By R Hassan, TON Bangladesh

Now-a-days, Bangladesh is going through a critical economic period owing to issues like high inflation and reducing forex reserves weakening macro-economic constancy.  In July 2022, the Bangladesh government approached the International Monetary Fund (IMF) for a loan confronting the country’s economic challenges. An IMF team is presently in Bangladesh to deliberate the particulars of the loan and make for the agreement. Bangladesh has asked for a USD 4.5 billion loan, which will be delivered from IMF’s Enhanced Credit Facility (ECF), Enhanced Funding Facility (EFF) program, and the New Initiatives, Resilience and Sustainability Fund (RST).

The context under which Bangladesh is looking for the loan is not unusual. Bangladesh's present economic situation is one in which countries frequently look to the IMF for the balance of payment funding. Bangladesh's trade shortfall is high as import payment is much upper than export income; in FY2021-22, the harmful trade balance reached over (-) USD 33 billion.

Bangladesh's current account deficit is also high since payment flow is negative in the current fiscal year; it amounted to USD 18.7 billion in FY22. This has led to decreasing foreign exchange assets and devaluation of the Bangladeshi taka. Bangladesh forex reserves have come down to USD 35.8 billion from USD 41.8 billion in FY22. As per the IMF assessment, the real reserves are USD 27.4 billion merely sufficient for about three months’ import expenditures.

Bangladesh is passing through a difficult time due to high inflation, food, and fuel crises, and depleting forex reserves have weakened the economic steadiness that Bangladesh has been enjoying for a long time. International economic tremors produced by the pandemic as well as the ongoing Russia-Ukraine war have affected all economies around the globe, irrespective of their development status. However, the scale of the impact depends on the intrinsic strength of each economy. That strength is achieved through suitable policies and the application of those policies with robust governance.

Unluckily, over the years, Bangladesh has failed to fortify its institutions that are accountable for delivering good economic results. Bangladesh's financial sector is loaded with a large amount of non-performing loans (NPLs) as loan defaulters are given leeway through various flexible measures. In June 2022, the sum of defaulted loans stood at Tk 1.25 lakh crore or about nine percent of the total loans spent.

According to the Bangladesh Bank, wastage and misuse of capital in schemes abound due to a lack of decent governance. Domestic resource mobilization efforts are inflexibly slow, and the tax-GDP ratio is only 7.6 percent at present. Added to these glitches are the uncontrolled price hike of all merchandise, making people’s lives depressed. Since IMF loans usually come with conditionalities. Though Bangladesh has taken loans from the IMF in the past, many still feel that such loans are not necessarily worthy for the country.

While restricted loans are disliked by countries, a significant motive for conditions is that the loan provider wants to make sure the money is used in such a way that the economic situations become improves, and the country is capable to reimburse the loans. Since the IMF’s fund is the contribution of its member countries, in other words, their taxpayers’ money it is similarly accountable for the correct use of the fund paid.

Considering Bangladesh’s request for a loan of USD 4.5 billion, IMF has asked the government to take some actions. These actions include improved governance of the financial sector, decrease of NPLs, transformation of revenue management, growth of tax net and increase of tax-GDP ratio, implementation of VAT law, a decrease of irrational support and fuel subsidies, bringing down the interest rate on savings certificates to a sensible level, and removal of interest rate restraints.

The obtainability and nature of the conditionalities depend on some features, how the government negotiates with the IMF, and whether the government is able to repay the loan along with its interest. Unluckily, there has always been a reluctance for undertaking reforms and refining the governance and competence of public organizations in Bangladesh.

As discussed with the IMF, Bangladesh should present its own strategy in the areas where its people’s interests are. The other issue is subsidies for the agriculture sector, which is related to food security. If the government can upsurge its fiscal space, it can provide support to farmers. Neither IMF loans nor the associated conditionalities are novel to Bangladesh. However, this is the largest loan that Bangladesh is looking to take from the IMF. The size of Bangladesh's economy has grown as its needs. The nature of the crisis is also diverse this time. Therefore, sensible use of the loan will be obligatory to bring the economy back on track. A transparent and accountable system will be significant to the successful result of IMF funding.