Why are IMF policies failing to stabilise our economy?
During its latest partnership with the International Monetary Fund (IMF), Bangladesh has been experiencing high inflation for the past 22 months, its economic crisis worsening gradually. Financial account deficits have surpassed $9.26 billion. With outstanding payments 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. The continuous dollar crunch and dollar payment crisis have persisted for the past 22 months, further strangling the country's business and employment sectors due to LC's substandard control.
Meanwhile, the government is also suffering from a local currency crisis. Being unable to make due payments in taka, it decided to issue special bonds worth nearly Tk 26,000 crore. Nearly half of the new foreign loans are being used to pay the interest and principal on unscrupulous loans taken in the past. The country has witnessed the highest depreciation in the value of taka during this time. So, the question arises: Why does macroeconomic instability continue to plague Bangladesh even after partnering with the IMF?
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In my opinion, there are 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 instalment 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 (NPLs) still persistent. However, government expenditure hasn't been reduced, rather development budgets (ADPs) 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 when lending interest rates 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 percent depreciation over two years, the new step of taka depreciation by 6.3 percent has led to an increase in the total foreign debt position to nearly Tk 70 crore (about $6 billion). With the dollar rate rising by Tk 7, the government's main burden of electricity 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, causing capital flight and deteriorating private sector investments. The Bangladesh Bank failed to put a brake on the rise of politically motivated non-performing loans (NPLs), nor could it restore depositors' trust.
The IMF has not really been critical about the mechanism of hiding billions of dollars' worth of NPLs. Despite IMF engagement, there has been no pressure on banks suffering with NPLs. Four state-owned banks alone have seen a 27 percent increase in defaulted loans, reaching nearly Tk 63,000 crore in total at the end of last year. The crucial issue is that there hasn't been any attempt to bring the top loan defaulters to book. Thus, the IMF has not been able to address the root cause of systemic economic issues.
All efforts to reduce inflation resulted in 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 motto of revenue increase) has triggered new poverty, energy poverty and urban poverty. In particular, continuous hikes of primary energy and electricity prices, import duty and VAT etc exacerbated poverty among the poor and middle class. Rising fertiliser and diesel prices caused very high food prices and fuelled hunger and malnutrition everywhere. International markets have seen a stable or declining price for primary energy over the past six months, yet due to IMF pressure, prices of energy and electricity have not decreased in the country—rather, the opposite happened.
Concerns persist that policy inconsistency and conflicts will not get in the way of ensuring macroeconomic stability in Bangladesh. Triggering all accelerators of inflation at the same time must be avoided; logical sequencing and order management are needed.
Mistimed currency devaluation under the crawling peg method will not curb inflation. Over 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 import LC blockade. Although private banks had a higher closing dollar rate of Tk 117 compared to the state-run banks' Tk 110, costly imports will exacerbate inflation. The plan to increase electricity prices four times a year over three years will raise inflation. All 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 from manipulated power sector capacity charges. Political malpractice in the power sector includes corruption in large circles, false hardware capability, capacity charges, faulty power plants, inefficient power plants, renewal of inefficient ageing power plants, high system loss, and other systemic flaws. Analysis of unit-wise production in 2023 shows that despite 23-25 percent unit mechanical failures in electricity production, revenue is obtained through capacity charges and overbilling. The Bangladesh Power Development Board (PDB) is procuring electricity production capacity from plants that are sitting idle through billion-dollar electricity purchases. All of these are absent in the IMF's "policy proposals." The pressure to reduce administrative expenses (austerity) is not visible.
IMF's policy on waivers is contentious. Despite failing to meet the three main conditions (dollar rate, net reserve limit, and percentage of NPLs) during the second instalment, Bangladesh received a waiver, which was delayed in other countries for the same reason. Despite the dollar crisis, the country has maintained regular debt servicing (payment of interest and principal on foreign loans), which may be why the IMF has brought flexibility into its policy here, adjusting its lending business to the government's terms. The June 2024 target for forex reserves has been brought down to $14.76 billion from $20.10 billion. Not only that, but 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 the knowledge of local data manipulation?
One of Bangladesh's major problems is misinformation, and the IMF remains indifferent to that. According to IMF studies, the actual amount of defaulted loans is twice the government's figure. There are discrepancies not only in population data, but also in per capita income data. There's uncertainty whether the new exchange rate will adjust the dollar value of the GDP. In the past year, despite a nearly 25 percent decrease in the value of the taka, there has been no trustable adjustment in the dollar rate for GDP. Despite inflating GDP at 9.5 percent inflation rate, a nearly 30 percent decrease has happened in the value of money over the last 1.5 years. There should be a drop in GDP and per capita in terms of dollars, and a sharp rise in debt-to-GDP ratio.
Based on its own information, the Bangladesh Institute of Development Studies (BIDS) found a 15 percent food inflation in a recent survey. But the Bangladesh Bureau of Statistics (BBS) reported a 10.22 percent food inflation in April 2024. The deviation between the two surveys is 46.77 percent. This level of misinformation and/or information discrepancy has crossed all limits. Controlling inflation is crucial as a means to restore macroeconomic stability in the country. If the inflation data remains misleading, the effectiveness of the proposed IMF reform policies will remain under question too.
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.'
Views expressed in this article are the author's own.
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