Now Bangladesh is opting for an IMF bailout

In May 2021, Bangladesh granted a US$200 million currency swap facility to Sri Lanka to help the latter deal with a severe shortage of foreign exchange. But a year later, Bangladesh itself is asking for a $4.5 billion IMF bailout for fiscal and balance-of-payments support.

Although Bangladesh’s difficulties are not at all as severe as those of Sri Lanka, the emerging “Tiger” in the Indian subcontinent has problems generated by the pandemic, rising oil prices, the Russian-Ukrainian war and the malfunctioning of parts of its own economy.

Bangladesh’s foreign exchange reserves had fallen to US$39.7 billion in July, enough for just over five months of imports. Reserves had fallen by $45.5 billion a year earlier. From July to May, the current account deficit was $17.2 billion (the current account shows the difference between exports and imports). During the same period of the previous year, the shortfall had been $2.8 billion. Its trade deficit had widened and remittances had declined.

Press Trust of India quoted officials from Bangladesh’s finance ministry to say that US$1.5 billion of the US$4.5 billion requested from the IMF would be interest-free. The rest would come at interest of less than 2%. An IMF mission is due to visit Bangladesh in September. An agreement should be concluded by December and submitted to the IMF’s executive board in January 2023.

While the IMF bailout would allow Bangladesh to bridge the large external transactions deficit and stabilize the exchange rate of its currency the “Taka” against the US dollar, the exchange rate should be market-based, said suggested Dr. Debapriya Bhattacharya. from the Dhaka-based Center for Policy Dialogue (CPD). Monetary policy should be harmonized with fiscal policy and subsidies should be controlled, he said.

Defaulted bank loans must be recovered, although this is not an easy task given that most defaulters are large, politically influential borrowers. Non-performing loans have become a major problem in Bangladesh and the IMF is concerned about it.

Writing in Financial Express in May this year, Syed Fattahul Alim, said that, being a net importing country, Bangladesh’s exports would need to increase to offset the deficit in the balance of payments. The government has already imposed import restrictions on some non-essential items to save foreign currency, but the export business is a different story.

Exports cannot increase all at once. The manufacture of some leading export products such as Ready Made Garments (RMG) is highly dependent on imported inputs. A devalued Taka will help increase exports, but it will also make imports more expensive. This will affect all consumers, including the manufacturing sector which imports machinery and raw materials.

Alim said that to plan properly, the government should have reliable and up-to-date data. Here, the role of the Bangladesh Bureau of Statistics (BBS) would be crucial. Some economic analysts have expressed reservations about the figures published by the BBS. For example, the inflation rate in March was given as 6.22 by the BBS, but Dr. Debapriya Bhattacharya estimates that the inflation was double.

Speaking to Dhaka Tribune, CPD Fellow Professor Mustafizur Rahman said Bangladesh would not be in the same situation as Sri Lanka largely because it has not taken on huge loans for White Elephant projects. However, although Bangladesh is now safe, it should be very careful about the type of projects it undertakes with foreign loans, he warned. The interest rate, the repayment period, the usefulness of the project and its ability to generate income should be carefully considered.

Economist Zahid Hussain thinks Bangladesh’s debt scenario is not bad. Sri Lanka’s debt to GDP ratio is around 110%. Bangladesh’s current debt (US$131.4 billion) represents 46% of its GDP. But it was 44.1% in FY21.

However, Dr Bhattacharya added a note of caution here. “Although Bangladesh’s debt-to-GDP ratio is lower than other South Asian countries, the amount of domestic and external debt has been increasing at an unusual rate since 2018. If this situation continues, it could make move Bangladesh beyond the green and into the risk zone in the 2024-25 fiscal year,” he warned.

All economists agree that Bangladesh should improve its tax collection. Ahsan H Mansur, executive director of the Policy Research Institute (PRI), reportedly said that while India derives around 20% of its GDP per fiscal year from revenue collection and Pakistan around 18%, the figure for Bangladesh is lower. at 10%. .

Dwelling on the subject of subsidies, Hasnat Abdul Hye said that since subsidies are provided by the government from taxes collected from the public, higher subsidies or a widening of the range of subsidies would mean higher taxes. or broadening the tax base. These are two politically sensitive areas.

COVID 19, had amplified the problem of subsidies as their demand had increased. Subsidies are a subject of great political importance. Even more so now, as the government faces the next legislative elections in December 2023.

According to Hye, the Bangladeshi government first tried to get banks to provide the subsidies by subsidizing the interest that would be charged for the loans to be given under the various stimulus packages. “When the banks were slow to apprehend the default, the government announced that refinancing would be available for sectors the banks were in doubt about. Although this did not thrill the banks, the government used its agencies to disburse loans, especially to small and medium-sized enterprises. This involved advancing the loanable funds and subsidizing the interest rate. With the cash grant to the poor, budget expenditures to deal with the pandemic began to explode,” Hye pointed out.

He suggested that some reduction in the electricity subsidy could be made if the Power Development Board purchased more electricity from its own power plants rather than independent power producers (IPPs) and rental plants. Indeed, the prices charged by the latter are higher than those charged by the public sector power plants.

According to Hye, the higher price of private sector factories is completely unjustified. Their cost of generation is lower than that of the public sector because they receive gas for power generation while most public sector power plants have to use diesel, a more expensive input.

The government encouraged employees abroad to send funds through the banking channel to increase its reserves. The rate was 2% on the amount remitted. This has succeeded in motivating expats to send money home through official channels. The employees demanded that the rate be increased to 3% compared to the current financial year. But the government decided to raise the rate to 2.5%.

Although Bangladesh has a difficult task ahead, it has an advantage that is not available to the government of Sri Lanka: Bangladesh enjoys political stability but it has been elusive in Sri Lanka. Although the Ranil Wickremesinghe government is in place in Sri Lanka and controls the state apparatus, its “moral legitimacy” is challenged daily by the opposition in parliament and the outside media.

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