Ending the stalemate and thereafter: The IMF loans in Bangladesh

At long last, the stalemate is over. Bangladesh has finally agreed to go for a market-based flexible exchange rate instead of pursuing a crawling peg. And the International Monetary Fund (IMF) has approved the release of the fourth and the fifth tranche amounting to $1.3 billion of its $4.7 billion loan package to Bangladesh.

The major bone of contention between the two parties was the exchange rate. The IMF has been insisting on Bangladesh to adopt a fully flexible market exchange rate, while the country has been resisting it for various reasons. Now with Bangladesh agreeing to the IMF conditionality, the deadlock is over. In fact, the World Bank, a sister organisation of the IMF, signalled yesterday, after consultations with the IMF, that it would provide $500 million budget support to Bangladesh. At that point, it was more or less clear that an agreement with the IMF is ensuing. The Bretton Woods Institutions, which include the IMF and the World Bank, always work in tandem and the external development partners follow their signals. Thus, the IMF and the World Bank actions would unlock fresh support talks with other development partners, such as the Asian Development Bank (ADB), Asian Infrastructure Investment bank (AIIB).

The context of the present scenario is rather complex. In this regard, three observations can be pertinent. First, the negotiations with the IMF have been continuing for quite some time. An IMF mission to Dhaka and discussion with Fund officials in Washington last month during the Bank-Fund Spring meeting could not resolve the differences in stances of the IMF and Bangladesh. It was resolved only after Bangladesh agreed to adopt a flexible exchange rate. Second, the exchange rate issue is just one of the conditionalities related to the IMF loan. The other areas of conditionalities were tax reforms including tax policies and tax administration, legal and regulatory reforms in the financial sector, reforms particularly in the banking sector etc. But of all these issues, the ultimate bone of contention between the two parties was the exchange rate policy. Third, some of the reforms are necessary for Bangladesh. So, in any case, the country must undertake them, irrespective of the IMF conditionalities and pressures. Bangladesh has to pursue those necessary reforms, even though they are politically unpalatable. Reforms are always tough choices.

The issue of IMF loans and conditionalities is not an emotional issue, rather a practical and pragmatic matter. Yet, sometimes an emotional stance is taken on them, ranging from we do not need the IMF loans to we shall take tough decisions with regard to the IMF loans. It is understandable that when the situation is uncertain and tense, emotions run high, and sometimes we have to say things to politically pacify the situation. But at the end of the day, we have to evaluate the situation objectively and pragmatically. Thus, going beyond the tranche issue, the IMF loan may be worth considering for three reasons.

First, the size of the IMF loan may not be large enough to make a strategic impact on the total Bangladesh economy, but even with a respectable level of foreign reserves, and a good inflow of remittances, the current Bangladesh economy suffers from some impediments and vulnerabilities. To name a few, there is a growth sluggishness, high inflation, considerable joblessness, production obstacles, and a weak banking system in the economy. The IMF loan support may assist Bangladesh to address some of these issues. One should also remember that the foreign exchange and the remittance scenario change quite frequently and in the face of global uncertainties, today's satisfactory situation is no guarantee for tomorrow's risks.

Second, the current resource constraint in Bangladesh is well-known. Because of the resource shrinkage, the incoming budget of the country is expected to be slashed, the size of the Annual Development Programme (ADP) would be reduced, the interest payments would be extremely high. Furthermore, the request to the external development partners for a $5 billion resource support has not yet been responded to. Under such circumstances, the IMF loan may help in meeting some of the resource requirements of the country.

Third, it is not the size of the IMF loan, but the loan itself, which can play a catalytic and symbolic role. The IMF loan would encourage other development partners to extend loans to Bangladesh, or to start new negotiations on assistance. In addition, it would boost investors' confidence. And as a result, more foreign direct investment may flow into the economy. The confidence of the IMF in the Bangladesh economy will have ripple effects in the global economy. The IMF loan may also create a momentum for other reforms, which in the absence of this loan, might have slowed down.

Having said all those, it must also be stressed that the IMF loan and its conditionalities must be addressed and tackled with necessary cautions for several reasons. For example, the viabilities and the consequences of flexible exchange rates on the economy and the welfare of the people need to be assessed properly. Given the current state of our economy, the foreign exchange market and probable remittance inflows, what other auxiliary measures do we take in the market to contain the volatilities to be caused by flexible exchange rates? Given the current state of foreign exchange reserves, remittance inflows, trade patterns, interest payment, the market may not be jittery right now, but one should be mindful of the probable impacts of the future. Can there be some sequencing patterns as we go for flexible rates? What would be its consequences on inflation and people's standard of living? Bangladesh would need some cushion to tackle some of the adverse impacts for fully-flexible exchange rates. It is prudent that the country has requested for a $1 billion stability fund to overcome the adverse impacts of a fully flexible exchange rate. It should negotiate further with the Fund to secure it.

Second, there should not be a single pre-occupation with the flexibility of the exchange rate. The country should also take up the other necessary reforms, irrespective of whether they are part of the IMF conditionalities package or not. For example, as a part of the tax administration reform, the current National Board of Revenue would be dissolved and two separate entities - one for tax policy and the other for tax administration would be created. In fact, with that reform, the World Bank has agreed to provide $500 million budget support to Bangladesh. The county should pursue further reforms to enhance the tax/GDP ratio for resource mobilisation, equity in tax incidence, and dependence more on direct tax rather than indirect tax. Similarly, the banking sector reform should be a priority.

Third, the political context of the loan would be important and it would be a tough balancing act for the government. On one hand, the government cannot be seen as giving in too easily to international institutions, which would be politically damaging. On the other hand, the loan must be prudently used to accelerate the development of the economy and the well-being of the people.

This balance is particularly important, as meeting the IMF conditionalities should not lead the country to compromise with the well-being of its people. In simple terms, budgets should not be balanced by unbalancing the lives of the people, as has been done on many occasions in various countries of Asia, Africa and Latin America during the time of the IMF's Structural Adjustment Facilities (SAF) and the Enhanced Structural Adjustment Facilities (ESAF), or the World Bank's Poverty Reduction Strategy Papers (PRSPs) during the decades of 1980s and 1990s. History should not repeat itself.

Selim Jahan, Former Director, Human Development Report Office, UNDP