Why are IMF policies failing to achieve macroeconomic stability?

A retail store in the capital. File Photo: TBS

Despite an ongoing partnership with the IMF, Bangladesh has been experiencing high inflation for the past 22 months, gradually deepening the country's economic crisis. The question is, if Sri Lanka can restore stability in its macro economy within 6 to 9 months of bankruptcy, why can't Bangladesh?

Financial account deficits have surpassed the country's highest ever, at $9.26 billion. Total bank credit has become more than total money, as in, M2 broad money. With outstanding payments of nearly $4 billion across various sectors like electricity, aviation, fuel imports, and various digital sectors, the net reserves have plummeted to just $13.8 billion, a situation reminiscent of nine years ago, or even worse. 

The continuous dollar crunch and dollar payment crises have persisted for the past 22 months, further strangling the country's business and employment sectors due to LC's substandard control. 

Meanwhile, the Bangladeshi government is also suffering from a local currency crisis. Being unable to make due bills in BDT, the government is going to issue bonds worth nearly 26 thousand crores. 

Nearly half of the new foreign loans are being used to pay the interest and principal on injudicious loans taken in the past. The country has witnessed the highest depreciation in the value of the taka during this time. The question is: why is macroeconomic instability continuing even after partnering with the IMF? 

In my opinion, here are the five major reasons: Mismanagement of policies, overlooking large-scale statistical discrepancies, failure to propose research-based policies, the nexus between corrupt governance and institutional incompetence, and, ultimately, the mindset of giving concessions to reform policies. 

Despite Sri Lanka stabilising its economy within six to nine months of entering a deal with the IMF, Bangladesh hasn't, raising questions about the effectiveness of IMF engagement here.

While the first installment of the lending package was granted a year ago, inflation has continued to soar, with banking liquidity crises, money laundering, weak bank mergers, and unresolved bad loan issues (NPL). However, governance expenditure has not been reduced; rather, development budgets (ADP) have been slashed. IMF negotiations haven't significantly impacted critical aspects of poor governance.

The implementation of the crawling peg method (which should have been done at least a year ago) to control the dollar rate was mistimed. Policy rates have been further increased since the lending interest rate doubled within a few months. The exchange rate against the dollar hasn't been realistically adjusted, and the real effective exchange rate (REER) hasn't been followed in due course. 

After 25% depreciation over a year, the new step to depreciate taka by 6.3%, led to an increase in the total foreign debt position to nearly 70 thousand crore taka (about 6six billion dollars). With the dollar rate rising to 117 taka, the government's main burden of electricity sector capacity charges, fertiliser, and fuel imports, especially electricity production expenses, will increase. As a result, the country will directly experience a new wave of inflation.

The savings interest rates on deposits have not been adjusted at the right time. Banks have created a messy window for swapping loans at low rates, and have also caused capital flight, deteriorating private sector investments. Bangladesh Bank could not put a brake on politically motivated rising NPL, nor could it restore depositors' trust.

The IMF was not really critical about the mechanism used to hide billions of dollars worth of NPL. Despite IMF engagement, there has been no pressure on banks suffering from NPL. Government banks alone have seen a 27% increase in default loans, reaching nearly six billion taka. The most crucial issue is that there hasn't been any attempt to bring top defaulters under the law. Thus, the IMF is not addressing the root cause of systemic economic issues.

All efforts to reduce inflation resulted in a further increase in prices. Measures like increasing interest rates, restricting capital flight and NPL, and halting capital flow mechanisms have not been taken on time to combat inflation. 

Zero incentive policy (the only motivation is revenue increase) has triggered new poverty, energy poverty, and urban poverty. Continuous primary energy price hikes, electricity price hikes, import duties, VAT hikes, etc have exacerbated poverty among the poor and middle class. Rising fertiliser and diesel prices have caused very high food prices and exacerbated hunger and malnutrition everywhere. 

