Meeting the conditions for the IMF Loan
In April, Dhaka was abuzz with news about the visiting IMF mission and their discussions with the government. Questions that made rounds included whether the conditions agreed upon by the country for obtaining the loan of $4.7 billion could be met and what might be the consequences of failure. While answers to such questions may not be simple, a look at the relevant issues may provide some clues.
Loan from the IMF: A repeat of similar experiences
It may be recalled that from a stable macroeconomic environment, by the third quarter of 2022, the economy of Bangladesh was confronted with several challenges on the macroeconomic front – balance of payments deficit, depletion of foreign exchange reserve, depreciation of taka and rising inflation.
Rather than trying to meet the challenges on its own, the government went for a loan from the IMF, and a credit programme for $4.7 billion to $3.3 billion from the Extended Credit Facility (ECF) and $1.4 from the Resilience and Sustainability Facility (RSF) – agreed upon in January 2023. The duration of the loan is 42 months, and it will be disbursed in seven instalments – subject to satisfactory review by the agency.
This is the 11th time Bangladesh has gone for loan from the IMF – the last being in 2012. And there is a degree of similarity in the background as well as the contents and conditions of such loans. The loan of 2012, for example, was preceded by circumstances very similar to those in 2022 – worsening of balance of payments deficit, pressure on the exchange rate, uptick in inflation, and weaknesses in financial management and supervision. The stated objectives of bringing back macroeconomic stability and returning to the path of growth also appear to be similar. In the current programme, mention is made of social spending, but there is nothing on how to protect the poor and low-income people from the fallout of the stabilisation measures like increases in the prices of fuel oil, electricity and overall food inflation. Employment is mentioned in the government's memo simply with a cryptic reference to the 8th Plan.
As is well-known, credit from the IMF comes with strings attached, and the latest one is no exception. They have been categorised under: (i) Quantitative Performance Criteria (QPC); (ii) Indicative Targets (IT); and (iii) Structural Benchmarks (SB). In addition to the conditions of the ECF, the fund from RSF comes with 11 "reform measures".
The QPC include floors on net international reserves – to be raised to the level of four months' import by 2026, and fiscal deficit to be limited to 3.3 percent of GDP. The ITs include floors on reserve money, tax revenue, capital investment of the government, and priority social spending. The "structural benchmarks" include: (i) measures for additional tax revenue of 0.5 percent of GDP in the budget of 2023-24; (ii) periodic adjustments in the prices of petroleum products and electricity; (iii) scrapping of the fixed interest rate regime and moving to an interest corridor system; (iv) move to market determined exchange rate; (v) calculation of net international reserves according to the IMF method; (vi) estimation of GDP on a quarterly basis; (vii) moving fast with the adoption of the Bank Companies (Amendment) Act, 2020, and the Finance Companies Act 2020; and (viii) reporting of banks' distressed assets. All these measures are due for implementation in 2023.
The MOU attached to the IMF report also includes inflation target of 5-6 percent, additional tax revenue of 1.7 percent of GDP by 2026, and limiting public debt to 45 percent of GDP.
While some of these goals and targets are quite reasonable and the government should have been working on them anyway, there are those which raise questions. For example, there was no need to submit to the IMF for aiming at restoring the foreign exchange reserve to a more comfortable level, raising tax revenue (low tax-GDP ratio of the country has long been a subject of discussion), abandoning the fixed interest rate and fixed exchange rate regimes, etc. Likewise, the Bank Act, and the issue of non-performing loan have been in public discussion for a long time.
What is surprising is the target of limiting budget deficit to 3.6 percent of GDP. While unproductive public expenditure and wasted subsidies are not to be condoned, fiscal policy should be an integral part of the government's strategy to address the current macroeconomic challenges. When restrictive monetary policy is used to fight inflation and stabilise exchange rate, fiscal policy should be used to adopt countervailing measures for preventing a slowdown in output and employment growth. Also, public expenditure is crucial for maintaining, strengthening and expanding the social safety nets when prices of fuel are periodically adjusted and prices of consumer goods rise in tandem.
Now the difficult part: Meeting the conditions
Qualifying for a loan from the IMF was easy for Bangladesh, but the real challenge would be to meet the conditions and satisfy the creditor in six reviews that will come in the next three years. Although it should not be difficult to meet several of the conditions, frontloading of too many conditions in the first 12 months of the loan programme is not only going to create tremendous pressures on the capacity of the government, it also raises question about the practicality of the whole programme.
As for the target of raising the net international reserve to four months' import cost, one would wonder why it should be difficult to attain this, especially for a country that only recently had attained the comfort of six months' import equivalent. Of course, that will require export proceeds to come back to the country in full and on time, and remittances through hundi to be brought down to previous normal levels. They, in turn will be contingent upon a stable and unified exchange rate reflecting the real value of the domestic currency. One can thus see that a number of the QPC, SB and IT are interlinked. It appears from media reports of statements by key policymakers and government officials that this is work in progress. So, one can hope that meeting some of the key conditions of the loan should not be a major issue. Of course, the ability to meet strict deadlines set in the agreement is another matter.
Several of the structural benchmarks like shifting to a corridor system for interest rate and market determined exchange rate, raising tax revenues, increasing prices of petrol and electricity, reducing public expenditures, moving ahead with the Bank Companies Act, etc. are political decisions. Once such decisions are made, it would be a matter of meeting deadlines. Of course, some, like raising administered prices are easier than others. And that's why we see them coming more frequently. It may be recalled that during the 2012 loan programme, prices of petrol and electricity were raised several times. Likewise, in 2022, price hike started even before the loan agreement was made, and more are expected to follow.
Repeat of the past: From role model to a nervous student?
The conclusion that follows from experience is that the easier of the measures (e.g., raising administered prices) are likely to be adopted quickly and regularly, those that are critical for passing the periodic reviews and ensuring smooth disbursements will also be undertaken – even if deadlines are missed, and the more complex ones may remain as work in progress. What will happen to negotiations and disbursements in actual practice remains to be seen. But if the past is any guide, both sides are likely to strive to conclude the programme in a respectable manner so that its success can be claimed.
The press release of the IMF (October 21, 2015) at the conclusion of the last two reviews and disbursement of the last instalment of the 2012 loan can be instructive in the above context.
It mentioned the success of the programme in bringing back macroeconomic stability and putting the economy back on its growth path, but reminded of the unfinished agenda of reforms including financial management and reduction of subsidies through further hikes in administered prices as well as "better labour rights and safer working conditions".
The years after 2015 saw acceleration in GDP growth coupled with increase in income inequality, fall in employment growth, decline in real wages, and continued vulnerability of the poor and near-poor. And in less than one year in 2022, the economy lost wind to such an extent that the government had to turn to IMF for assistance – at least for obtaining some breathing time/space. A country that was being lauded as a role model has now become a nervous student under strict supervision and tutelage. But the result may be increased difficulty in breathing for the poor and the vulnerable.
Dr Rizwanul Islam is an economist and former special adviser to the Employment Sector, International Labour Office, Geneva.