Is the IMF to blame for growing pressure on your wallet?
The recent increase in electricity prices twice has made consumers unhappy with the extra financial burden, but it has pleased the International Monetary Fund (IMF) as it terms the hike "a welcome step."
Meanwhile, industries have seen a whopping hike in gas prices and consumers await more shocks as further hikes in energy prices are planned to cut subsidies to zero in the next three years through a periodic formula-based price adjustment mechanism.
Though adopting such a mechanism is among key structural benchmarks for the latest IMF loans, it has been a pledge of the government too, made by former finance minister AMA Muhith in 2012 while seeking budget support from IMF, and repeated by the current Finance Minister A H M Mustafa Kamal this time.
"To contain fuel subsidies, we will move to an automatic adjustment formula by December 2012, which will ensure full pass-through of changes in international prices (a program benchmark), with a clear timeline…" Muhith wrote to the IMF. "Moreover, we will adjust fertiliser prices…in order to contain subsidy growth," he added.
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After 10 years, Mustafa Kamal in his letter to IMF in December 2022 wrote: "Going forward, we plan to eliminate all structural subsidies for petroleum products and, to this end, will move to a periodic formula-based price adjustment mechanism."
As subsidy burdens keep growing, the government wants to get rid of it by raising energy prices. Subsidies for gas and electricity are expected to reach about 0.9% of GDP in FY2023 compared to 0.4% of GDP in FY2021.
However, the fertiliser and food subsidy is going to stay, amounting to 0.7% of GDP this fiscal year.
Fuel, fertiliser, and food subsidies are set to jump to a whopping Tk1,61,370 crore this fiscal year – almost three times as high as this year's subsidy allocation for these sectors –Tk56,000 crore.
Steps for zero structural subsidies for petroleum products actions are expected to help ease budget pressures for energy subsidies and encourage more efficient fuel consumption going forward, IMF says.
It also refers to the government's commitment not to increase these subsidies during the three-year loan programme and explore options to gradually reduce them further, while scaling up social protection schemes.
Formula-based petroleum pricing has not been put in place, depriving the consumers of the benefit of lower global prices for years and benefiting only the state-owned fuel monopoly BPC.
But the authorities were prompt in hiking fuel oil prices in the last two years, close to 50% in August 2022 on top of a 23% in November 2021, to match soaring international prices. It was followed by record hikes in gas and electricity tariffs.
Social protection scheme has also been on the IMF's agenda to cushion the vulnerable groups, be they people or businesses, from energy price shocks.
This will require more investment for social schemes. The IMF shows the way for revenue growth and the government also pledges reforms in tax and revenue administration to increase tax-GDP ratio by 0.5% in FY24 and further growth during the next three years to facilitate higher social spending and public investment.
It will require the National Board of Revenue to collect more than Tk24,000 crore in the next fiscal year and over Tk1 lakh crore in FY26 to raise tax-GDP ratio by 0.7% as intended in the latest IMF loan programme. To achieve the growth, the revenue board will need over 18% annual growth in next two fiscal years, from nearly 11% this year.
Making tax returns a must for more government services, increasing the number of registered taxpayers to 10 million by 2026 and installing another 300,000 electronic fiscal devices over the next five years are among the promised steps to yield an additional revenue of Tk105 billion.
This means the government will keep passing the pressure on consumers as soon as it rolls out the reforms to cut subsidies and increase tax-GDP ratio.
Our tax-GDP ratio is one of the world's lowest because of tax exemption, inefficiency, lack of automation and alleged pervasive corruption in the tax system. There is no easy way to increase the ratio since tariffs are already high, which need to be rationalised to keep our businesses competitive after LDC graduation.This is one area that should be improved to create an environment conducive to investment, as stressed in the IMF's new programme.
Blame the IMF?
But wait a minute before doing so.
Analysing the current situation, the IMF says while there is not a full-blown crisis, rising inflation, slowing economic activity, and strict austerity measures to deal with the shock are compressing demand, hurting the poor most.
So, the global lender has reminded the government repeatedly not to forget people vulnerable to the shocks induced by the subsidy cut.
It suggested strengthening the social safety net. It asked to expand coverage and benefit level of the social safety net programme and enhance the delivery capacity.
