The devil is in implementation
Bangladesh's economic crisis will not go away if the government does not strictly adhere to the conditions tagged with the International Monetary Fund's 42-month loan programme, said the lender's top official.
"Implementation is the key," said Krishna Srinivasan, director of the IMF's Asia-Pacific department, in response to questions from Bangladeshi journalists earlier this week in New Delhi.
IMF organised a three-day training programme for economic and financial reporting at the Indian capital for a select group journalists from Bangladesh, India, Bhutan, Nepal and the Maldives.
The Washington-based multilateral lender has designed the $4.7 billion loan programme around restoring macroeconomic stability, increasing tax revenue, addressing banking sector vulnerabilities, modernising monetary policy framework and climate- and pandemic-preparedness.
If the programme is well-adhered to, the upsides are pretty strong, he said.
"In every country where we had a programme, if the programme is adhered to, there is a virtuous cycle which comes back and the problem we faced start declining. That is the whole idea. Being on the programme is one thing, implementing the programme is equally important."
When Bangladesh 'proactively' reached out to the IMF for fund facility, the country faced back-to-back shocks, which left its economic growth tapering off, external accounts weak, reserves strained and currency depreciating rapidly.
"If the programme is implemented, you will see a reversal in the context of the shocks. When a country comes to the IMF, its reserves have fallen. Once the programme is implemented, you build reserves organically."
The objectives set out by Bangladesh's loan programme have been cherry-picked by the government itself and not the IMF.
"This is the government's programme. It is part of their five-year plan -- they have certain policies they want to pursue. So it is a homegrown programme which is being supported by the IMF. Let's be clear about that."
One of the long-term issues of the Bangladesh economy is the low tax revenue, and the IMF programme has focused on addressing this.
The root of Bangladesh's economic problems is its 'pretty weak' fiscal position, said Srinivasan, who assumed his current position of overseeing the IMF's work on all countries in the Asia-Pacific region in June last year.
"And that is based on mobilising higher revenue, largely because Bangladesh has one of the lowest tax-GDP ratios across the world. Bangladesh is an outlier in terms of tax revenue as a share of GDP."
The ratio is below 9 percent, which is lower than the low-income developing countries' average of 12 percent and emerging markets' average of 17 percent.
"One anchor for the programme is on ensuring that the fiscal position comes on a strong footing. They have to boost the tax revenue to GDP, which is very, very important."
Part of improving the fiscal position is rationalising the subsidy expenditure.
"Not all subsidies are good, not all subsidies are geared towards the poor and the vulnerable. If you look at Bangladesh, a lot of subsidies are given for gas and electricity. Who drives cars? Who consumes air conditioning? It is not the poor, it's the rich people. Those people do not deserve the subsidy they are getting in the context of a country going through a fiscal problem."
Blanket subsidies also limit how much the government can support the social safety net programmes and infrastructure spending.
Subsequently, the lender insists on providing targeted subsidies and not blanket subsidies or blanket tax exemptions.
It is important in the case of Bangladesh for fiscal discipline to rationalise subsidies, make taxes progressive and broaden the revenue base, Srinivasan said.
"For the poor and vulnerable, you provide them targeted support through direct transfers and so on. You create a social registry and you see who are the poor and vulnerable and you provide them targeted support. That is the way to go, esp. when you are facing such significant fiscal problems."
Vulnerabilities in the banking sector are also being addressed through the programme.
"Clearly, the state-owned commercial banks are on the weaker side. But in the context of the pandemic, they did provide the kind of support which was needed for the economy. Now, going forward those vulnerabilities have to be addressed."
The vulnerabilities stem from inadequate regulation and supervision.
The authorities with the help of IMF staff will address the issues in the financial sector, he added.