The Bangladesh case

During its seven decades, the International Monetary Fund [IMF] was a savior for many countries in the developed and developing world. Membership [190 countries] provides an edge over certain privileges, making them disciplined in financial norms and policy packages, restoring sound macroeconomic management essential for growth. However, the regime shifts in the exchange rate, the dissolution of the Soviet Union in 1991 and membership of the East European nations, the unification of Germany, the Asian Financial crisis of 1997, and the world financial crisis of 2007-08 put the Fund under stress. Still, through innovation and timely intervention, the institution withstood the test of time. French was the first country to receive the support on March 1, 1947, in the IMF’s history. Argentina is the biggest debtor to the IMF, with a total outstanding debt of USD 42.2bn. The country has had a long and troubled relationship with the IMF, with a history of equally spectacular fall-outs and bail-outs. The bail-out packages for Sri Lanka could heal the economic wounds shortly.

When a country approaches the balance of payments support, the IMF imposes specific measures known as conditionalities that help to restore both the internal and external balance. These practices of conditionalities developed during the 1950s and 1960s underwent several reviews to optimize the resource use in economic perils, such as fundamental disequilibrium in the Balance of Payments, poor growth prospects, and surge in inflationary pressures. The fund policies on conditionalities revolved around performance criteria such as credit ceilings, foreign borrowing, the balance of payments crisis, budget deficit, and revenue and expenditure structure reform.

The most apparent wholesale support by the FUND was during the 1970s crisis when the global economy was in the whirlwind of severe and widespread payment imbalances. Indeed, the first five years of the seventies were the most turbulent period until the Jamaica Agreement in 1976 on adopting the official Floating Exchange Rate. The chaos erupted with continuous deterioration in the USA merchandise trade balance during the end of the sixties and the suspension of gold convertibility on August 15, 1971. The fixed exchange rate was a significant feature of the Bretton Woods agreement in 1944 with the gold exchange standard. The world monetary system entered a new age of floating exchange rates with the Second Amendment of the Articles of Agreements. The global economy was in the throes of inflationary pressure owing to regime change akin to what we are experiencing in the aftermath of COVID-19 and the Russia - Ukraine War. The inflationary pressure could eventually lead to a severe recession in the industrial world with adverse consequences for the economies of the developing world. The practice was relatively low conditionality in easing the burden for countries at an early stage of payments difficulty “ it would not have to introduce harsh measures and run the risk of reinforcing the recessionary trends associated with the upsurge in inflation in general and the price rise in particular. “

The priority was to make resources available subject to relatively low conditionality with salutatory effect on the growth prospect and decelerating the momentum of the recession in both the developed and the developing world. The creation of a temporary oil facility in 1974 helped many countries finance payment deficits related to the increase in fuel costs. Two qualitative requirements shaped the conditionalities. First, consultation with the Fund on their BOP policies and prospects, including approaches to cope with the energy problem. Secondly, refrain from relying on restrictions on international transactions in dealing with the difficulties. The decision was reversed with the oil Facility of 1975 with moderately tightened conditionalities--a quantitative description of the policies addressing the BOP difficulties. The oil facility worked as a shield for 55 member countries. The package with about 7 billion Special Drawings Rights [SDRs] divided into tranches and with a convenient interest rate as an elixir in those hard times.

Bangladesh pragmatically sought IMF support worth 4.5 billion under the Extended Credit Facility, Extended Fund Facility, and the IMF’s new Resilience and Sustainability Facility (RSF) to augment foreign exchange reserves, budget support, and improved growth prospect. As a result, the World Bank revised the GDP growth at 5.20 per cent by slashing the projection of 6.7 per cent in FY 23 and the forecast for FY at 6.2 per cent. The economy is in flux with a few macroeconomic aggregates such as rising energy costs, trade deficit due to rising cost of imports, depreciation of Taka by 18 per cent, depletion of foreign exchange reserve, and average inflation roaming about 8 per cent.

The USD 4.5 billion loan support for Bangladesh is likely to be approved at the executive board meeting of the International Monetary Fund (IMF) on 30 January. The first installment will be disbursed in February 2023, while the last one, the seventh installment, will be in December 2026. The loan's interest rate has been set as per the market price at 2.2 per cent. However, the assistance does not constitute bail-out support but rather a preemptive measure as the economy is not debt-ridden and with considerable fiscal resilience. The government has adopted development programs targeting poverty alleviation and food security as well as various measures like widening social safety net coverage and providing food and other essentials through TCB and VGF cards. Macroeconomic policies in recent years have helped keep inflation stable, the debt-to-GDP ratio low, and external buffers adequate. However, a few challenges could yield positive benefits, such as a poor Tax- GDP ratio, building a more efficient financial sector incorporating the market-based criteria, and the uncapping of deposit and lending interest rates. Moreover, the export diversification drive could help Bangladesh’s economy become more resilient and support long-term inclusive and sustainable growth. However, Bangladesh should immediately address specific legacy problems clouding the growth prospect, such as the NPL episode implicit in massive leakage that could bolster domestic investment.

The present global economic ordeal is a repercussion of the 1970’s episode after COVID-19. Moreover, the Russia-Ukraine war would drag the adjustment process for developed countries, with many developing world’s languishing on growth prospects. China, an economic superpower, experienced the lowest growth rate in history and growth prospects in the USA and EU cajole recessionary syndrome. The global economy is projected to grow by 1.7 per cent in 2023 and 2.7 per cent in 2024, subject to the complete restoration of the world supply chain currently at risk because of the flare-up of the Ukraine-Russia war.

The impending global recession is in the World Bank and IMF manifesto. The interest rate hike by Fed contributed to inflation in many countries, and the world supply chain is in disarray with trade sanctions. Therefore, the world expects the conditionality criteria should be more humane and clothed with a human face.

The writer teaches at BRAC University and BIDS as an adjunct Faculty in the Master's Program in Economics. His email address is mirobaidurr7@gmail.com