After more than a decade, Bangladesh sought financial assistance from the International Monetary Fund. Four months later, the International Monetary Fund’s Executive Board approved the $4.7 billion package, carrying an average interest rate of 2.2%:

- $3.3bn under the International Monetary Fund’s extended credit facility/extended fund facility programme to help countries with balance of payments issues

- $1.4bn under the International Monetary Fund’s resilience and sustainability programme to help with resilience against climate change and natural disasters

The loan will enable Bangladesh to continue financing imports and conducting monetary policy, but they come with a catch: Compulsory conditions that consist of macroeconomic reforms that the International Monetary Fund maintains will stimulate growth, lower inflation, increase international competitiveness, and fix balance of payments issues.

The domestic response to the loan contained both reasoned and inflammatory perspectives that squared off governmental and central bank independence against the exigencies of the country’s inflation, balance of payments, and foreign exchange reserve crises.

Admittedly, evaluating the loan would have been a challenging task had we not possessed International Monetary Fund’s track record in helping distressed economies. History is instructive, and can help us frame our opinions.

Why was the loan necessary?

The Russian invasion of Ukraine in early 2022 deprived the world of their exports, led to the closure of multiple ports, disrupted major shipping lines, and ultimately triggered a global supply chain crisis. The two nations are major suppliers of wheat, grain, maize, corn, soybean oil, fertiliser, gas, and oil. The shortage of such commodities led to food crises in multiple African and West Asian countries, and sparked a persistent rise in prices worldwide.

Developing countries were disproportionately hit due to their overreliance on imports to fuel commercial activities and their lack of domestic substitutes. The situation worsened when the United States Federal Reserve raised interest rates: The resulting spike in dollar value made commodities (which are priced in greenbacks) even more expensive and heightened inflationary pressures worldwide.

Think of a country’s foreign exchange reserves as its international wallet, denominated in US dollars. Bangladesh earns dollars through exports and inward remittances, and spends them on imports, debt repayments, monetary policy, and exchange rate stability.

Over the last year, the slowdown in export receipts (due to a crunch in orders in the readymade garments sector) and remittances (due to the devalued taka and illegal money transfers) meant Bangladesh just was not earning enough dollars to finance increasingly expensive imports and hold the taka’s value against the rising dollar. Forex reserves now stand at $31bn, the lowest figure in six years and down from the $41bn exactly a year ago.

There are two ways out of this: Either borrow from an international financial institution or reduce the current account deficit. The latter can be done either by depreciating the currency to stimulate exports or by dialing down economic activity. Since both tools are untenable for a developing country with poor social welfare programs caught in the middle of a global supply chain and inflationary crisis, the government decided to file for an International Monetary Fund loan.

The headquarters of the International Monetary Fund in Washington in October. Credit: Reuters.

What are the conditions

• Fiscal austerity

The International Monetary Fund wants Bangladesh to increase tax revenues by 0.5% of the gross domestic product, or GDP, in 2024 and 2025, and 0.7% in 2026 and so, has specified exact tax revenue targets (Tk395,100 crore by June, and Tk404, 000 crore by December). In order to meet these targets, Bangladesh must enact sweeping reforms; it has already pledged to raise the number of taxpayers to 10 million by 2026, improve IT-administration, and simplify the tax code. This underlines the government’s decision to move away from trade-related taxes to income and value added taxes, thereby satisfying the International Monetary Fund demands for trade liberalisation.

A second noteworthy adjustment called for by the International Monetary Fund is an end to fuel subsidies and the introduction of a periodic formula based pricing system for petroleum products by December 2023. This is in line with the International Monetary Fund’s principle of letting the market decide prices – it argues that amounts spent on fuel subsidies last year (Tk82,000 crore) is better directed at improving social safety nets, healthcare, and education. The government has clarified that subsidies on food and fertiliser will continue unabated to build the nation’s resilience against imported prices.

While such a reform will allow the country to enjoy any global reduction in petroleum products, it also opens up the possibility of high prices. While this is consistent with IMF’s desire to shift preferences away from petroleum, it can constrain Bangladesh’s economic growth. Moreover, the expected benefits from better healthcare, social welfare, and education will depend on better execution, governance, and accountability.

