IMF’s reform proposals: Where is the beef?

The International Monetary Fund (IMF) approved a $4.7 billion loan for Bangladesh on 30 January. The approval enables immediate disbursement of about US$476 million. The rest will be disbursed in seven instalments over 42 months. However, the reform program to come with the cash apparently lacks the punch to be a platform for long-term economic growth. Adverse global developments coupled with inadequate, misdirected, overplayed, and delayed policy responses could lead into a perfect storm if we are not careful early enough.

Considering the rising financing costs globally, the IMF loan is an excellent financial deal. This approved amount is larger than the expected $4.5 billion due to the appreciation of the SDR dollar rate since November 2022 when the latter was first inked. Of the total $4.7 billion, about US$3.3 billion is under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) arrangements. The rest $1.4 billion is under the newly created Resilience and Sustainability Facility (RSF). "Bangladesh is the first country in Asia to receive financing under the RSF," says the IMF Press Release (PR).

ECF financing carries a zero-interest rate with 5.5 years grace period and a 10-year maturity period. EFF interest rate is based on the SDR interest rate plus 100 basis points. At current SDR interest rate this is about 4.23%. There is a 0.15 percentage point commitment fee. Amounts drawn under an EFF have to be repaid over 4.5–10 years in 12 equal semiannual instalments. RSF has a 20-year maturity with 10.5-year grace period. The interest rate could be around 4%. You cannot get hard currency any cheaper these days.

Indications on the reform programme

The IMF PR contains all the buzzy phrases characterising the reform program. The program objective is to "restore macroeconomic stability and prevent disruptive adjustments to protect the vulnerable, while promoting structural change to support strong inclusive and green growth. The concurrent RSF, which supplements the balance of payment support available under the ECF and the EFF, will expand the fiscal space to finance the government's climate priorities."

On the identification of reform areas, it is spot on. Enhancing governance and the regulatory framework, stronger financial sector oversight; developing capital markets; expanding trade and foreign direct investment; developing human capital; supporting large-scale climate investments; rationalisation of expenditures to increase growth and inclusion-enhancing spending; higher revenue mobilisation and monetary policy modernisation are areas where reasonably deep reforms can unlock virtuous cycles. But the meat is in the details which will probably be disclosed in the Fund's yet to be uploaded Program Document (PD).

According to media reports quoting Bangladesh government officials, there are about 30 reform actions, such as automatic, formula-based adjustment of fuel prices and setting up asset management company to recover defaulted loans. They apparently do not include some elephants in the room such as the interest rate cap on bank lending and the multiplicity of the exchange rates. 

Gas and electricity prices have allegedly been hiked as part of IMF's subsidies rationalisation. The program requires separating the allocation of interest on savings certificates and pensions of government employees from the social safety net allocation, starting next fiscal year, as part of reforms expanding the reach of social protection to lower income groups. 

The government has reportedly committed to reduce corruption in the Memorandum of Economic and Financial Policy. The word "governance" appears thrice in connection with fiscal, financial, and regulatory reforms in the press release. It is difficult to gauge what credible commitment the IMF has managed to get in these areas if they are not captured in the yet to be public Quantitative Performance Criteria (a measurable, controllable, and powerful indicator such as official foreign exchange reserves), Indicative Triggers (a similar indicator that can later morph into QPC such as a floor on revenues) and Structural Benchmarks (e.g. adoption of an automatic oil pricing formula).

A lack of punch (?)

The IMF mixes a reasonably objective reading of Bangladesh's situation with hyperbolically articulated public policy recommendations in the PR. This is understandable, PRs being what they tend to be. What is less understandable is its forward-look sounding like there we go again. One need only look at the bland, if not repetitive, language of the PR: 

"Multiple shocks have made macroeconomic management challenging in Bangladesh…. robust economic recovery from the pandemic has been interrupted by Russia's war in Ukraine, leading to a sharp widening of Bangladesh's current account deficit, depreciation of the Taka and a decline in foreign exchange reserves". This "all externally driven theory" misses the role of policy in the propagation of external shocks domestically. 

The role of policy finds a place in their narrative but only after nourishing "the fundamentals are strong like no other" kind of complacency. "The authorities have taken on a comprehensive set of measures to deal with these latest economic disruptions… While confronting challenges resulting from the global headwinds, the authorities need to accelerate their ambitious reform agenda". There is a look the other way tactic to avoid looking at the subset of measures that went awry despite noble intentions. 

Many of the key reasons for a diminished push for game changing reforms have little to do with the institution itself. Nothing prevents the government from carrying out needed reforms. But the IMF and, for that matter, the World Bank, cannot shirk in pushing the "exact" parts of the economic science into policy making, a global public good. Both institutions could be bolder in recognising reform reversals to entrench the stickiness of reforms supported under their current and future programs. The cherished principle of evidence-based policy content, sequencing and timing has been manifestly overlooked. 

Yes, the governments' weak appetite for institutional reform challenges the grit to keep at it. The multilateral institutions generally are constrained by the ecosystem in which they operate. Yet no denying that their managements also have tended to shy away from embracing sweaty reform initiatives. Rather than acting as a catalyst by underwriting the considerable reputational risk involved with approaches that inevitably face resistance, they often have been happy to condescend from the sideline.

Wishful economics (?)

The IMF maintains an impressive analytical edge, owing to its talented and dedicated staff as well as its unique links to countries. Sadly, the press release hardly portends any of this edge expected to be present in the PD.

The fund's interventions and assessments seem out of touch with experience and ground-level realities. Speaking of protecting the vulnerable first, the presence of social protection in a QPC, IT or SB signals policy commitment to the envisaged reforms in social protection. This emperor allegedly has little clothes in the IMF program. Second, the Fund is projecting a reserve build up of $3.4 billion by end June FY23 even though BB has already unloaded nearly $9 billion in the first seven months. This implies a rebuilding of reserves for the rest of FY23 by $12.4 billion, a turnaround in the overall balance of payments that is hardly possible. 

Exchange rate flexibility and unification are conspicuously absent from the reform agenda hinted in the PR. The reticence of the Fund in calling a spade a spade on the prevailing exchange rate arrangement is confounding. The BB has promised a unified and market-based exchange rate by July in the new monetary policy while paradoxically asserting that the current system is market driven. Is this one of those promises that are meant to be broken without being seen as such?

Retraction of failed reforms in slices struggles to cross the last mile. What came in one stroke of a pen can also go in the same stroke. Waiting for external conditions to improve presumes the current regime is not hurting more than warranted by the external factors.

Doing it on our own volition

Unlike the WB, designed as a lending institution focused on longer-term development and social projects, the IMF's core mandate is to be a watchdog of the monetary and exchange rate policies, a "financial crisis fighter". Bangladesh turned to the IMF as financing imports and servicing short term creditors became a lot harder, a sign of potential crisis. With balance-of-payments troubles, the idea is to buy time to rectify economic policies.

Will our economic management finally start to befit the times? Lot seem to have rested on the IMF program, which doesn't look poised to deliver a wholesome package of reforms that otherwise could not be done. We cannot reliably know whether the consequences of the IMF program will be worse than whatever the alternative could have been. However, the indications are that the envisaged reform program is not a platform for long-term economic growth. It lacks the punch. Adverse global developments coupled with inadequate, some misdirected, some overplayed, and almost all delayed policy responses could lead into a perfect storm if we are not careful early enough.

So do not get too excited about any transformative reforms triggered by the Fund program just yet. Be that as it may, we have many hard choices to make, and we need to make them soon. We can grow our way out of this, but it will require a lot of finesse and foresight in doing the possible.