Dhaka Faces Four Tough Conditions Set by the IMF

To get a new big loan from the International Monetary Fund (IMF), Bangladesh must pass four big tests this time. The IMF may want to see clear progress in four areas: raising revenue, reforming the banking sector, cutting and rationalising subsidies, and bringing back stability in the economy. The release of the sixth instalment of the current loan programme is also part of this.

An IMF team will come to Dhaka later this month. During a visit of about two weeks, the team will review the overall state of the economy of Bangladesh. It will also check how well the country has met the conditions of the earlier five instalments. Before that, the annual meetings of the IMF and the World Bank will take place next week in Thailand.

Bangladesh plans to push talks on the new loan programme at that meeting. The government aims to take 4.5 to 5 billion dollars in loan support from the IMF under the new programme. So this month’s talks are seen as the first big test for the new loan. Meanwhile, Finance Minister Mr. Amir Khasru Mahmud Chowdhury said Bangladesh will no longer follow any IMF condition.

The minister said the government has cancelled the IMF loan deal. He said, “We have cancelled the IMF loan deal and taken a step to stand on our own feet.” He said the economy of Bangladesh will reach one trillion dollars by 2034 without help from donor agencies.

First condition: raise revenue

Revenue collection may be the biggest challenge under the new loan programme. The tax to GDP ratio of Bangladesh has stayed low for a long time. So the spending power of the government is not growing, while the budget deficit and the pressure of public debt keep rising. The latest IMF review also named low revenue collection as one of the biggest weaknesses of the economy.

The IMF says the government cannot raise enough money for social protection, development and public services without more revenue. In this round of talks, the IMF may ask about the progress of the National Board of Revenue (NBR) in collecting revenue. It may also ask about plans to widen the tax net, reform tax administration and raise the revenue to GDP ratio. This is the big test for the government. The economy needs more spending to regain stability, but low revenue limits the power to meet that spending.

Second condition: bring the banking sector back to a strong base

The second big issue under the new loan programme will be reform of the banking sector. Bad loans, weak banks, shortage of capital, shortage of cash and weak governance in the financial sector still make the banking sector a big risk for the economy. After its visit to Bangladesh earlier this year, the IMF said the banking sector is still under heavy pressure. It said a trusted and joined up plan is needed to rebuild the sector.

So this time the IMF may look for real progress, not only announcements of reform. Talks may cover the government’s plans to restructure weak banks, cut bad loans, raise bank capital and bring good governance to bank boards and management. Economists say it will be hard to use the new loan money well if the weakness of the banking sector stays. A weak banking sector blocks investment, jobs and the flow of loans to the private sector.

Third condition: hold back subsidies

Subsidy management may also be an important issue in the new programme to ease pressure on government spending. Price swings of fuel and other goods in the international market, import costs and government spending on power and energy have all raised the pressure of subsidies. So Bangladesh may talk with the IMF about how much subsidy goes to which sector and how to bring it down to a fair level. The government has already raised the prices of diesel, petrol, octane and kerosene. It says it took this step because of the international market, transport and insurance costs and the pressure of subsidies.

The government says raising fuel prices is not a direct IMF condition. Still, fuel price adjustment, gas and electricity prices and the size of subsidies may become key topics in talks on the new loan programme. This means the new loan may also touch the cost of living of ordinary people in an indirect way.

Fourth condition: inflation and stability in the economy

The fourth big test for the new loan will be to bring back stability in the economy. High inflation, weak investment, pressure on the foreign currency market and slow growth mean the economy of Bangladesh is still going through hard times. Food and fuel prices in particular have raised the cost of living for ordinary people. The latest IMF forecast also shows concern about growth in Bangladesh. The IMF expects growth to fall to 3.5 percent in the current fiscal year.

The IMF has also warned that growth may fall further in the medium term if reforms do not speed up. So the new programme may focus on more than the size of the loan. It may also look at plans to control inflation, strengthen foreign currency reserves, manage the exchange rate and bring back economic growth.

The IMF team and the government’s plan

With these four big issues in mind, the IMF team will come to Dhaka later this month. The team will be led by Mr. Chris Papageorgiou, head of the IMF Development Macroeconomics Division. It will meet Bangladesh Bank, the Finance Division, the Financial Institutions Division, the NBR, the Power Division and the Energy and Mineral Resources Division. The visit will review how well Bangladesh has met the conditions of the current loan programme. A decision on the sixth instalment may come on that basis.

So the government has two goals at the same time. One is to secure the sixth instalment of the current programme. The other is to win the IMF over for a new programme. The first target of the government is to take 4.5 to 5 billion dollars under the new programme, and the Macroeconomic Wing of the Ministry of Finance is getting ready for this. The likely shape of the new programme will give weight to revenue collection, banking reform, subsidy management, inflation control and public debt management.

The government aims to finalise the new loan deal by the end of this year. If the formal process ends on time, Bangladesh may get the first instalment early next year. Along with the IMF, the government is also trying to get new funding from the World Bank. Bangladesh may ask for budget support, and for money for energy security, food and fertiliser imports, banking sector rebuilding, social protection, jobs and climate response.

At the annual meetings of the World Bank and the IMF, Bangladesh has planned to meet top officials of both bodies. There it plans to present the current state of the economy, its funding needs and its reform plans.

What experts say

Economists say the new loan may give Bangladesh short term relief from foreign currency pressure and budget management. But a loan cannot fix the basic weaknesses of the economy. Dr. Zahid Hussain, former lead economist of the World Bank Bangladesh office, says the government must have a clear plan on where it will spend the new loan money and how it will raise the revenue to GDP ratio.

Dr. Mustafizur Rahman, Distinguished Fellow of CPD, says the new IMF programme can open a chance to push needed reforms. But he says Bangladesh must reform its revenue system, banking sector and foreign currency management for its own needs, not only to get a loan.

So the question before Bangladesh is not only whether it will get a new loan. The question is where the country must take hard decisions to open the door to a new loan of 4.5 to 5 billion dollars. The IMF review this month is the first step of that test. How easy the path of the new loan programme becomes will depend largely on whether Bangladesh passes or fails it.