Originally posted in The Business Standard on 27 July 2022
What are the reasons behind Bangladesh seeking this loan?
Bangladesh economy is currently experiencing serious structural problems in its external balance. The import-export balance, the current account which includes remittance flow and the overall balance of payments – on all three counts the recorded deficits are all time high. These have contributed to weakening of taka, depletion of the foreign exchange reserve to less than three months equivalent imports and introduction of import control measures restricting, among others, purchase of liquid fuel.
It is a classic case for seeking IMF support; IMF was created to provide this type of balance of payment support. This is the time for Bangladesh to seek access to the IMF’s policy based credit facility. Indeed, recent Sri Lankan experience tells us that countries afflicted by serious balance of payment challenges should approach the IMF earlier than later.
Given the size of Bangladesh economy and magnitude of the problem, $4.5 billion is a reasonable amount to ask for. However, as known, IMF loan does not come without “conditionalities.”
There would be a set of “prior actions” through which the government has to establish its commitment and credibility concerning policy and institutional reforms for accessing the money. Further, to “trigger” disbursement of each tranche, the government has to accomplish certain pre-agreed measures. It may be recalled that there had been occasions when Bangladesh missed out on receiving the negotiated full amount because of non-compliance of pre-agreed policy and institutional measures.
It may be expected that so as to access IMF funds, Bangladesh may have to move towards an explicit market-based exchange rate management. This will mean doing away with the premiums paid to various parties, including remittance earners and exporters. We may have to move towards using globally acceptable standards for estimating our forex reserve; we may recall that the IMF has objected to inclusion of some encumbered money in our foreign exchange reserve accounting.
Establishing a more robust interface between the monetary policy and the fiscal policy may become a matter of compliance. Strengthening the role of the Bangladesh Bank in face of extreme debt default could become part of the conditionalities.
Whatsoever, the fact that the government finally had the good sense to acknowledge the emerging extreme vulnerabilities needs to be acknowledged. There would be some political backlash, but prudence demanded approaching the IMF.
The paradox of the situation is that the government will be now undertaking a number of significant actions under the IMF conditionalities which the independent experts of the country had been asking for some time.
Possible conditions could be withdrawing subsidies and removing interest rate caps, are we in a situation to do that?
Stronger congruence between the monetary and fiscal policies may call for putting a cap on the subsidy spending. The current capping of the lending and interest rates have to be relaxed.
However, the government may have some flexibility in determining the sectoral composition of the agreed absolute amount. At same time, there may be specific issues concerning upway adjustment of prices of energy products. In this connection, the government may get some leeway by collecting more revenue in terms of GDP for underwriting the required subsidies.
Revising the mechanism used to calculate foreign currency reserves might be one of the conditions; what can be the impact of that move?
We should abide by the global standards used for calculating a country’s foreign exchange reserve. A country should have only its unencumbered foreign liquidity in its reserve estimation otherwise it creates an illusion. Bangladesh Bank needs to get out of the practice of showing on lent foreign exchange of dubious possibility to be returned in the country’s foreign exchange reserve. As we now know it better that this is good for short term politics, but not helpful for real economics. What we cannot spend, should not be counted.