Careful use of IMF loans and implementation of reform initiatives

Hiren Pandit
The International Monetary Fund (IMF) usually stands by to help one of its member countries when they are in economic trouble. When the agency negotiates with a country, there is a policy package to help the borrowing country deal with its crisis while also enabling the country to repay its debt. The IMF team of experts from the institution visited the country and holds talks with policymakers. The conditions given to Bangladesh by the IMF are to raise revenue and introduce rational expenditure measures. In particular, the cost must be determined keeping in mind the fact that it contributes to growth. Taking specific social protection programs targeting the vulnerable sectors. Inflation control and formulation of modern monetary policy. Also making the currency exchange rate more flexible. Addressing weaknesses in the financial sector, enhancing oversight, increasing the reach of government and regulatory authorities, and developing capital markets. Improving the business environment by creating an environment to attract trade and foreign investment, improving human skills, and ensuring good governance in the financial sector. Strengthening institutions to mitigate the effects of climate change, taking action to improve the environment, and ensuring more investment and financial provision in climate-related sectors.
The board meeting of the International Monetary Fund (IMF) approved a loan of 4.7 billion dollars for Bangladesh. This loan is being given in seven installments in 42 months. The average interest rate of this loan is 2.2 percent. $3.3 billion will be provided from the Enhanced Credit Facility or Extended Fund and $1.4 billion will be available under the Resilience and Sustainability Facility. This loan will help to protect the stability of Bangladesh’s macroeconomics, necessary reforms to create more capacity for social and development spending, strengthen the financial sector, modernize the policy structure and make the people more resilient to the impact of climate change.
The IMF has long examined the trends, problems and weaknesses of the Bangladesh economy and held discussions with government officials. Since independence, Bangladesh has achieved breakthroughs in poverty reduction, improvement of people’s living standards, expansion of education, development of public health and agriculture, infrastructure development, increase in electricity consumption, industrial development, expansion of business and trade, etc. through economic development. At the beginning of 1972, when the per capita income of people was below 90 dollars, it increased to 2 thousand 824 dollars. The poverty rate of 40 percent in 2005 has come down to 20.5 percent in 2019. While the size of the GDP in 1973 was around 8 billion, it increased to 465 billion US dollars in 2022. According to IMF statistics, the size of the economy of Bangladesh in 2022 is considered the 35th largest economy in the world.
The IMF noted that Bangladesh has done well in economic recovery during and after the pandemic. But since February 2022, the Russia-Ukraine war and the global inflation, recession and energy crisis have also put Bangladesh’s economy under pressure. In FY 2021-22, exports grew at a record level of $52 billion, but imports grew at a comparatively higher rate of $89 billion. On the other hand, remittances have not increased much. As a result, there is a deficit in the balance of trade and transactions. The country’s foreign exchange reserves continue to decline rapidly. Reserves, which reached around $48 billion in August 2021, have declined to $24 billion till December 2022. In this situation, there is no room for argument that Bangladesh needs IMF assistance to maintain trade deficit and transaction deficit and economic stability.
Undoubtedly, this assistance from the IMF is an expression of their confidence in Bangladesh’s financial management. However, according to the conditions of the IMF, Bangladesh has to undertake reform activities in various sectors. For example, revenue collection should be increased by reforming the revenue sector; Through which it will be possible to give more allocation to the social sector, infrastructure development, government financing and investment and climate change sector. Good governance and regulation should be improved by reforming the financial sector and banking system. An enabling environment for trade and foreign direct investment should be created through policy-structural reforms. It has also been suggested to reduce the losses to the economy by reducing subsidies in various sectors. As a result, the price of fuel oil and electricity will increase. It has also been said to limit the budget deficit, through which domestic and foreign borrowing and public spending can be reined in.
However, at the moment, there is no option to implement the proposed reforms even if all the conditions of the IMF are not fulfilled simultaneously. Civil society and economists also have suggestions for the implementation of these reforms for the overall economic stability of the country, bringing good governance by removing irregularities and bringing self-reliance by increasing the tax-GDP ratio of the country. Subsidies in agriculture, energy and gas electricity should be gradually reduced. Global recession, supply chain disruption due to the Russia-Ukraine war, inflation, etc., as well as several internal problems, need urgent attention and remedial measures.
