On February 1 of this year, Bangladesh received the first payment of $476 million from the International Monetary Fund (IMF) as part of a $4.7bn loan package.
Six equal payments of $704m each are planned for the remaining money. Between April 25 and May 7, IMF staff members visited Dhaka to talk about current macroeconomic trends and program implementation.
While observers were concerned about the difference between Bangladesh's existing foreign reserve and the reserve target established by the IMF before the next installment, the IMF's recent report highlighted possibilities for the nation. Therefore, it's interesting to consider how the IMF and Bangladesh are now equated.
Reserve gap
One of the major conditions of IMF for the loan was to maintain $24.46bn net reserve by June. According to the central bank of the country, Bangladesh Bank (BB), the country has a gross foreign reserve of $30.97bn.
But, the IMF's formula for foreign reserves is different from that of BBs. IMF's formula excludes export development funds, deposits with state banks, deposits with IDB, loan to Sri Lanka etc.
And as per IMF's formula Bangladesh needs more than $2bn reserve to meet the target set by IMF.
There is a question floating in the economic sector whether Bangladesh will be able to fulfill this condition and if not, what would the IMF do next. However, the question that should have been asked by now is whether it is okay to fulfill this requirement anyhow by stopping all the development projects or not.
According to the IMF's most recent study, in terms of GDP growth rate for the current fiscal year, Bangladesh will come in second to Vietnam. Bangladesh may exceed China in terms of growth in 2024, according to the IMF's Regional Economic Outlook for Asia and the Pacific, published in May 2023.
The idea that the country would achieve its foreign reserve target by reducing funding to the productive sector is now fascinating, but at the expense of potential future growth.
The equation is quite straightforward. The nation can meet the IMF's reserve requirement if it ceases funding EPZs and other productive sectors, as well as any current initiatives.
However, future prosperity will suffer as a result. One cannot expect its economy to grow tomorrow if it doesn't invest today. The ability for Bangladesh to prosper should not be hampered by rigidity in preserving reserves that are more than necessary during this time of crisis.
The Bangladesh Bank has brought down the volume of the Export Development Fund to $4.77bn from $7bn in compliance with the IMF's condition to change the calculation of foreign exchange reserves as per international standards.
By September of this year, the amount will have been further lowered to $2bn. This might ultimately deter exporters and reduce export volume.
The Bangladeshi government is now investing in areas where the growth is predicted. Imports have already been significantly reduced in the nation. As opposed to the IMF's ultimate goal of raising the global living standard, further cuts will have an impact on people's quality of life.
Additionally, a drastic reduction in imports could stop exports, which would worsen the reserve's situation. By reconsidering its aim of foreign reserves, it should allow the nation some breathing room.
Revenue increase
Increasing domestic revenue collection was one of the IMF's mandatory requirements. However, the World Bank says that the ideal ratio would be 15%, whereas Bangladesh's tax to GDP ratio is only 7.5%. Bangladesh thus has numerous opportunities to increase VAT and tax collection which is the best way to boost revenue.
The current share of trade taxes in NBR tax-revenue is 26%, much higher than in any developing economy pursuing export-led growth. Thus, the IMF recommendation for increasing the tax-GDP ratio by 0.5% does not indicate mobilizing revenue increasing trade tax. Considering this, Bangladesh is trying to increase its revenue from other vats and taxes.
The country has asked the NBR to be more efficient in revenue collection and has set a target of BDT 4.30 trillion for the next fiscal year. To aid achieve the target, from the next fiscal year, the government has proposed imposing a 5% VAT on locally-manufactured mobile phones and refrigerators. Additionally, gain taxes and fees on flats and plots are also expected to increase by 1-2% in the next budget.
Bangladesh is concentrating on accounting difficulties as well as rates. For instance, the government intends to establish a maximum retail price for a pack of cigarettes in order to generate more revenue and close the discrepancy between what merchants charge customers and what is stated on the packet.
The NBR calculated that if taxes were collected based on the retail sales price, the government might have made an additional BDT5,000 crore from the tobacco industry in just one year. Apart from that, the government is to impose carbon tax from the next financial year.
Export incentive cut
To embrace the concept of open and free trade, as per the suggestions of IMF, Bangladesh is cutting down subsidies and incentives as well. The cutting down of subsidies has made the cost of fuel and electricity rise high.
This was, however, Bangladesh's best option at the moment. Additionally, the nation will immediately reduce its export incentives. In preparation for the post-LDC era beginning in 2026, when cash incentives will no longer be permitted under WTO rules, the government has decided to gradually reduce cash incentives for exporters.
There is a proposal in principle to reduce cash export incentives by 0.5 to 2% beginning in the following fiscal year. However, the nation has also stated that it will work to support the RMG business so that the cut doesn't heavily impact them.
Even without the IMF's meddling, the nation should have implemented the reforms it has recommended. But if the nation had been allowed to implement such reforms at its own pace, ordinary citizens wouldn't have been impacted.
Because of the IMF's continued stance of strictness, the economy may be in danger. Because of demand-management measures, the IMF predicts that Bangladesh's GDP growth rate will drop to 5.5% in 2023.
The rate, though, is still greater than China's predicted 5.2% growth rate. In order to be sustainable, Bangladesh needs the growth rate. So, the IMF should be accommodating with Bangladesh and allow the economy some breathing space as a result.
Bangladesh is already making progress, but this progress won't have an immediate effect. The IMF might take this into account and help Bangladesh reach its objective.
Dr Ashraful Alam Chowdhury is an Independent Researcher. He completed his MSS in economics from Dhaka University. Then, he pursued post-graduation and PhD in economics from Emory University, Georgia, USA. He has experience of working in the US, Bangladesh, Myanmar and India.
