Why is Bangladesh going for IMF help?

2 August 2022 12:09 am Views - 1316

 Bangladesh's economy depends heavily on Ready Made Garments to bring in revenue, but it's foreign exchange reserves had fallen sharply to US$ 39.7 billion in July

In May 2021, Bangladesh extended a US$ 200 million currency swap facility to Sri Lanka to help the latter face a severe foreign exchange shortage. But a year down the line, Bangladesh itself is seeking an IMF package of US$ 4.5 billion for budgetary and balance of payment support.  


Although Bangladesh’s travails are not at all as dire as those of Sri Lanka, the emerging “Tiger” in the Indian subcontinent has problems generated by the pandemic, the rise in oil prices, the Russo-Ukraine war, and the malfunctioning of parts of its own economy.  


Bangladesh’s foreign exchange reserves had fallen to US$ 39.7 billion in July, which was sufficient for just over five months’ imports. Reserves had come down from US$ 45.5 billion a year earlier. From July to May, the current account deficit was US$ 17.2 billion (the current account indicates the gap between exports and imports). In the same period in the previous year, the shortfall had been much at US$ 2.8 billion. Its trade deficit had widened and remittances had fallen.


Press Trust of India (PTI) quoted Bangladesh Finance Ministry officials to say that US$ 1.5 billion out of the US$ 4.5 billion sought from the IMF would be interest-free and the remaining would come at an interest of less than 2%. An IMF mission is expected to visit Bangladesh in September. A deal is expected to be locked by December and placed before the IMF Board in January 2023.


While the IMF bailout would enable Bangladesh to fill the large deficit in foreign transactions and to stabilize the exchange rate of its currency the “Taka” against the US dollar, the exchange rate would have to be based on the market, suggested Dr. Debapriya Bhattacharya of the Dhaka-based Centre for Policy Dialogue (CPD). Monetary policy would have to be harmonized with fiscal policy and subsidies would have to be controlled, he said. Defaulted bank loans have to be recovered, though this is not an easy task given the fact that most of the defaulters are big and politically influential borrowers.  Non-Performing loans have become a major issue in Bangladesh and the IMF is worried about them. 


Writing in Financial Express in May this year, Syed Fattahul Alim, said that, being a net importing nation, Bangladesh’s exports should increase to offset the balance of payments deficit. Government has already put restrictions on the import of some non-essential items to save Forex, but the export sector is a different kettle of fish. Exports cannot be increased all of a sudden. The manufacture of some leading export products such as Ready Made Garments (RMG) depend heavily on imported inputs. A devalued Taka will help increase exports but it will also make imports costlier. This will affect all consumers, including the manufacturing sector which imports machinery and raw materials. 


Alim says that to plan correctly, the government should have reliable and updated data. Here, the role of the Bangladesh Bureau of Statistics (BBS) would be crucial. Some economic analysts have expressed reservations about the figures put out by the BBS. For example, the rate of inflation in March was given as 6.22 by the BBS, but Dr. Debapriya Bhattacharya feels that inflation was twice that. 
Talking to Dhaka Tribune Prof. Mustafizur Rahman, a Distinguished Fellow at CPD, said that Bangladesh would not be in the same situation as Sri Lanka, largely because it did not take huge loans for White Elephant projects. However, while Bangladesh is safe now, it should be very careful about the kind of projects it undertakes with foreign loans, he warned. The interest rate, the repayment period, the usefulness of the project, and its ability to generate revenue should be carefully examined. 


Economist Zahid Hussain thinks that Bangladesh’s debt scenario is not bad. Sri Lanka’s debt-to-GDP ratio is about 110%. Bangladesh’s current debt (US% 131.4 billion) is 46% of its GDP. But it was 44.1% in FY21. 
However, Dr. Bhattacharya adds a note of caution here. “Although Bangladesh’s debt to GDP ratio is less in the context of other South Asian countries, the amount of domestic and foreign debt is increasing at an unusual rate since 2018. If this situation goes on, this could move Bangladesh beyond the green and into the risk zone in FY2024-25,” he warned.


All economists agree that Bangladesh would have to improve its tax collection. Ahsan H. Mansur, Executive Director of the Policy Research Institute (PRI) is quoted as saying that while India gets about 20% of its GDP per fiscal year from revenue collection, and Pakistan about 18%, the figure for Bangladesh is less than 10%.
Dwelling on the subject of subsidies, Hasnat Abdul Hye says that since subsidies are given by the government from taxes collected from the public, higher subsidies or an expansion of the range of subsidies, would mean higher taxes or the expansion of the tax base. Both are politically sensitive areas.


COVID 19, had magnified the problem of subsidies as the demand for them had increased. Subsidies are a subject of great political importance. More so now, when the government has to face the next parliamentary elections in December 2023.

According to Hye, the Bangladesh government first tried to get banks to provide the subsidies by subsidizing the interest that would be charged for the loans to be given under the various stimulus packages. “When banks dilly dallied apprehending default, the government announced that refinancing would be available for the sectors about which banks had misgivings. When even this did not enthuse the banks, government used its agencies to disburse loans, particularly to the Small and Medium Enterprises (SME). That meant advancing the loanable funds and subsidizing the interest rate. With the cash grant given to the poor, the fiscal expenditure to address the pandemic started ballooning,” Hye pointed out. 


He has suggested that some reduction in the subsidy on electricity can be made if the Power Development Board bought more power from its own plants rather than from Independent Power Producers (IPP) and rental power plants. This is because the prices charged by the latter are higher than those charged by public sector power plants. According to Hye, the higher price of private sector plants is wholly unjustified. Their cost of production is less than that of public sector because they are given gas for power generation while most public sector power plants have to use diesel, a costlier input.  


The government has been giving incentives to wage earners abroad to send remittances through the banking channel to increase its reserves. The rate was 2% on the amount remitted. This has been very successful in motivating expatriates to send money home through the official channel. The wage earners demanded the rate to be raised to 3% from the current fiscal. But the government has decided to raise the rate to 2.5%. 
Though Bangladesh has an uphill task ahead, it has one advantage not available to the government of Sri Lanka: Bangladesh enjoys political stability but it has been elusive in Sri Lanka. Though the Ranil Wickremesinghe government is in place in Sri Lanka, and is controlling the State machinery, its “moral legitimacy” is challenged daily by the opposition in parliament and the media outside.