Renowned economists, civil society and bankers of the country are writing extensively identifying various weaknesses of the banking system. The facilities and concessions given to borrowers in the last five years are unprecedented. As a result, debt collection has not improved, but defaulted loans have been hidden. The amount of debt of willful borrowers has increased. According to the calculations of Bangladesh Bank, as of September last year, defaulted loans in banks and financial institutions were Tk 1 lakh 50 thousand crores. Many are of the opinion that the actual defaulted debt is around Tk 4 lakh crore, including the defaulted debt that has been hidden by various opportunities and write-offs. Bad loans and money laundering are increasing due to the lack of good governance in banks. Apart from that, money laundering under the guise of business has now become a casual affair. Neither the NBR, BFIU, ACC nor the law enforcement agencies of the government are able to take effective action. The conscious people of the country are concerned about this. The authorities need to pay attention to this.
About 1 crore 4 million people of Bangladesh are working from abroad. All but a few Bangladeshis living in Europe, America and Canada regularly send remittances to the country. But many of them do not send remittances through legal channels. Due to hundi trade, the desired foreign currency does not reach the country. Again, a significant part of the country’s export income is being left abroad. Due to these reasons, a foreign exchange crisis has arisen in the country. Despite Bangladesh Bank releasing foreign currency in the market at regular intervals, the crisis is not over. Meanwhile, the domestic currency has depreciated by around 20-22 percent. Another reason for the scarcity of foreign exchange is that a class of bank officials, exchange houses, and even common people keep the dollar, pound and euro for a long time to sell later by inflating the price. This is causing a market dollar crisis. The foreign exchange market has also been destabilized due to illegal dollar-pound trading. In this situation, scheduled banks are not able to provide dollars to open LCs for the import of daily necessities and raw materials for export.
Along with the foreign exchange crisis due to the global economic crisis, foreign investment in the country is gradually decreasing. Depreciation of the taka, price ceiling of the capital market, corruption, bureaucratic complications, dollar crunch, difficulty in availing NBR tax exemption and profit repatriation etc. have seen a slowdown in foreign investment in the last few years. In particular, FDI stocks fell in all three sectors – equity capital, reinvested earnings and inter-company loans – last year. Apart from this, new foreign investment is also not coming. Therefore, it is important to find out the reason for the decrease in investment and find out its solution.
Along with foreign investment, the number of foreign aid commitments and financial concessions also decreased in the current fiscal year. Typically, $300 to $400 million in aid commitments are received in the first six months of the fiscal year. According to sources from the Department of Economic Relations, only $1.76 billion has been pledged from development partners from July to December of the current fiscal year. Apart from this, due to the inefficiency and lengthy process in the implementation of foreign-aided projects, the grant of development partners has also decreased. At this time of the country’s low reserves and the dollar crisis, through the implementation of foreign-aided projects and the selection of the right development projects, dollars could have played a role in solving the crisis.
In recent years, private foreign borrowing has been gradually increasing. At present, the amount of foreign debt in the private sector is 2 thousand 6 billion of dollars. The government also has to provide guarantees for loans taken by the private sector. During the foreign exchange crisis, private loans are creating additional pressure on Bangladesh Bank’s foreign exchange management. Foreign loans like bank loans fall on the government if defaulted by a private individual or company. If the matter is not monitored properly, there is the danger of future dangers.
Another important area of foreign exchange utilization needs attention. The demand for uninterrupted power supply to households and industries by generating the necessary electricity is gradually getting stronger. In this situation, the government may soon take a decision to import fuel oil and LNG. Increasing the amount of foreign exchange reserves is very necessary in this regard. In addition to the loan received from the IMF in the month of February, immediate attention should be given to increasing exports and ensuring that export earnings are brought to the country and bringing in foreign income through legal channels.
It can be said that the patriotism, united efforts and skills of all the people engaged in the financial management of the government, businessmen, entrepreneurs, professionals, and expatriate Bangladeshis can play a helpful role in the economic recovery of the country. In particular, the measures the IMF has called for as conditions for the loan have emphasized poverty alleviation, tackling climate change damage and enhancing social security. If these conditions are fulfilled by the government, it is expected to give momentum to the rural economy.
Apart from this, it is now necessary to be frugal and speak out against corruption. Establishing good governance in administrative activities is now the need of the hour and at the same time accountability. It is expected that the government will have to do everything properly and complete the post-loan planning before the initial assurance that we have received now comes to hand.
Hiren Pandit is a columnist and researcher

Leave a Reply

Your email address will not be published. Required fields are marked *