International Monetary Fund (IMF), a global body entrusted with stabilizing the world economy, has approved a $4.7 billion loan for Bangladesh: $3.3bn under Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements and $1.4bn under Resilience and Sustainability Facility (RSF).
Till today, IMF has provided assistance to 94 nations, but Bangladesh is the first Asian country to access the newly created RSF. While the country was applying for IMF's loan, the citizens were concerned about the state of Bangladesh's economy, as the application was made at a time when Pakistan's economy had been in turmoil and Sri Lanka's economy had crumbled. Therefore, a detailed understanding of how IMF's loan would benefit the country and why the loan is worth revisiting.
First, it's important to realize that Bangladesh has not asked for a "bail-out" package like Sri Lanka or Pakistan, but rather for a stabilization package (EFF, ECF, and RSF). Giving financial support to a country or firm that faces insolvency is referred to as a "bail-out." Whereas EFF is granted for structural reform, RSF for balance of payment (BOP) stability, and ECF for a stable and sustainable economic position. Rather than waiting for the crisis to destroy the economic solvency, Bangladesh government has decided to take precautionary measures and to look for ways to overcome the economic recession before it grasps the whole economy.
Generally, the IMF offers help through ECF/EFF and RSF when a country has balance of payment volatility and needs policy direction by securing short- to medium-term funding, and allowing the borrower to return the fund over a longer duration. For instance, ECF has a zero-interest rate, a five-and-a-half-year grace period, and a 10-year final maturity.
Therefore, a country can obtain funds without incurring any costs, use the funds to implement structural changes that would boost its economy, and then repay the loan after 10 years, when the country will be able to benefit from the reforms. By deferring payment, such funds not only lessen strain on the BOP, but also allow the government to return with a better financial foundation for a thriving economy.
Bangladesh is receiving this stabilization package, but that doesn't imply it lacks the foreign currency needed to cover its import expenses. Generally, three months of import cover is internationally accepted as a healthy reserves position, and with $33.75 billion (gross) in reserves as of December 2022, Bangladesh has enough dollars to cover its import expenses for 4 months. Thus, Bangladesh economy may be volatile for now but can't be labeled as unhealthy.
So, undoubtedly, the nation borrowing from IMF is not because it is experiencing a financial catastrophe like Sri Lanka or Pakistan, but rather as a preventative step. However, in order to receive the loan, the borrowing country must implement IMF's recommendations.
The creation of an asset management business to recover and dispose of defaulted loans is one of such reforms IMF has suggested for Bangladesh. This reform was desperately needed, given how quickly non-performing loans were growing in the banking sector of the country. Enhancement of financial sector regulation and setting a ceiling on the government's budget deficit, are also some of the conditions of IMF which, by increasing waste reduction efforts, will eventually relieve economic pressure.
A crucial step that the nation should have done even without the IMF's advice was the modification of outdated laws such as Bank Company Act-1991 to reflect current society. Bangladesh still needs to worry about a few arenas, though.
First, Bangladesh is no longer economically independent to determine policy. Whenever it will design a policy, it must guarantee that the policy does not contravene any of IMF's conditions. For example, until recently, Bangladesh Bank (BB) set monetary policy based on its own assessment of what is best for the economy. However, BB has recently declared a shift from a Keynesian to a monetarist economy, and chosen to let the economy operate in a free market. Automated fuel price was one of IMF's requirements, therefore BB had no alternative.
Without a doubt, Bangladesh was meant to adjust the monetarist economy today or tomorrow as a part of financial inclusion that has been prioritized globally to create "one economy" since 2009. The issue is whether the economy can actually survive without any government support.
Second, IMF wants Bangladesh to increase its revenue. If, to increase revenue, the country chose to increase tax rate or VAT, it may marginalize and impoverish the poor. Their economic development will be hampered. Thus, implementing all of the IMF's recommendations without upsetting the current system will be difficult.
However, Bangladesh's tax to GDP ratio is only 7.5%, whereas World Bank suggests the ideal ratio would be 15%. Thus, Bangladesh has a wide scope to raise VAT and tax revenue. But to ensure that it doesn't marginalize the poor, the additional fund collected should be used to increase social safety net and public spending in such a way that is in line with the goal of poverty reduction.
Third, the fund will be provided in installments by IMF. That means the fund could be withdrawn unless Bangladesh rigorously adheres to the terms. In the past, when rumors of alleged corruption in the Padma bridge financing circulated, the World Bank withdrew its money, which was followed by ADB, JICA, and IDB. If such suspicions resurface, the IMF may also suspend its funds. Under such circumstances, the economy will struggle to function on its own because funding from other sources will be unavailable then.
Today, when the global economy is encountering challenges, the IMF is the best source of funding and advise for Bangladesh. But the country must keep in mind that the debt must be returned. The country must focus on two aspects in order to overcome the issue.
To begin, the country must ensure that the flow of funds from the IMF is not interrupted. It must constantly monitor the fund's flow and utilization. Then, the fund must be converted into products. Without raising production, the nation won't be able to benefit from the loan for as long.
Secondly, Bangladesh needs a backup plan. What if IMF stops its funding after a few installments? The backup plan may be bilateral agreement with developed countries like USA, China, or regional assistance from SAARC or ASEAN. However, an ultimate solution to today's economic volatility is production. Increasing domestic production doesn't have any alternative.
So, Bangladesh must ensure that it is disbursing funds to boost up production. Increasing production will bring foreign exchange in and the BOP will improve. Only then will the decision to take loan from IMF be successful, as the economy will be stronger than today.
Dr Ashraful Alam Chowdhury is an independent researcher and columnist.