Will reform pledges to IMF work this time?

Along with approval of a $4.7b loan, the IMF has assigned Bangladesh with a set of tough homework to improve the health of the country's financial sector and fiscal management through sweeping reform programmes in which the country fell short. Good news is Bangladesh will receive the first instalment this month, which will give some cushion to the depleting foreign exchange reserve and the balance of payment deficit.

But the government needs to stay on the path of reforms to avail the rest of instalments in the next 42 months.

In its latest forecast, the IMF does not project a quick recovery for Bangladesh from the global shocks and reaching pre-pandemic may take up to FY27. The next year may see some indicators getting worse.

Economists believe the IMF loans are much needed for Bangladesh to tide over the crucial times, getting the instalments disbursed as scheduled may depend on the progress of reforms as promised.Instead of considering those as mere proposals and subjects to forget, it will be wise to take those as conditions and adhere to, they suggest, as reforms are long over due for the sake of the country, not to get IMF loans alone.

The government took several reform initiatives under the IMF's loan package in 2012, some of those made some progress while most others were not even initiated holding back the disbursement of the amount in full. The situation is now much worse than in 2012 and it depends on how necessary these reforms are considered to get the IMF loans disbursed in full, they view in their comments given to The Business Standard.  

Because of the IMF's pressure, the government in 2013 amended the Banking Companies Act incorporating that failure of three loan instalments would be considered a borrower a defaulter. But the Bangladesh Bank has shifted from this by issuing circulars from time to time and now a borrower is regarded a defaulter after failure of six instalments.

Also, loan repayment rules have been relaxed further since the Covid-19 pandemic hit the country in March 2020 when borrowers got a moratorium on their loans and after that, easy rescheduling. Defaulted loans soared to over Tk134,000 crore as of September 2022 from Tk42,000 crore in 2012.

Similarly, of the other conditions IMF tagged with the previous loan to Bangladesh like modernising the tax system, implementing the value-added tax (VAT) law and demutualisation of the stock market were critically important. Though the new VAT laws are in place, it has been changed several times after pressure from the business community.

This time, the IMF has imposed a number of conditions, mostly similar to those of the previous loan given in 2012.

Introduction of the energy price adjust system was also in the pledges which did not make any headway. Rather the government chose to be rigid not to adjust energy tariffs when global prices were low.

Now, as the negotiations for the latest loan package was in progress, the government was quick in hiking prices of electricity and gas when the industries were asking for uninterrupted energy supply and inflation was on the rise.

Sharing their views with TBS today, economists have said the latest IMF loan package has necessitated reforms in the banking sector, revenue, and energy price adjustments.

After Bangladesh secured $4.7 billion loan packages from the International Monetary Fund (IMF) on Monday night, it has now become a million-dollar question whether the country will be able to deliver on its financial reform promises it made from time to time.

Over the decades, the country turned to the IMF at least a dozen times, last in 2012, but the reform pledges and subsequent initiatives were left half-baked despite the authorities' fulfilment was crucial for any healthy economy.

Take the country's banking sector as an example. Bangladesh's financial system is hugely bank dominated, but the sector has been living with chronic illness from nonperforming loans to poor regulations and governance.

After more than a decade of the last credit support by the IMF, none can surely say that the conditions of the banking sector have improved, with many arguing that banking health has deteriorated further.

The $4.7 billion IMF loan will be released in 42 months, as Bangladesh will receive the first tranche of the loan by 10 February.

According to the fund, Bangladesh is the first Asian country to have $1.4 billion from the newly formed Resilience and Sustainability Facility (RSF) to tackle climate change issues, which expose the economy to large risks that could threaten macroeconomic stability.

Broadly, the IMF has given reform focus on four key areas - creating fiscal space to enable greater social and developmental spending; strengthening the financial sector; modernising policy frameworks; and building climate resilience – with the loan.

The IMF says, "Fiscal reforms to strengthen the management of public finance, investment, and debt will improve spending efficiency, governance, and transparency. Reducing financial sector vulnerabilities, strengthening oversight, enhancing governance and the regulatory framework, and developing capital markets will help mobilize financing to support growth objectives."

There will be pressure this time

The IMF-mandated policies and reforms can have both positive and negative impacts both in short and long-term.

For example, structural reforms may help the country reduce corruption and increase transparency, but the move may prompt immediate fuel shocks compelling people and the government to tighten the belt. This eventually can have an impact on a country's social welfare goals and poverty outlook.

Prof Mustafizur Rahman, distinguished fellow of the Centre for Policy Dialogue (CPD), believed, this time Bangladesh will be in pressure to carry out the IMF-mandated policies and reforms as the country needs the loan more now than in 2012.

Like 2012, the fund this time too emphasises dynamic fuel price adjustment followed by most of the developed nations including neighbouring India. At that time, the then finance minister talked about dynamic fuel pricing to reduce government subsidies, but the government did not implement it in the end. However, the IMF is strict on this issue this time.

Finance ministry officials said implementation of most of the reforms that the IMF imposed in 2012 had started. But after receiving the last instalment of the loan, the implementation was stalled.

Not a resurgent tonic, but a trust-building tool

The conditions set by the IMF are essential for any healthy economy, according to a top finance ministry official.

He agrees that reducing fiscal imbalances, strengthening social protection, reducing public debt and budget deficits by increasing revenue, and ensuring a strong financial sector are paramount for any country.

"As Bangladesh has not done any reforms in these sectors, the IMF has identified the vulnerabilities and has set various targets for improvement. If we still do not implement those seriously and turn to the fund after ten years, the organisation will still impose the same conditions," he told The Business Standard.

Finance Division officials said a $4.7 billion loan by the IMF in 42 months will not provide a resurgent tonic to the forex reserve or the economy as the amount is equivalent to Bangladesh's import costs for 15 days.   

But they labelled the loan approval a tool to repair the country's trade and credit trust to its foreign partners.

"Now the foreign banks do not want to confirm the LC [letter of credit] of Bangladesh," said one of the officials, adding, "But the fragile confidence would no longer dominate our external trade when they [banks abroad] come to know that Bangladesh is under the IMF programme."