The International Monetary Fund (IMF) wants to give loans to all possible eligible applicant countries, but only after thorough discussions and investigations. If the IMF loans money to a country, it examines whether it can return the loan and fulfill its conditions. So, the IMF wants an account of the country's reserves because its money comes from other nations. Therefore, it may be noted that they don't want to lend to anyone easily.
Normally, IMF teams visit the concerned country to negotiate conditions regarding the loan they've applied for. A letter of intent is signed between the IMF and the concerned country after both sides agree to comply with the lender's conditions. Then it will go to the IMF board for final approval.
IMF and Bangladesh agreed on principle for a loan of $4.5 billion, subject to be reproved by the IMF board, regarding Bangladesh's loan application in January 2023. The first installment of $447.8 million would be released the following month. It will be followed by six equal installments of $659.18m subject to the fulfillment of the time-bound reform measures laid out in the loan proposal.
Bangladesh has reportedly agreed to as many as 30 conditions laid out by the IMF for the loan program, including some key reforms stalled for years. The 42-month loan program has 30 conditions that fall under three categories: Quantitative performance criteria (QPC), structural performance criteria (SPC) and general commitment. All the conditions are not available in public documents for discussion and evaluation.
The commitment includes some mandatory conditions -- which are specific, measurable targets (QPCs), would be a minimum level of net international reserves and domestic revenue collection and a ceiling on the government's budget deficit. The government must meet the stipulated targets for the respective QPCs before the IMF releases further installments. The targets for these three QPCs, which were set by the IMF with the view of building on the country's reserve buffer and creating fiscal space, would progressively increase with each installment.
Alongside, there are 16 SPCs -- which are reform measures that often are non-quantifiable but are critical for achieving programme goals and are intended as markers to assess program implementation.
One of the SPCs is the passage and implementation of the draft Income Tax Act 2017, which was approved in the cabinet in 2017. The draft, however, has many loopholes. It was formulated to make the income tax law easier and more effective, but it is yet to be sent to the parliament to make it a law.
The government allows a lot of tax exemptions to various sectors. However, the IMF wanted to know how many tax exemptions the government allows before the next budget. And, over the course of the loan program, the tax exemptions would be pared back.
The global lender also proposed reforms in macro-economic management and sought pledges for efficient use of resources in some sectors. As agreed, the government should set a floor on how much it would spend from the total budget on social spending: Education, health, and social safety net. Regarding the present social safety net program, government staff's pension and interest on savings certificates must be left out of the budget.
The government has started implementing some of the conditions set by the IMF in the financial and energy sectors ahead of the global lender's board meeting to discuss Bangladesh's $4.5bn loan request.
Bangladesh used to subsidize the price of energy and sell at fixed prices. A pricing formula linking the local prices to those prevailing in the global market should be implemented in the energy sector, including for fuel.
As part of this, the interest cap of lending will be withdrawn soon and the state-owned banks have been asked to reduce the amount of defaulting loans by 12% by June 2023, down from the existing average of 30% to 40%.
Regarding the issue of reforms, the government has taken an initiative to amend the Bank Company Act and it was approved in the cabinet in 2021. The draft defined the willful loan defaulters. The IMF set a timeline to pass the bill in parliament and its implementation.
The formation of an asset management company to manage bad loans is another condition that the IMF laid out in the loan proposal. Bangladesh has never agreed to set up an Asset Management Company (AMC) to manage the non-performing assets (NPA) of banks. The IMF has also outlined a timeline for the government to gradually reduce the bad loan and introduce a market-based bank interest rate and exchange rate.
The IMF's stringent conditions include non-interference in the foreign exchange market, ensuring accountability of the expenses of the mega projects, and maintaining good governance in every sector of the economy.
It is expected that the IMF program will catalyze additional financing from other developmental and bilateral partners, which will prop up the dollar stockpile.
Bangladesh is usually not willing to reform its law, rules, and policies due to conservative attitude of policy-makers. The recent agreed reforms are apparently due to the persuasion of big business conglomerates. The memorandum of understanding with the IMF for reform in exchange of a loan is a reluctant move from the government. Bangladesh needs its own initiative for reforms to cope with the local and global economic situations.
MS Siddiqui is a Legal Economist and a Non-Government Adviser at the Bangladesh Competition Commission.
