Three pertinent issues regarding the IMF’s mission visit

It is a common practice to seek financial assistance from multilateral donor agencies when countries are exposed to uncertainty in the backdrop of monetary and fiscal mismanagement. A number of onslaughts with both domestic or external links crippling economic performance and retarding the growth process also warrant short-term external support from donors in upgrading the status of a few macroeconomic aggregates. There are instances that countries overcome the ordeal through the intervention of the Monetary Fund [IMF] that addresses the urgent problems of depreciated currencies, weak reserve position, current account deficits, or the imbalance between the outflow and flow of foreign currencies.

Two examples are the Tequila crisis of 1994 in Mexico and the Asian Financial crisis of 1997-98. A substantial devaluation of the Mexican currency peso led to a currency and banking crisis. Economic maladies such as currency mismatch, current account deficit, overvalued currencies, and political situation conspired in the dwindling of foreign exchange reserves draining USD 3 billion, out of which USD 1.6 billion on November 18, 1994, in a single day.

The ambivalence of the peso's devaluation by Finance Minister Jaime Serra Puche resulted in a loss of USD 855 million on December 15, 1994. The crawling peg of the Mexican peso was under fire owing to a currency mismatch, the Mexican government owed money in USD to pay its debt, but the receipts were denominated in pesos. The Central Bank of Mexico devalued the currency by 15 percent on December 20, 1994, and in the next two days, USD 4.6 billion left the country, half of the foreign exchange reserve. Intervention in the foreign exchange market is lifted, and the peso is allowed to float freely; the peso was devalued to 35 to 40 percent by the end of December 1994.

Fortunately, Mexico as a member of NAFTA, received the favor of President Bill Clinton in weathering the crisis. The IMF announced a rescue package of USD 7.8 billion on January 26, 1995. Surprisingly, the rescue package on January 31, 1995, by the United States of USD 50 billion consisting of USD 20 billion from the US, USD 18 billion from the IMF (including the USD 7.8 billion announced on January 26, 1994), USD 10 billion from the Bank for International Settlements, and USD 3 billion from private commercial banks. Due to the credit line, Mexico could roll over its short-term dollar-denominated debt. In early March 1995, The Mexican government promised IMF a stringent austerity package that bolstered the confidence of investors.

The agreement by Sri Lanka for a loan of about USD 2.9 billion in early September 2022 is the most recent IMF intervention. The deal is subject to approval by IMF management and its executive Board. “Debt relief from Sri Lanka’s creditors and additional financing from multilateral partners will be required to help ensure debt sustainability and close financing gaps.” Spread over 48 months, the government commits to raise revenue to support fiscal consolidation, introduce new pricing for fuel and electricity, hike social spending, bolster central bank autonomy and rebuild depleted foreign reserves. The staff level agreement is only the beginning of a long road for Sri Lanka, and authorities have already begun the reform process, and it must continue with determination.”

The government of Bangladesh approached the IMF in July 2022 for a USD 4.5 billion loan, available through the Enhanced Funding Facility [ECF], Enhanced Credit Facility [ ECF], and the new initiative, Resilience and Sustainability Fund [ RCF]. The IMF team discussed macroeconomic and structural fiscal and monetary policy issues. The team is at the last leg of their visit and identified a few lacunae in the state of affairs. First, the IMF wants the Bangladesh Bureau of Statistics [BBS] to release GDP data every quarter. The GDP data is recorded every quarter in the Western world and many South Asian countries. Quarterly data series help in various research works and provides holistic and seasonality elements. Econometric software requires data sets for several years and in exploratory analysis, annual data sets may be a better guide in interpretation.

The IMF is supporting the BBS through technical assistance, and it is expected that the BBS could provide the quarterly data series within a few months. The quarterly data series is also essential to project and calculate GDP growth in every quarter. The frequency of monetary policy statements also depends on the GDP series' quarterly release. Secondly, reform in the banking sector is a prerequisite for ensuring transparency in the whole structure. The interest rate cap of 6 percent for deposits and 9 percent for lending is against the market norm. Over nine percent inflation is a disincentive for depositors.

The burgeoning default loans threaten the economy; provisioning costs the depositor and budget support costs the fixed-income earners and marginal taxpayers. Thirdly, the calculation of foreign exchange reserve is inflated by a few elements such as an export development fund, green transformation fund, and a loan is given to Biman by the Sonali Bank.

As a result, the net foreign exchange revenue reserve would be USD 27.98 billion instead of USD 35.98 billion as of October 19, 2022. The IMF has advised the government to initiate specific measures to reduce the budget deficit, such as expanding the tax net and incrementing the tax-GDP ratio that is abysmally low compared to many neighboring countries.

The Bangladesh economy is experiencing weakness in a few macro-aggregates; the deficit in the current account in the neighborhood of USD 30 billion, a drop in both export earnings and remittances flow, and a fluctuating currency value. The IMF’s loan can be an elixir when executed by sound institutional infrastructure with transparency. The political climate has been crucial in smooth navigation since 2022-23 is the penultimate year of the national election.

A weak link exists between the Mexican crisis with the peso and the Bangladesh currency Taka; both currencies suffered depreciation, and there was intervention by the Central Bank in the process, but the backing of the United States in restoring the Mexican peso is unparalleled. However, Bangladesh is pragmatic on two counts; the Bangladesh Bank is more cautious in safeguarding the currency value and maintaining a foreign exchange reserve of a minimum of three months' import payments. Indeed, there is pragmatism in approaching the IMF to get rid of uncertainty in the continuation of Ukraine- Russian war.

The writer teaches at BRAC University and BIDS as an adjunct Faculty in the Master's Programme in Economics. He can be contacted at [email protected].