$4.5 billion dollar IMF loan: The pros and cons
Bangladesh has never sought such a large loan from the IMF before. The last loan of $99 million was taken almost a decade ago in 2012
Just a week after Finance Minister AHM Mustafa Kamal said that Bangladesh did not need any loan from the IMF right now, he reportedly sent in a formal request to the IMF for a $4.5 billion loan on Sunday. In an environment of economic uncertainty, such inconsistency of words and actions certainly does not inspire confidence.
The budget deficit for the current fiscal year is Tk245,000 crore - more than one-third of the total Tk678,000 crore national budget and 6.2% of the GDP. As things stand, we only have sufficient funds in the foregin reserves to cover import bills for just about five months.
So a loan to help with balance of payment and budget support might prove to be very useful.
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However, Bangladesh has never sought such a large loan from the IMF before. The last loan of $99 million (approximately Tk800 crore, not adjusted to inflation) was taken almost a decade ago in 2012.
The IMF loans also traditionally come with their own set of conditions, which might include the withdrawal of subsidies on fuel, electricity and fertilisers, removing the interest rate caps on lending and borrowing and revising how Bangladesh Bank calculates our reserve.
Such reform plans have ended up being too exacting to implement for many countries.
The Business Standard spoke with three noted economists for their assessment of the pros and cons of seeking such a loan.
'$4.5 billion is a reasonable amount to ask for'
Debapriya Bhattacharya
Distinguished Fellow, Centre for Policy Dialogue (CPD)
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.
'This loan will help stabilise the market'
Ahsan H Mansur
Executive Director, Policy Research Institute of Bangladesh
Do you think Bangladesh did the right thing by seeking the loan?
I believe the government has done the right thing by seeking this loan. In order to stabilise the market and restore people's confidence, this will be very helpful.
When giving out loans, the IMF suggests policy changes, and we desperately need some policy changes (both monetary and fiscal). So we will also have to work on our policies.
For example, the IMF might suggest removing the interest rate cap, in my opinion this is do or die; otherwise, we can't control the exchange rate. We have to increase the interest rate a lot, even if it is for a short time. We can increase it for a few months and gradually bring it down. If we can negotiate the program with the IMF quickly, market stability will return.
Keeping the past track record in mind, the IMF might ask the government to withdraw subsidies. Are we in a situation to make such a decision?
Withdrawal of subsidies will be a bit tricky. In the energy sector, a reform has been long overdue. Even though India has reformed their energy pricing strategy, their government no longer controls energy prices there - instead it is dictated by the market situation. Every week the price changes and the market fluctuates; we can also try that.
The time, however, is not good. When prices were lower, it should have been done then, if it was done at that time, prices would have gone up gradually and it would not have been a political issue.
When it comes to agricultural subsidies, I believe there will be partial solutions. Some subsidies should be withdrawn, but some should remain.
For example: rice prices are quite high now so why shouldn't fertiliser prices increase? We are still selling them at the rate we used to sell them at when the dollar prices were much lower.
If people get fertiliser for too cheap, they might not value it, and potentially go on to waste it. This subsidised fertiliser will also be smuggled to neighbouring India because fertiliser is not as cheap there. If we buy it for TK120 we have to sell it for at least Tk50, which is still a big amount of subsidy.
Resetting the methodology to report on foreign currency reserves might be one of the conditions; what can be the impact of such a move?
The impact of redesigning the methodology we use to report on foreign reserves is that our reserves will decrease by $7 billion. Some funds that the governments consider available will have to be removed. For example, the money Sri Lanka owes us needs to be removed since we no longer have it.
It is nothing too difficult however. The major issue is we have to make the dollar exchange rate more market-based and some of the subsidies need to be removed.
'There are other ways to address the deficiencies'
MM Akash
Professor, Department of Economics, University of Dhaka
The IMF's conditionality for giving out the proposed $4.5 billion loan to Bangladesh is based on several objections it has with previous and concurrent government policies. For example, the IMF has continually criticised the 'one-sided' emphasis of previous government policies on export promotion and the reluctance to withdraw massive subsidies given to the fuel, power and fertiliser sectors. The IMF also requires concessions to the private sector and emphasises on the de-regulation of markets in Bangladesh.
But Bangladesh, at present, needs selective import substitution, selective subsidies for food and agriculture given the recent global shortage of food grains as well as high import price of imported raw materials like fertiliser to ensure food security. Moreover, there are other ways to address the deficiencies such as, strict punishment of debt defaulters, illicit money launderers, tax avoiders and black money holders.
The government also needs a more democratic, more transparent and more accountable political system and a non-bureaucratic state machine. The issues addressed by the IMF are mainly emblematic of the failure of state in its duties.
That being said, it is true that the state has many failings, but the market and private sector too have failures. IMF conditionalities are also oblivious of these failures.
