Home ›› 04 Sep 2022 ›› Editorial
Finance Minister AHM Mustafa Kamal and a few dignitaries will attend the 2022 Annual Meetings of the Boards of Governors of the World Bank and IMF in Washington, DC during the week of October 10-16, 2022.
The Annual Meetings are usually held for two consecutive years at the IMF and World Bank headquarters and every third year in another member country. The Board of Governors for each institution consists of one governor from each of the institutions’ member countries, typically the finance minister or the central bank governor.
The joint meeting provides a road map of the sequences of activities in which the Boards of Governors decide on significant policy issues.
Executive Boards of the two institutions subsequently implement the approved list of work plans.
It is a huge gathering, over 13,000 dignitaries from all over the world attend in person but the last two meetings were held in virtual mode due to Covid-19 restrictions. This year’s meeting is important as Bangladesh is seeking support from the IMF in strengthening the economy.
The country is showing certain weaknesses in macro aggregates in the backdrop of Covid-19 and the uncertainty in the Ukraine-Russia war. These twin events cast a shadow over the commodity markets and economies all over the world are experiencing burgeoning inflation.
Bangladesh’s foreign exchange reserves meet the ideal criteria of three months’ import payments but yet not at a satisfactory level.
The feedback from the meeting would be instrumental for subsequent negotiations in the visit of the IMF mission to Bangladesh for a detailed plan of action.
The IMF’s regular Article IV consultation and the last IMF mission on July 12, 2022, pointed out macroeconomic weaknesses in certain areas such as reform in the revenue sector and reduction of subsidies.
The tax-GDP ratio is abysmally low; at a margin of 10 per cent and the annual budget deficit is hovering around 6 per cent of GDP. The issue of capping the deposit and lending interest rate in the range of 6 to 9 per cent is another deviation from the market norm.
The deposit rate is rather perturbing as this yields negative returns when inflation is about 8 per cent. It is rather difficult to endorse the point that business is not sustainable at a lending rate above 9 per cent. The other issue is the trend and the extent of the Non-Performing Loan [NPL].
The relaxed loan classification policy and the government’s failure in the loan recovery process could be a stumbling block to loan negotiation.
The NPL stood at Tk 95,085 crores in March 2021 from the ceiling of 1,16,288 in September 2019, and then reached Tk 1,13,441 crore in June 2022; an increase of 19.3 per cent. Unfortunately, about 45 per cent of the defaulted loans with the state-run six banks manifest political patronisation in the default loan culture.
The exercises on loan rescheduling could not bring the desired results. The Centre for Policy Dialogue (CPD) in a report expressed the gravity of the problem hidden in the longstanding moratorium on loan classification. “The current level of NPLs is hardly indicative of reality.
It is apprehended that the actual volume of NPLs is far greater than the official figures. It is anticipated that NPL will rise further in the coming days, as loans under the Covid-19 liquidity support packages were not provided in a transparent or accountable manner.”
The Ministry of Finance is working on the background papers to be placed in the meeting for consideration of the proposed financial support.
The background papers need to consider issues that the IMF mission emphasized in their previous reports such as the rationalization of the VAT and modernisation of the tax structure, and blueprint of steps toward a more progressive tax structure.
There is little elbow room for the government to act on certain crucial issues; the most important is the financial issues that span from revenue collection to discipline in the banking sector. Sticking to the current deposit and lending rate may not be a viable option.
It is not officially disclosed to the IMF the exact loan amount but the loan size dictates the terms structure and the bindings on the recipient end. However, certain facilities require the fulfilment of certain marginal conditions.
One such facility is the Resilience and Sustainability Trust [RST] which is designed to enhance macro-financial resilience to climate change and the facility is tagged to Special Drawing Rights [SDR] allocation. Bangladesh is among the 20 countries in Asia eligible for this facility.
Bangladesh has an excellent record of loan management with 12 facilities since membership on August 17, 1972.
It is always preferable to borrow from multilateral donors as these institutions maintain homogenous treatment of all member countries often with more liberal terms and conditions for LCDs and developing countries.
There are certain strings in such loans that often help the borrowing countries in restoring discipline in monetary sectors that contribute to the growth of the economy.
Indeed, the recent drives on certain initiatives such as a drop in the currency value of the Taka may have a salutary effect on export earnings augmentation.
The fixation of margin on inter-bank foreign currency transactions and the appropriate steps towards several banks halted the downward spike of the currency value.
The judicious and cautious move of the government on banning the import of luxury and non-essential items helped to contain the increasing trade deficit of over USD 30 billion.
There are a few fault lines in our economy that successive governments failed to address in the last three decades. Fault lines relate to structural problems in an economy mainly in the financial and political institutions.
Spewed by self-interest and political patronization these fault lines could be a future recipe for a more devastating crisis. To be more specific fault lines lie in the weak financial sector, stagnating private investment, unequal growth, low foreign investment, and leakages through various means.
The country immediately needs to address the weak institutional base and thus requires a strong political commitment to fight corruption.
The anomalies that we observe in different state functioning focus on a narrow and partisan denominator that makes fracture in the democratic structure hidden in the concept of rent-seeking.
The writer is a former Member, Directing Staff, Development and Economics Division, Bangladesh Public Administration Training Center at Savar, Dhaka. He can be contacted at mirobaidurr7@gmail.com
