A smooth sail so far

The government has passed the IMF tests of progress on macroeconomic management and structural reforms for the second disbursement, about $690 million, rather comfortably. An equivalent third check in May 2024 is within reach.

A partial view of the economic malaise

The IMF's diagnosis of the recent economic developments in Bangladesh identifies global shocks as the principal driver of the persistent external imbalance and high inflation.

"Russia's war in Ukraine disrupted the strong economic recovery from the Covid-19 pandemic. Rising global commodity prices, supply chain disruptions and global uncertainties have threatened macroeconomic stability. Continued global monetary tightening, coupled with existing vulnerabilities, has challenged near term macroeconomic management," says the IMF's December 2023 Article IV report. There is a minor subtext acknowledging the role of the post pandemic demand recovery in the surge in imports and inflation.

The Special Issues chapter on inflation quantifies the contributions of different shocks. Of "the total consumer price index (CPI) increase of close to 10 percent in FY23, about half of it can be attributed (directly and indirectly) to exchange rate depreciation. Although initially triggered by temporary cost-push factors, higher inflation has over time gotten more entrenched as the second round effects took hold." 

Bangladesh weathered the pandemic with relatively few deaths and limited economic losses. Subsequent supply shocks created fertile ground for spiralling inflation, aided by policy support during the pandemic and easy money. Inflation has persisted high for a long time relative to countries facing the same external and domestic shocks. 

The IMF report shies away from nailing the mediating role of policy in the domestic propagation of global supply and price shocks. On the contrary, it attributes temporary moderation in non-food inflation in September-October to monetary tightening even though the transmission of policy rate hikes to the lending rates is yet to fully kick in, not to speak of the economic response lag. 

Their forward looking analytics settle for blending monetary tightening and exchange rate flexibility with fiscal neutrality (keeping the budget deficit unchanged at 4.7% of GDP in FY24-25). The report warns "delayed adjustments to monetary and exchange rate policies and insufficient efforts to address elevated non-performing loans (NPLs) in the banking sector could undermine financial stability and dampen growth prospects." 

What are we doing to manage the risks?

The path to the third check

The path to the third disbursement looks highly pliable except for the same speed breaker and pothole the second check managed to ride over. The Bangladesh Bank, National Board of Revenue, Finance Division, Energy Ministry and the Bangladesh Bureau of Statistics together can deliver most of the Performance Criteria (PC), Indicative Targets (IT) and Structural Benchmarks (SB).

The SBs comprise mostly of plans, papers, and notes plus a few actions on public expenditure efficiency and the operating framework of monetary policy. Several SBs, such as formula-based petroleum pricing and legislative reforms in the financial sector, are reincarnations of reform actions supported by IMF itself and the other development partners in the past. The good news is what needs to be done is known for long by the institutions who need to know. The bad news is the required actions have so far found it hard to cross the last mile. Hence, they keep reappearing in successive reform programs. A few steps before the last mile will again be revisited. 

The speed breaker is the end-March Net International Reserve target. Raising net reserves to $19.3 billion will require a major turnaround in the financial account. The Fund appears to share the expectation that repatriation of export dollars may get a boost from fading political uncertainties in early 2024. BB has recently allowed banks to take deposits in foreign currency in their Offshore Banking Units. Banks can pay a maximum of 9% interest on such deposits in foreign currency. Will this help get those export dollars? Not necessarily if they are sitting abroad because of reasons other than political uncertainty. 

Remittances in December are on course to hitting nearly $2 billion for the second consecutive month. Banks are now reportedly offering competitive rates to remitters. If BB mood does not swing back to policing compliance with Bafeda-ABB rates, the boost in remittances in the vicinity of $2 billion a month the rest of the year will help grow the current account surplus and stem the erosion of reserves. 

All we know at present is that the best possible outcomes on repatriation of export dollars and attracting remittances through formal channels will be needed. Can those happen without pivoting the exchange rate regime towards flexibility sooner than an undefined later? 

There are no SBs on exchange rate reforms for the third disbursement and no time bound path to exchange rate flexibility. The report suggests some less than fully baked "crawling peg" ideas. Whether such a method of setting the exchange rate will move the regime sideways or forward is not clear. The transition could be inordinately long because the end game is vaguely conditioned on the development of forex market architecture and adoption of explicit inflation target. You don't get the sense of a deep dollar shortage from such noncommittal policy directions. 

The pothole is the Indicative Target on revenues for end-March set at Tk2,761.7 billion and Tk3,945.3 billion by end-June 2024. This subsumes about 20% annualised growth, a rare feat in recent history. There are no tax revenue generating measures in the SBs. NBR will have to report tax expenditures on personal income taxes, corporate income taxes and VAT and prepare a tax compliance improvement plan. This means the IMF judges the existing tax policy framework good enough for not falling below the FY24 revenue floor. 

Will the history of the road to the second tranche repeat itself in the third? Probably, including the disbursement. We will find out how. 

No game changers

The game changing part of the IMF program is passé without really changing the game even on the turf of macroeconomic management where the IMF is known to excel. The program has lifted the game in the monetary policy operating framework while being resigned to or supportive of the BB-backed Bafeda-ABB exchange rate regime and counting on other development partners for assisting fiscal and financial stability risk mitigation. 

This IMF-lite programme is useful both for bringing cash dollars and keeping the talk on the reform talk alive. It is no more realistic to expect the IMF to play the role of a mover and shaker in macroeconomic management and structural policy reforms. That is an agenda unequivocally in the domain of Bangladesh's polity. If we reform, the dollars will come.

Zahid Hussain, former lead economist at the World Bank, Dhaka Office