan programme of the International Monetary Fund (IMF).
IMF Conditions
As usual, the IMF loan programme has attached reforms in major economic areas for which the government needs to fulfill 45 conditions to get the entire amount of the loan in the next 42 months. Among the conditions, cutting subsidies on gas and power, increasing tax base and reducing non-performing loans are the main ones. The government has already raised prices of power, fuel oil and gas to reduce subsidies and has been able to release the first tranche. It brings relief for the government since it needs dollars to overcome the lingering foreign currency crunch.
High Inflation
However, the price hikes of energy items have put people to face an almost double-digit inflation. The low and fixed income groups are in serious problems to meet both ends. The businesses also feel the pinch since the cost of doing business has gone up. Apparel exporters projected slowdown in export because of looming recessions in the Western economies amid geopolitical volatilities centering the war in Ukraine. Anyway, the government’s top priority is to ensure availability of dollars rather than addressing problems faced by the majority of people.
IMF Tough on Subsidy
It is now trying to fix problems in the country’s macro-economy that became critical because of the government’s shyness to reforms. The current government’s decision to seek assistance from the IMF has been described as a pre-emptive move against the backdrop of bankruptcy in its South Asian neighbour Sri Lanka. IMF reform programmes in revenue and banking sectors are welcomed although they are not new. The country’s economists have long been urging the government to do reforms but without much success. Now there has been an apprehension that the Washington-based lender may not be so tough on the reform agenda in banking and tax sectors as it is for subsidy.
IMF Goes Soft
Economists recalling the past IMF loan programme between 2012 and 2015 said the agreed reforms in the critical areas — banking sector and tax administration — were not properly implemented. During the period the government increased the price of fuel oil on five occasions and the price of power on eight occasions. The agreed reforms in banking and tax administration under the IMF loan programme of the Extended Credit Facility between in 2012-2015 had remained incomplete.
IMF Was Tough
However, IMF did not stop paying installment under the Extended Credit Facility although it had records of suspending payment under its loan programme in the mid-2000s. The multilateral lender did not disburse $123 million under the Poverty Reduction Growth Facilities citing government failure to develop a new strategy for sale of Rupali Bank and forming a tax policy unit under the Ministry of Finance. The then government that initiated the Poverty Reduction Growth Facility agreement in 2003 and received around $467 million in six installments faced problems to maintain balance of payment amid price hike of fuel oil, fertiliser and food in the global market following the suspension of seventh and final tranche.
Govt Managing Capacity Grows
It will not be wrong to say that the government makes upward adjustment in prices of fuel oils by the prescription of the IMF but somehow manages to keep the reform in other areas incomplete. As per the Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding of the Extended Credit Facility in 2012, the government committed continuing to strengthen the state owned commercial banks’ capital position in line with regulatory capital adequacy standards, conditional on progress on actions agreed under the MoUs and in the business plans approved by the SOCBs. Bangladesh Bank will continuously monitor loan recovery practices by SOCBs.
Incomplete Banking Reform
But those conditions were not executed leaving the country’s banking sector in an abysmal state. The sector is overburdened with defaulted loans, amount of which soared to Tk 1,34,396 crore at the end of September from Tk 1,25,257 crore at the end of June. Of the amount, Tk 1,18,553 crore turned bad loans which are almost beyond recoverable. NPL generally refers to money that is not in utlisation. Many suspect that a significant amount of NPL might have links with the growing capital flight from the country. A small group is benefitting from the banking sector although savings of small investors account for over 80 per cent of a bank asset. Despite repeated calls from the country’s economists, the government has failed to establish discipline in the sector known as the nerve of the country’s overall economy.
New Reform Recipe
IMF while releasing the first tranches of the current loan programme on February 2 identified failure to address the problems in the banking system. It includes high non-performing loans among the risk assessment matrix. High and increasing NPLs and low capital adequacy in the State Owned Banks would hamper the banking sector’s ability to finance business investment, add to the fiscal burden, and undermine growth. It suggested addressing main causes of weak bank performance, including structural weaknesses in governance, regulation, supervision, and legal systems. Improve the ability of banks to deal with NPLs, including by establishing a framework that can help NPL resolution. Reassess the role of state-owned commercial banks, said the IMF.
Tax Reform The country’s revenue-GDP ratio is one of the lowest in the region — a fact that needs to be changed for enhancing the government capacity to tackle crises generated internally and externally. Policy Research Institute Executive Director Ahsan H Mansur said the IMF had already identified the problems but those were not new. In the last IMF loan programme between 2012 and 2015, the IMF suggestions on revenue mobilisation especially the enforcement of value added tax law was not implemented during the loan programme period. That the revenue GDP dropped below 10 per cent of the GDP in the past one decade is already identified by the country’s economists.
Big Challenges
Now the IMF suggested that the government should take tax revenue measures yielding an additional 0.5 per cent of GDP in the FY24 budget. In fact, such the condition will remain until the conclusion of the programme leaving the government to mobilise an additional overall Tk 234,000 crore to meet the IMF conditions tagged with its $4.7 billion loan. Attaining the target will be very challenging if the National Board of Revenue follows its business, said Ashan H Mansur. Former World Bank Dhaka office chief economist Zahid Hussain hoped that reform in the tax and banking sector will be carried out properly.
Proper Reform Must
But improper reform will only add to the woes of the common people since the flawed policy on power generation has forced the countrymen to buy electricity at a higher price.