It also asked to adopt a national disaster risk financing strategy that integrates social assistance measures.
If subsidy is rationalised and tax-GDP ratio is increased, the government will have a healthy financial capacity to stand by the vulnerable.
The government promised that it would not leave vulnerable people alone to feel the shock. It will take some measures to support the poor.
For the current state of the economy, the IMF found some key problems and risks which must be addressed to reduce vulnerabilities of the financial system.
The financial sector particularly the banking system has been gripped by scams and surging default loans. Its spillover impact has been affecting the economy and people as well. It needs to be improved as many businesses and people think they are suffering from others' corruption.
Between 2012 and 2022, non-performing loans rose by billions of taka. Default loans accounted for 10% of total loan in 2012, the percentage was 9.36% in September 2022, but the amount was three times to Tk134,396 crore from Tk42,740 crore a decade back.
The government agreed with the IMF to clean the mess in the financial sector. It pledged to a herculean task to bring down NPL by 10% from the current 25%. It agreed to work to improve governance in the financial sector and combat corruption.
In the letter to IMF, the finance minister and the central bank governor pledged to move toward Basel III standard for loan classification, capital adequacy and provisioning requirements to improve the banks' health.
Investing in human capital
Investment in education and health is also much below the minimum threshold required for transforming humans into capital. Crisis of skilled workforce is acute for both the public and private sectors. Low productivity still remains one of the structural constraints of the economy.
Human capital development has been seen as crucial to boosting labour productivity and long-term growth potential. The programme will leverage the efforts to progress on human capital development.
Before Covid-19, the economy was growing, but it could not generate enough employment. The twin shocks of the pandemic and war pushed more people to joblessness while higher inflation forced people to cut consumption.
IMF says human capital development is crucial to boosting labour productivity and long-term growth potential. Reform efforts to improve education outcomes and address the gaps in educational and vocational training are key to building skills and reducing informality.
"Upskilling of female workers is also vital to improve productivity as well as to promote gender equity," it asserts.
"The program will leverage the efforts of the United Nations and other DPs who are providing technical and financial support to make progress on gender equality, financial deepening, and human capital development as part of Bangladesh's Sustainable Development Goals (SDGs). Deepening financial inclusion, particularly among women, remains important," reads the IMF document.
Risks ahead
IMF says amid multiple external shocks, macroeconomic challenges have intensified in Bangladesh. A robust economic recovery from the Covid-19 pandemic was interrupted by Russia's war in Ukraine.
While there is not a full-blown crisis, rising inflation, slowing economic activity, and strict austerity measures to deal with the shock are compressing demand, hurting the poor most, it says.
While on track to graduate from the Least Developed Country (LDC) status by 2026, Bangladesh aspires to reach upper middle-income status by 2031. However, substantial gaps remain in social and development spending, tax revenue mobilization, the scale and diversification of exports, foreign direct investment inflows, and vibrancy of the investment climate, IMF states in its statement released on Thursday.
"Bangladesh would risk falling into a subpar equilibrium of low growth, low investment, and weak human development, if left to restore macroeconomic stability on its own," it warns.
The IMF's new loan arrangements – ECF/EFF – are expected to help accelerate overdue macroeconomic reforms including revenue mobilization, public sector management, and the modernization of monetary and financial systems to lay the foundations for the authorities' aspirations to reach upper middle-income status by 2031, it says.
A decade ago, when the Bangladesh economy was feeling the heat of slow recovery out of the global financial crisis and expansionary domestic measures, the finance minister had said, "We face several major challenges now, which have given rise to an actual balance of payment financing need that is expected to be protracted".
Muhith then approached the IMF for balance of payment support to chase two major goals – Millennium Development Goals by 2015 and Vision-2021 programme.
Now, the crisis is much deeper and even bigger long-term goals are ahead -- LDC graduation by 2026, upper middle-income status by 2031 and high income level by 2041.
Mustafa Kamal builds hope on the IMF's new programme for 2023-26.
"The current 42-month program is centred on upfront policy actions aimed at preserving macroeconomic stability and gradually rebuilding our reserve buffer, while undertaking macro-critical structural reforms to lay the foundations for achieving upper-middle income status by 2031," he wrote in the Memorandum of Economic and Financial Policies (MEFP) attached to his letter to IMF in December.
