Bangladesh pledges to reduce corruption to get $4.5b IMF loan Tuesday

The government has pledged to reduce corruption in the country as a condition for getting a $4.5 billion loan from the International Monetary Fund (IMF) amid the forex crunch, according to officials.

The Ministry of Finance has made the commitment in the Memorandum of Economic and Financial Policy signed with the Wasington-based lender.

The IMF board was scheduled to hold a meeting last night regarding the approval of Bangladesh's $4.5 billion loan proposal. Expressing optimism about the loan programme, finance ministry officials said the multinational lender may officially announce the loan approval in the early hours of Tuesday.

If the loan is approved, Bangladesh will get $4.5 billion in seven instalments over 42 months, of which the first one as early as before mid-February.

In addition to reducing corruption, there are about 30 conditions in the loan agreement, including dynamic adjustment of fuel prices, bringing down the default loan of state-owned banks to 10%, setting up asset management companies to recover defaulted loans, and leaving the exchange rate to the market, according to the officials.

However, the set of conditions do not incorporate lifting the interest rate cap on bank lending and deposits, they confirmed.

"The finance minister has added a paragraph at the end of the MEFP, in which the government has pledged to play an active role in reducing corruption," a Finance Division official told The Business Standard.

He, however, said that there is no specific mention in the pledge about what kind of steps will be taken to reduce corruption or the rate at which corruption will be reduced.

To the query about how it will be determined whether corruption in Bangladesh has reduced or not, the official said, "The IMF has asked us to reduce corruption, and there is a promise that the government will try to do so. There is no specific target on how much corruption should be reduced."

He said the IMF team suggested reducing the huge wastage in government expenditure, which was identified as a major failure in budget management.

Finance Division officials said the IMF's conditions are referred to as "targets" in the MEFP. Although the IMF suggested reducing the subsidy on fertilisers, this was not included as a condition as the government did not agree to it.

However, the IMF has conditions to reduce the overall subsidy. As part of this, gas and electricity prices have been increased. In the next fiscal year, the subsidy will be much less than FY23, they noted.

They said there is no condition by the IMF for "dynamic adjustment of gas and electricity prices". Only the price of fuel is subject to that adjustment.

On setting up an asset management company to reduce defaulted loans, an official of the Ministry of Finance said that the Financial Institutions divisions has prepared a draft of the law in 2020 and published it on the website for opinions.

According to the draft, it will be a 100% state-owned specialised company. But the IMF believes that it will not be possible to recover default loans through a  government entity. Therefore, the lender has set conditions for the formation of private asset management companies.

Besides, the IMF has given conditions to amend the Bank Company Act in order to bring changes to the definition of loan default. According to the conditions, any borrower who fails to pay three instalments should be marked as a defaulter.

At present, if six instalments are not paid, the banks mark them as defaulters.

In 2012, the IMF levied similar conditions aiming at financial sector reforms while approving a $282 million loan to Bangladesh. At that time, the lender said the government will pursue legal and prudential reforms to strengthen financial sector governance and oversight and reinforce the Bangladesh Bank's supervisory mandate and capacity. 

Finance ministry officials said the IMF's terms this time also include limiting the budget deficit to 4.5% and boosting revenue. Apart from cancelling tax exemptions, the agency has imposed conditions for revenue administration reform. In addition, the IMF has imposed conditions to strengthen the implementation of the annual development programme, reduce government corruption and waste. Besides, it has called for public financial and debt management reforms.

In 2012, the IMF in similar conditions noted that the government has agreed to contain its budget deficit (excluding grants) to 4.5% of GDP in FY13, including the settlement of fertiliser subsidy overruns from FY12, with moderate consolidation over the medium term. Underpinning these targets are further tax policy, revenue administration, and public financial and debt management reforms.

"Further efforts will be made to contain subsidy costs, anchored by a fuel price adjustment formula. To mitigate the impact of adjustments on the most vulnerable, agreed fiscal targets will protect social spending by the government. Accelerated implementation of the Annual Development Program and the government's focused use of non-concessional external borrowing and guarantees should hasten the transition from quick rental to base power generation, an essential pre-condition for reducing subsidy costs and relieving the burden of price adjustments on final consumers," the lender then noted.

Finance ministry officials said gas and electricity prices have already been escalated as part of IMF's conditions for reducing subsidies.

The agency stipulated that monetary policy announcements should be made four times a year, while Bangladesh has agreed to three announcements per year. And as part of that, the Bangladesh Bank announced a monetary policy in January this year.

The central bank has promised a market-based exchange rate in the new monetary policy as per the IMF terms. The size of the Export Development Fund (EDF) has also been decided to be reduced by $1 billion.

Apart from this, the IMF has set conditions for separating the allocation of interest on savings certificates and pensions of government employees from the social safety net allocation, which the Finance Division may implement in the next fiscal year.

Finance ministry officials said that the government had no obligation to fulfil any condition before the first instalment. However, the MEFP has specified the conditions that the government will implement before receiving each of the next instalments. 

Before receiving each tranche from the second instalment, the IMF mission will visit Bangladesh to review the implementation of those conditions and present them to the board of the organisation. If the board is satisfied with the implementation, the IMF will release the next instalment of the loan package.