Monday, 27 March, 2023

IMF loan: A Boon or Bane for Bangladesh

Mohammad Zonaed Emran

IMF loan: A Boon or Bane for Bangladesh
Mohammad Zonaed Emran

On 30th January 2023, IMF Executive Board has approved USD 4.70 billion loan to Bangladesh for economic support, preserving macroeconomic stability under its different credit programs such as the Extended Credit Facility (ECF), the Extended Fund Facility (EFF) arrangements and the newly created Resilience and Sustainability Facility (RSF) after having request from Bangladesh government November last year. Earlier IMF team paid visit to Bangladesh and had several meetings with government and central bank high ups in order to understand the current scenario of balance of payments and probability of lending loans.

Just after having approval from the Global lender, Bangladesh has received its first installment of loan of USD 476 million on 03.02.2023. Remaining loan amount would be disbursed every six months within next six installments, stretching over 42 months. Prior to disbursement of the subsequent installments, IMF will observe closely whether Bangladesh has fulfilled its tagged conditions or not. If Bangladesh fails to fulfill its conditions, it may withdraw its subsequent installments of loans. However, the average interest rate of IMF loans would be 2.20 percent and the loan amounts would be repaid by 10 to 20 years with a grace period of 3 to 10 years, according to newspaper report. Bangladesh has opted for the IMF loan at a time when it has been experiencing stress in Balance of Payments (BOP) and depletion of its foreign currency reserve gradually having higher pressure of import and slower growth of remittance and export.

Receipt of IMF loans has come up with a lot of conditions. There are many conditions/reform are associated with as preconditions for having IMF loan. However, Bangladesh has accepted all conditions of global lender without any contest so far. All Conditions has to be fulfilled within targeted timeframe. IMF conditions to Bangladesh for getting loan are divided into three main categories. The 42-month loan programs have 30 conditions that classified under three categories: quantitative performance criteria (QPC), structural performance criteria (SPC) and general commitment.

IMF conditions include reformation of tax laws so that government could generate more tax revenues and tax-GDP ratio can be enhanced. Our Tax-GDP ratio is roughly meagre 7.5 percent. IMF has given emphasis on banking sector reform as statistics show that ratio of Non-Performing Loan (NPL) has been steadily piling up and crippling the banking sector and reached at 9.4% to Tk. 134,000 crore in September 2022. It also suggests improving capital base of some banks as few banks are suffering from capital shortfalls and also given directives to modification of bank company act. IMF also recommends withdrawing the Cap of 6 and 9 percent deposit and interest rate of banks. Rather they urge that the market will determine the deposit and lending interest rate of bank. Furthermore, Instead of offering different exchange rates and managed rates for export,  import and remittance, IMF insists that exchange rates should be determined by the market i.e. supply and demand will determine currency exchange rate especially dollar price. It also suggests curtailing or no subsidies to electricity, petroleum and gas etc. and recommended to adjust the price of these products every month in line with market prices. As per its prescription, the government has already revised and adjusted price of electricity and gas twice recently. IMF has given condition that government dependence on savings certificates for meeting its budget deficit should gradually reduce.

Since the government asked for loan from multilateral organization, there have been lots of debates over IMF loans efficacy and consequences. Some experts are saying that the IMF loan is not a panacea for Bangladesh economic crisis and this loan will not resolve our reserve crisis overnight. Their arguments are that USD 4.7 billion is less than one month of import costs of Bangladesh as our monthly import cost is roughly 7 billion. Moreover, we are going to have the loan amount in seven instalments within 42 months. In addition, government has to withdraw subsidies from many items like gas, electricity and petroleum as per the prescriptions of IMF, which will consequently make the items costlier and skyrocketing the price of commodities. As a result, the middle class and lower class of people would be the real sufferers. Already inflation has reached highest ever 8.71% point to point as on December 2022 and withdrawal of subsidies will further add fuel to inflationary pressure. The government is advised to withdraw or gradually reduce selling of savings certificates meeting budget deficit. As such, many elderly retired people who lead their lives by having interests from saving certificates will suffer a lot. According to economic experts, if the government took the reform earlier, it would not have faced such challenges.

On the other hand, some economists opine that the government has taken a timely and bold decision to approach IMF before it is too late. The government should have taken some reforms earlier; however, the much needed reform was not possible due to pressure from some pressure groups. Now it would be easier for the government to take bold steps and take reforms which are long overdue in the name of IMF conditions, which would help to recuperate from the economic crisis.  The banking sector reform has long been pending. The reform has to be implemented to salvage the banking sector. IMF reform will help to reduce NPL, capital shortfalls and rejuvenate the bank industry. The government has already taken initiative to revise Bank Company Act in line with IMF prescription. Our Tax-GDP ratio is low compared to some countries of the subcontinent. Over the year, NBR hasn't been able to collect targeted taxes for government exchequer. IMF reform agenda incorporates reform of income tax law and restructuring of NBR so that NBR can be equipped to collect targeted revenues.

Last but not least, it apparently seems that IMF initiatives are appropriate and saviour of our economic crisis to some extent. We cannot say blindly that IMF conditions are good or bad. IMF bailout works well for some countries and some countries are reeling under IMF loans and no headway. However, all it depends on government's commitments to effectively implement the reforms imposed by IMF. Multilateral organization’s loan is not a panacea for our ongoing economic crisis but its reformation will help strengthen and revive our economy. The government has to take more initiative and reforms apart from IMF reforms to come out from macroeconomic instability.


The writer is a banker