Bangladesh approached IMF at the right time

Bangladesh has averted a potential major crisis by reaching out to the International Monetary Fund (IMF) in a timely manner, said Kaushik Basu, a former chief economist of the World Bank.

"People are criticising [the government move of] reaching out to IMF but it was the right move. We have an example in Sri Lanka of the big risks associated with not reaching out to IMF timely," Basu told a group of journalists after his lecture on development policy at Dhaka University yesterday.

In July last year, when the foreign exchange reserves were hovering around the $39 billion-mark, Bangladesh wrote to the Washington-based multilateral lender for a loan to help the country cushion the blows of the pandemic and the Ukraine war.

Last month, the IMF approved a 42-month loan programme involving $4.7 billion and a host of long-delayed reforms.

Basu cited the case of India when it reached out to the IMF for support in 1991.

India had an import cover of just 13 days when it sought an emergency loan of $2.2 billion in 1991. Bangladesh had an import cover of five months when it sought funds from the IMF.

"Given the circumstances of Covid and the Ukraine war, Bangladesh is doing pretty well. But the rough road for economic growth lies ahead."

He went on to suggest that Bangladesh can take inspiration from India's approach towards the IMF loan programme in 1991.

India carried out the reforms with such sincerity that after two years, it informed the lender that it did not need further instalments of the sanctioned amount.

The reforms were much-needed but the Indian authorities were dragging their feet then.

"For Bangladesh, that is possible," said Basu, who served as the chief economic adviser to the government of India from 2009 to 2012.

Indian advisors told the IMF that they need reforms and urged them to make it happen through the conditions in the loan programme, said Basu, who is now an economics professor at Cornell University.

"In the case of Bangladesh, the same thing might be happening."

Chief among IMF's conditions are raising the tax-GDP ratio and paring back on subsidy expenditure.

"Tax-GDP ratio can be increased in the region. But 14-15 percent is possible."

He, however, acknowledged the inertia among the tax administration that prevents the tax-GDP ratio from going up.

"It is not easy though. This is a target that must be there. You have to give attention and you have to try better."

Subsidies must be pared back intelligently, he said.

"In many countries, as political pressure intensifies, subsidy starts to increase. There comes a time that subsidy needs to be withdrawn a bit and that must be done intelligently."

The ordinary people are the most vulnerable people, so when the subsidy is cut, buffers need to be provided for them.

"At the same time, fiscal deficit must be watched. Subsidy cannot be a free good -- you have to make people understand this. There is a balancing act involved," Basu added. 

Meanwhile, in his speech, Basu said every crisis provides an opportunity.

Bangladesh Pathashala, a social organisation, arranged the discussion at RC Majumder Auditorium. Rehman Sobhan, chairman of the Centre for Policy Dialogue, chaired the event.

One of the major problems in developing countries like Bangladesh is the implementation of policies, said Mustafa K Mujeri, executive director at Institute for Inclusive Finance and Development.

"Bureaucracy does not want massive changes. They prefer marginal changes," he said.

Shamsul Alam, state minister for planning, said during his initial days as a member of the planning commission, he faced questions from bureaucracy about the necessity of planning.

Citing some decisions by former finance minister AMA Muhith regarding giving the planning ministry the responsibility to make projections for economic growth and poverty reduction, he said political far-sightedness is important.

More autonomy for the Bangladesh Bank is necessary so that the central bank can determine the interest rate and solve foreign exchange issues.

"It should be given more scope," Alam added.