July 27, 2022, 09:50

Last modification: July 27, 2022, 10:35 a.m.

From left to right: Debapriya Bhattacharya, Ahsan H Mansur and MM Akash. Sketch: TBS


From left to right: Debapriya Bhattacharya, Ahsan H Mansur and MM Akash. Sketch: TBS

Just a week after Finance Minister AHM Mustafa Kamal said Bangladesh does not need an IMF loan at the moment, he has reportedly sent an official request to the IMF for a 4.5 billion loan. dollars on Sunday. In an environment of economic uncertainty, such inconsistency in words and deeds certainly does not inspire confidence.

The budget deficit for the current financial year is Tk 245,000 crore – more than a third of the total national budget of Tk 678,000 crore and 6.2% of GDP. As things stand, we only have sufficient funds in foreign reserves to cover import bills for about five months.

So a loan to help with balance of payments and budget support could be very useful.

However, Bangladesh has never requested such a large IMF loan before. The last loan of $99 million (about Tk 800 crore, non-inflation adjusted) was taken almost ten years ago in 2012.

IMF loans also traditionally come with their own set of conditions, which may include the removal of fuel, electricity and fertilizer subsidies, the removal of interest rate caps on loans and borrowings, and the review of how the Bangladesh Bank calculates our reserve.

Such reform plans have proven too demanding for many countries to implement.

The Business Standard spoke to three renowned economists for their assessment of the pros and cons of seeking such a loan.

“4.5 billion dollars is a reasonable amount to ask for”

Debapriya Bhattacharya. Photo: TBS

Debapriya Bhattacharya.  Photo: TBS

Debapriya Bhattacharya. Photo: TBS

Debapriya Bhattacharya

Emeritus Fellow, Center for Policy Dialogue (CPD)

Why is Bangladesh applying for this loan?

Bangladesh’s economy is currently experiencing serious structural problems in its external balance. The import-export balance, the current account which includes the flow of remittances and the overall balance of payments – on these three points, the deficits recorded are unprecedented.

These contributed to the weakening of the taka, the depletion of the foreign exchange reserve to less than three months of equivalent imports and the introduction of import control measures restricting, among other things, the purchase of liquid fuel.
This is a classic case for seeking IMF support; The IMF was created to provide this kind of balance of payments support.

Now is the time for Bangladesh to apply for access to the IMF’s Policy Support Credit Facility. Indeed, the recent experience of Sri Lanka teaches us that countries facing serious balance of payments problems should contact the IMF as soon as possible.

Given the size of Bangladesh’s economy and the scale of the problem, $4.5 billion is a reasonable amount to ask for. However, as we know, the IMF loan does not come without “conditionalities”.

There would be a set of “prior actions” through which the government must establish its commitment and credibility regarding policy and institutional reforms to access the money. In addition, to “trigger” disbursement of each tranche, the government must perform certain pre-agreed actions. It should be recalled that there had been occasions when Bangladesh had not received the full amount negotiated due to non-compliance with previously agreed institutional policies and measures.

It can be expected that in order to access IMF funds, Bangladesh will have to move towards explicit market-based exchange rate management. This will mean the removal of premiums paid to various parties, including remittance recipients and exporters.

We may need to adopt globally acceptable standards for estimating our foreign exchange reserve; remember that the IMF objected to the inclusion of certain encumbered funds in our accounting of foreign exchange reserves.

Establishing a more robust interface between monetary policy and fiscal policy can become a matter of compliance. Strengthening the role of the Bangladesh Bank in the face of extreme defaults could be part of the conditionalities.

Either way, the fact that the government finally had the good sense to recognize emerging extreme vulnerabilities needs to be acknowledged. There would be a political backlash, but prudence demanded approaching the IMF.

The paradox of the situation is that the government will now take a number of important actions under IMF conditionalities that the country’s independent experts have been calling for for some time.

Possible conditions could be withdrawal of subsidies and removal of interest rate caps, are we able to do this?

Greater congruence between monetary and fiscal policies may require capping subsidy spending. The current ceiling on borrowing rates and interest rates should be relaxed.

