The government wants some money to strengthen the reserve position. The IMF is looking for work and they should be able to work together to draw out a deal.
Let us examine this situation closely.
The story is ironic.
The IMF, along with the Federal Reserve and the European Central Bank, have sold us all the idea that despite the large expenditures made during the Covid-19 pandemic -- to ensure that everyone could maintain their living standards or even do a bit better -- could be spent without adverse consequences.
Any macro-economist who was honest knew that this was a wrong idea and that the result was more likely going to be greater inflation.
Larry Summers (one of the few economists who understand how the world actually works) explained this repeatedly but few listened.
To add to the confusion, Vladimir Putin started a war and energy markets spun into chaos.
Interest rates started up partly as the central banks began to shrink their bloated balance sheets and partly to reduce inflation.
All of this caused a serious balance of payments crisis in Bangladesh in FY22.
The ultimate cause of Bangladesh's balance of payments problem is the irresponsible behaviour of the advanced countries' central banks and their club, the IMF, who have promised that smoking the opium of excess government expenditures will bring eternal bliss.
The Bank for International Settlements saw the coming reality more clearly.
Having got the Bangladesh economy in trouble all are grateful that they are considering making a small loan (1% of GDP) to improve the appearance of the foreign exchange position.
This is however more complicated than the public discussions.
What do we expect will happen to the balance of payments during 2023?
Implications
The first four months reveal a reserve loss of $1.5 billion per month compared to $0.45 billion per month during FY22.
My estimate, if there is no change in the exchange rate and the economy grows at 5.0%, there will be a decline in exports and imports and when all is considered the current account deficit will be $20 billion (compared to $18.7 billion for FY22).
The financial account has been running at an average inflow of $1.15 billion per month for the past 26 months.
We estimate $14 billion inflow below the line in 2023.
This analysis concludes with an estimated overall deficit of $5-5.5 billion for FY23.
IMF comes in
An IMF loan plus some loans from other international organizations might lend $4 billion with the reserve position declining $1-1.5 billion, i.e. the reserve position would hold about where it is now.
There would be another $3 billion coming from the IMF assuming the government maintained the agreement.
Everyone will have their numbers on these matters.
Critical to slowing down the economy and reducing inflation is to keep the balance of payments in equilibrium through the right level of economic growth and exchange rate.
The most difficult matter is to estimate the exports of the RMG sector.
I expect that the advanced economies will move into recession.
In addition to the impact of rising interest rates there is every prospect of a vicious political battle in the United States should the Republicans gain control of at least one house of Congress.
That battle may center on raising the debt level of the US government and attacks on some of President Biden's arguments about taxes.
It will not be pretty and of course the economic implications cannot be easily estimated.
The best assumption is that the advanced economies are very likely to enter a moderate recession reducing the export prospects for Bangladesh.
Reducing inflation in Bangladesh will be difficult with the balance of payments under pressure.
The garment workers' wages will be adjusted in the next few months; inflation to date is placing serious harm on the urban low-income population.
It is obvious that a sharp reduction of the growth rate is needed to reduce imports.
Further, a major economic support program is needed for the 20% of the 45 million households that have the lowest income.
Particular attention focuses on the urban areas.
The government budget deficit should be reduced despite the incorporation of this kind of welfare program.
Reducing NPLs
The most important thing to improve the financial sector is the reduction of the level of non-performing loans (NPLs).
The current level of NPL for the good private banks is now about 8-10%.
This is substantially higher than the official rate but the rescheduled loans are unlikely to be repaid and one does not have a lot of confidence in the bank's self-assessment of NPL nor the central bank's inspection system.
It implies loan loss provisions if correctly estimated of the order of 5-7%.
The most optimistic level one can collect is 25% on NPLs.
It is impossible to operate a bank with a 9% lending cap, a cost of funds of 5%, loan loss charges of 4.5%, operating costs of 2% and a minimum profit that requires charges against loans of 1.5%.
Costs of a loan come to 13%. How can you make money at 9%?
The single most important action needed is to improve loan recovery and insure that the culture of default is history.
The IMF playing around with the lending cap and the exchange rate will achieve no meaningful results.
Effort must concentrate on loan recovery.
The country must decide if it wants loans repaid.
Assuming that this is agreed, then the keys are improving the related operations of the judicial system, improved assets registries, better accounting for NPLs, better inspection by the central bank and ruthless insistence on honest accounting reports by auditors.
The IMF should stop fiddling with exchange rates, loan caps etc, and offer a $15 billion loan for a serious attempt to clean up the NPL mess.
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.