International markets have seen a stable or declining price for primary energy over the past six months, yet under IMF supervision, prices of energy and electricity have not decreased, but rather the opposite. In Bangladesh, inflation has been on the rise since November '22, with a record energy price hike of nearly 42.5 to 62% (November 22–July 23).

Concerns persist that policy inconsistency and conflicts will not ensure macroeconomic stability in Bangladesh. All accelerators of inflation must not be triggered simultaneously; logical sequencing and order management are needed.

Mistimed currency devaluation under the crawling peg method will not curb inflation. In the past two years, the effect of 'new money injection' has fuelled new inflation, i.e., the flow effect of printing reserves is still ongoing. 

Inflation will continue due to the import-LC blockade. Although private banks had a higher closing dollar rate of 117 compared to government banks' 110, costly imports will exacerbate inflation. 

Planned increases in electricity prices four times a year, over three years, will raise inflation. Logical expectations for inflationary growth will also increase prices in the market.

The IMF's policy to reduce incentives centred around electricity accounts is flawed; the policies are not research-based. In reality, Bangladesh loses billions of dollars due to manipulated power sector capacity charges. Malpractice in the power sector includes corruption in large circles, false hardware capability, capacity charges, faulty power plants, inefficient power plants, renewal of inefficient aging power plants, high system losses, and other systemic flaws. Analysis of unit-wise production in 2023 shows that despite 23-25% unit mechanical failures in electricity production, revenue is obtained through capacity charges and overbilling. 

Despite nearly 40% of electricity production capacity being idle, PDB is procuring billion-dollar worth electricity from abroad; all of these are absent in the IMF's 'policy proposals'. The pressure to reduce administrative expenses (austerity) is not visible. A significant portion of the IMF loan is likely being lost to corruption, leading to increased hardship for livelihoods.

Even after this long engagement with the IMF, the government has yet to ensure LC quality control. Influential figures and various government agencies continue to engage in true-or-false LCs. Reports of under- and over-invoicing are regular in the media. However, ordinary importers are struggling with dollar shortages in trading goods, industrial capital, and raw material imports.

The IMF's policy on waivers is contentious. Despite failing to meet the three main conditions (dollar rate, net reserve limit, and percentage of non-performing loans) during the second installment, Bangladesh received a waiver, which was delayed in other countries for the same reason. 

Despite the dollar crisis, Bangladesh has maintained regular debt servicing (payment of interest and principal on foreign loans), which may be why the IMF has brought flexibility to its policy here, adjusting its lending business to the government's terms. The June 24 target for reserves has been brought down to $14.77 billion from $20.10 billion. 

The IMF has also reduced the government's revenue target. The question is, has the IMF not conducted sufficient research and preparation? Or does the Bangladesh mission lack enough expertise and local data manipulation knowledge?

Bangladesh's major problem is misinformation and the IMF remains indifferent. According to IMF studies, actual default loans are twice the government's figure. There are discrepancies not only in population data, but also in per capita income data. There's uncertainty about whether the new exchange rate (6.3% decline) will adjust the dollar value of the GDP. In the past year, despite a nearly 25% decrease in the value of the taka, there has been no trustable adjustment in the dollar rate for GDP. 

Despite inflating GDP at a 9.5% inflation rate, a nearly 30% decrease has happened in the value of money in the last 1.5 years. There should be a drop in GDP and per capita in terms of dollars, and a sharp rise in the debt-to-GDP ratio. 

Based on the information collected by themselves, BIDS (Bangladesh Institute of Development Studies) found a 15% food inflation rate in a recent survey. However, BBS reported 10.22% food inflation in April 2024. The deviation between the two surveys is 46.77%. 

Controlling inflation is crucial as a means to restore macroeconomic stability. If the inflation data remains misleading, the effectiveness of the proposed IMF reform policies will also remain questionable. 

Faiz Ahmad Taiyeb writes on sustainable development and is a public policy critic. He has several books to his credit, including 'Fourth Industrial Revolution and Bangladesh', 'Bangladesh: Development Trajectory And Democracy Deficit' and '50 Years of Bangladesh Economy.'

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.