The IMF had come to Bangladesh to gather information, discuss key issues and will go back to Washington on November 9 (Wednesday) to finalize a draft agreement.
From the newspaper description on the discussions held by the IMF, we can conclude that they will focus on a few difficult issues.
It is very likely that the recommendations or conditions that they formulate for Bangladesh to obtain a loan will be similar to those made by Bangladesh's leading think tanks.
The Bangladesh government should give more attention to the technical views of these think tanks, this would certainly provide a deeper view of economic policy choices.
In this article I will touch briefly on seven issues. Of these, six seem to have been topics of discussion.
Increasing exports
The one issue that seems not to have much discussion is also the most important: How to accelerate the growth of exports and diversity the goods exported.
Of course, the IMF team as all observers will call for diversification of exports.
For 25 years we have all heard how important this is for the stability of the economy. I have seen no effort by any government to take actions to achieve such an outcome.
Over the years I observe that responsible bureaucrats see the exporters as rich persons trying to extract more benefits from the government, and so have no serious intentions to actually do anything.
Nothing much will come of this objective without a different approach.
It is unlikely the IMF will say much except “do it.”
A serious program to promote exports, both expanding existing products and developing new ones remains the most important work to support economic growth in Bangladesh.
Interest Rates
The Bangladesh Bank imposes a cap on bank lending rates of 9% and an informal floor on fixed deposits of the inflation rate.
The central bank can enforce the lending rate but obviously not the floor as the inflation rate is now 9%.
Most economists in Bangladesh believe that the lending cap is poor economic policy.
The IMF will certainly require that the cap be removed or lifted.
This is probably a do-or-die requirement for the IMF.
However, there may be a formulation that allows Bangladesh Bank to save face while the cap is effectively lifted.
The central bank has a habit of issuing orders that are not orders.
Hence even if the cap is lifted there may be no loans above 9%.
Bangladesh Bank's view of the private commercial banks is that these are owned and led by very wealthy individuals.
The bankers also seem to come around begging for changes that will enable them to become even richer. Not much sympathy.
The central bank often puts forth the view that there are “good-productive” loans and “bad-non-productive loans.”
This is the central bank playing god. It justified interference.
It is an ego trip that reflects badly on their economic analysis.
Risk
It is always difficult to figure out what risk means to a central bank.
There is always a tendency to want all loans to be at the same rate, as is now the case, 9% shoe fits all loans.
Risk connected to market conditions, individual character, type of industry etc. does not exist in this view.
A good commercial banker is someone who is able to assess the full range of risk involved in making a loan.
A prime loan rate for the least risky borrower linked to the central bank's policy rate is the right concept, with the lending rate for a particular loan reflecting the risk.
The current preference of the central bank is to subside bad loans through forcing higher costs for good loans.
This is the path towards poverty.
The point of this long section is to set out the notion that the interest rate problem is quite different than just arguing over the cap.
Exchange rate
The IMF will certainly want a floating exchange rate.
BB seems to want a fixed rate but does not have a way to maintain it.
The forecasts of the FY23 balance of payments that are floating around seem to me far too optimistic.
To make a forecast one has to come to some decisions about the GDP growth rate.
That is a key determinant of imports.
If the GDP growth is 5% in FY23 then my estimate of the current account deficit is $15-$20 billion with the average exchange rate at Tk108/dollar.
To cover the current account deficit the central bank can borrow from abroad or use its reserves.
One problem is how to determine the exchange rate.
The second problem is for a given growth rate and an average exchange rate what is the size of the current account deficit.
Finally, does Bangladesh have sufficient foreign exchange, including new borrowing, to cover this deficit?
Taxes
The IMF will want a much greater effort in tax collection, and may well demand that the deficit be agreed.
If there are more taxes there can be more government expenditures.
Decades of effort have failed to raise the tax/GDP ratio.
Perhaps the IMF will have a magic potion.
Non-performing loans
The IMF will have a lot to say about non-performing loans.
There will be some targets, but these will prove very difficult to achieve.
But no one really expects much improvement here.
State Banks
The IMF will suggest targets and actions to improve the functioning of state banks.
This is a song that has been sung many times.
In reality nothing much can be done to improve the operation of these banks.
Thirty years of effort by the IMF and the World Bank have failed to make any progress.
But it is a ritual that all must go through while recognizing that one cannot expect much progress.
Governance of private banks
This is an area where the IMF will have strong positions and it is easy to get an agreement.
But it is very hard to overcome the way this has been handled over the past 10 years with excessive forbearance and an unwillingness to manage the handful of problem banks.
But this is an area of great importance and the IMF may be helpful here.
The completion of this loan agreement with the IMF is going to take some time, patience and negotiating skills but I believe an agreement with the IMF can be reached.
Forrest Cookson is an economist who has served as the first president of AmCham and has been a consultant for the Bangladesh Bureau of Statistics