However, the government may have some flexibility in determining the sectoral composition of the agreed absolute amount. At the same time, there may be specific problems regarding the upward adjustment of the prices of energy products. In this regard, the government can gain some leeway by raising more revenue in terms of GDP to secure the necessary subsidies.

The revision of the mechanism for calculating foreign exchange reserves could be one of the conditions; what can be the impact of this move?

We should adhere to the global standards used to calculate a country’s foreign exchange reserve. A country should only have its unencumbered foreign liquidity in its reserve estimate, otherwise it creates an illusion. The Bangladesh Bank should abandon the practice of showing on loaned currencies a dubious possibility of being returned to the country’s foreign exchange reserve. As we know better now, this is good for short-term politics, but not useful for the real economy. What we cannot spend should not be counted.

Ahsan H Mansur. Sketch: TBS

Ahsan H Mansur.  Sketch: TBS

Ahsan H Mansur. Sketch: TBS

“This loan will help stabilize the market”

Ahsan H Mansour

Executive Director, Bangladesh Policy Research Institute

Do you think Bangladesh made the right choice in applying for the loan?

I believe that the government did the right thing by asking for this loan. To stabilize the market and restore people’s confidence, this will be very helpful.

When giving loans, the IMF suggests policy changes, and we desperately need policy changes (monetary and fiscal). So we will also have to work on our policies.

For example, the IMF might suggest removing the cap on interest rates, in my view, it’s do or die; otherwise, we cannot control the exchange rate. We need to raise the interest rate a lot, even if it’s for a short time. It can be increased for a few months and gradually reduced. If we can quickly negotiate the program with the IMF, market stability will return.

Bearing in mind the past track record, the IMF could ask the government to withdraw the subsidies. Are we in a position to make such a decision?

Withdrawing grants will be a little tricky. In the energy sector, reform is long overdue. Even though India has reformed its energy pricing strategy, its government no longer controls energy prices there – rather it is dictated by the market situation. Every week the price changes and the market fluctuates; we can also try that.

The weather, however, is not good. When the prices were lower, it should have been done at that time, if it had been done at that time, the prices would have gradually increased and it would not have been a political issue.

With regard to agricultural subsidies, I believe that there will be partial solutions. Some subsidies should be removed, but some should remain.

For example: rice prices are quite high now, so why shouldn’t fertilizer prices increase? We are still selling them at the rate we were selling them at when dollar prices were much lower.

If people get fertilizer too cheaply, they may not like it and waste it. This subsidized fertilizer will also be smuggled to neighboring India because fertilizer is not as cheap there. If we buy it for 120 TK, we have to sell it for at least 50 TK, which is always a big subsidy.

Resetting the methodology for reporting foreign exchange reserves could be one of the conditions; what can be the impact of such a movement?

The impact of the overhaul of the methodology we use to report foreign exchange reserves is that our reserves will decrease by $7 billion. Some funds that governments deem available will have to be cut. For example, the money that Sri Lanka owes us must be withdrawn since we no longer have it.

It’s nothing too difficult though. The main problem is that we need to make the dollar exchange rate more market-oriented and some of the subsidies need to be removed.

Professor M M Akash. Sketch: TBS

Professor M M Akash.  Sketch: TBS

Professor M M Akash. Sketch: TBS

The IMF’s conditionality to extend the proposed $4.5 billion loan to Bangladesh is based on several objections it has with previous and competing government policies. For example, the IMF has continually criticized the “one-sided” emphasis of previous government policies on promoting exports and the reluctance to withdraw massive subsidies to the fuel, electricity and fertilizer sectors. The IMF is also demanding concessions from the private sector and stressing market deregulation in Bangladesh.

But Bangladesh at present needs selective import substitution, selective food and agricultural subsidies given the recent global shortage of food grains as well as the high price of raw material imports raw materials such as fertilizers to ensure food security. Besides, there are other ways to address the loopholes such as strict sanctioning of defaulters, illicit money launderers, tax evaders and holders of black money.

The government also needs a more democratic, transparent and accountable political system and a non-bureaucratic state apparatus. The issues dealt with by the IMF are mainly emblematic of the failure of the state in its duties.

Having said that, it is true that the state has many failures, but the market and the private sector also have failures. IMF conditionalities also ignore these failures.