On seeking a loan from the IMF
There is some stigma associated with seeking IMF loans because the governments have often gone to the IMF when they were in a desperate situation and thus had to accept tough conditions to obtain the loan. But that does not mean that one goes to the IMF only when things are desperate. We are not living in an autarkic world. Hence, taking loans per se is not a bad thing
The government's decision to seek a $4.5 billion loan from the IMF is now one of the hot subjects of discussion in Bangladesh and, I suspect, also among external observers of the country.
Many feel that this is a confirmation of what they were fearing, i.e., that the macroeconomic balances of the country are seriously threatened and hence a 'bail-out' is needed from the Bretton Woods institution. Others feel that going to the IMF means having to accept policy conditionalities that are harmful for the country. Both these views are misplaced.
We are not living in an autarkic world. Hence, taking loans per se is not a bad thing. Governments need financing, just as companies and households do. The important questions are the following: a) what use are we going to put the funds to? b) what are the terms and conditions of the loan? and c) do we have adequate capacity to service the debt? These are relevant questions for the government as they are for companies and households.
In the popular mind, there is some stigma associated with seeking IMF loans. This is because governments have often gone to the IMF when they were in a desperate situation and thus had to accept tough, often humiliating, conditions to obtain the loan.
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That does not mean that one goes to the IMF only when things are desperate. As suggested above, a country may go to a financier, such as the IMF, because it feels that the latter can fulfill its financing needs under reasonable terms and conditions.
So, a lot depends on whether the country is in a very desperate situation (as Sri Lanka is now and Pakistan may soon be) or whether it can negotiate from a position of some strength.
So where does Bangladesh stand on that ground?
The joint World Bank-IMF debt sustainability assessment for Bangladesh, done just a few months ago, is arguably the most rigorous analysis available on Bangladesh's debt servicing capacity in the coming years.
It states, "Bangladesh has a low risk of external debt distress and a low overall risk of debt distress. All external debt indicators are below their corresponding thresholds under the most extreme shock" (source: Bangladesh: Joint World Bank-IMF Debt Sustainability Analysis, April 2022). In other words, even under pessimistic scenarios of future GDP, export and import growth, the debt servicing capacity will remain adequate.
Some questions may be raised about this analysis. Let me identify two: a) how comprehensive are the debt data used by the IMF when it carried out (along with the World Bank) its debt-sustainability analysis for Bangladesh? To what extent will their projections of debt sustainability indicators (such as external debt/GDP ratio, and external debt servicing/export earning ratio) for the next five fiscal years change if we assume a higher stock of debt to take into account the possible undercounting in the IMF data?
And, b) given the new developments since the report was prepared (I understand that the calculations were done by February 2022 with the report being published in April), especially the Ukraine-Russia war and its destabilizing effects, to what extent will the key macroeconomic assumptions underpinning the analysis, such as projected growth rates of GDP, exports, imports, aid inflows and interest rates change, and what will such adjustments do to the debt sustainability indicator values?
These are the kind of questions that we should be raising in the public discourse on debt sustainability, foreign exchange reserve situation and borrowing from the IMF.
A comment on IMF conditionalities
The IMF conditionalities are not necessarily bad for our economy. It is a question of what our government is able to negotiate. We have seen many cases, and this could be true of Bangladesh as well in the past, where governments have on their own decided to carry out some reforms but needed the cover of an IMF program to deal with the domestic political challenges of implementing the reforms.
It seems that the decision to seek support from the IMF was not whimsical. I would not be surprised if there has been at least some discussion within government involving various ministries and agencies with a likely role in implementing the policy actions that an IMF loan would require.
Thus, it is likely that the option of seeking support from the IMF was on the table for quite some time and not something pursued hurriedly in the wake of very recent developments.
We know that a crisis often forces governments to swallow the bitter pill and take unpleasant, but necessary actions. However, a crisis may also induce panic, and panic may trigger rash decisions.
I am of the view that a pre-crisis situation (where a crisis has not happened but there is risk of one), rather than a crisis itself, creates the best environment for taking much-needed policy actions in a prudent manner. I think this is where Bangladesh is now.
Government responses to challenging economic conditions usually go through stages such as these: a) denial (no, this will not happen to us); b) private acceptance but public denial (know this is happening but can't acknowledge in public); c) acceptance and willingness to embark on a sensible program of corrective actions (yes, we have some difficulties but we shall take necessary actions to address this); d) engagement with stakeholders, i.e., becoming transparent with citizens and seeking help of experts (we have nothing to hide and we don't know all the answers, so let's work together).
My assessment is that the government was somewhere between stages (a) and (b) for all this time but it seems that now at least some parts of it are slowly moving to stage (c). It would be best if the whole of government moves firmly into stage (c) and then onto stage (d).
The wisest course of action on the part of the government is to be transparent with the citizens, sharing data on economic conditions and information on what it is planning to do, and to engage with experts who can help identify and design the appropriate policy interventions.
Gestures from the government in this direction will help steer the current discussion of macroeconomic conditions from one characterised by over-generalisation, sweeping comments and scaremongering to a more substantive one where we ask the right questions and jointly seek answers to these.
Syed Akhtar Mahmood is an economist who previously worked for an international development organisation.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.