• Monetary policy

The International Monetary Fund requires Bangladesh Bank to switch to an interest rate corridor system – a shift in operational strategy that reflects the preference of most central banks worldwide. From July onwards, Bangladesh Bank will enforce the market interest rate by setting a minimum deposit rate and a maximum lending rate. As there is no incentive for national banks to break those limits, the theory holds that, given sufficient liquidity supply from the central bank, rates will converge to the targeted interest rate.

It is true that a corridor system requires a lot of fine-tuning; only by adjusting the supply of money to banks can the central bank ensure that the targeted interest rate is achieved. It requires capable forecasting of liquidity situations and deft operations. But as such capabilities are the hallmarks of a capable central bank, the IMF condition towards the same are to be welcomed.

A second noteworthy directive is the unification of exchange rates across the country – a much needed change to ensure stability in the forex market.

The Bangladesh Bank in Dhaka. Credit: CAPTAIN RAJU, CC BY-SA 4.0, via Wikimedia Commons

• Financial sector

The most notable reform is the crackdown on non-performing loans, particularly within the state owned banks. The International Monetary Fund has mandated that Bangladesh fully institute Basel III standards to control risk within the banking sector and follow the International Financial Reporting Standards to correctly identify balance sheet weaknesses among banks. By 2026, Bangladesh must reduce non-performing loans ratios to below 10% for state-owned banks and 5% for private banks.

• Climate change

The International Monetary Fund pledged $1.4bn of the $4.7bn loan to help finance Bangladesh’s climate related spending, particularly on the National Adaptation Plan and Bangladesh Delta Plan. The intent is to buttress the country’s resilience against natural disasters, build climate-resilient infrastructure, improve climate-related food security, and catalyse renewable energy development.

Do IMF reforms work?

Academic findings on the topic are worrying: International Monetary Fund reforms do not lead to economic growth, although they are useful against currency and banking crises. Before digging deeper, I will concede a natural selection bias at play that qualifies the International Monetary Fund’s poor track record: Loans are typically requested by countries whose economies are already distressed and whose institutions are already struggling. That being said, the International Monetary Fund’s structural adjustment policies have certainly worsened the economies of recipient countries such as South Korea, Ghana, Pakistan, Nigeria, and Nicaragua.

Commentators have been quick to condemn Bangladesh’s loss of agency due to the International Monetary Fund loan. Bangladesh and the International Monetary Fund do not share equivalent interests; there is an inherent erosion of sovereignty when Bangladeshi policies are adjusted from beyond its borders.

Fiscal austerity measures encouraged by the International Monetary Fund, such as lower governmental spending on subsidies and increased taxation, help with inflation but often lead to a loss in output and employment in nations that are already struggling with low incomes and high unemployment. Without an equitable tax code and accountable spending on social welfare, fiscal austerity can increase the burden on the nation’s poorest.

Furthermore, the gains from fiscal austerity can only be had if all necessary changes are made: For example, the funds saved from subsidies must be invested into social welfare, healthcare, and education – otherwise the nation will be worse off than before. This is a risk that the International Monetary Fund has regularly overlooked when prescribing reforms in nations with differing internal politics and protocols.

Harsh criticism has also been levied against the International Monetary Fund’s trade liberalisation reforms, as most of the developed world owes their growth to protectionist policies. By depriving developing countries from enforcing protective tariffs and subsidies, the International Monetary Fund exposes countries to undue competition and makes economies overly reliant on global demand for exported products.

On the other hand, certain conditions attached to Bangladesh’s package such as the interest corridor, better reporting standards from the central bank, a unified exchange rate, and better risk assessment in the banking sector are likely to have a positive impact. The extent to which the remaining conditions will help or hinder Bangladesh’s impressive growth over the last decade will be dependent on the nation’s policymakers ensuring the country’s interests are not scarified in favour of the International Monetary Fund.

Samiul Karim is a freelance contributor.

This article was first published on Dhaka Tribune.