IMF and reforms in Bangladesh

On January 30, the International Monetary Fund (IMF) executive board at a meeting in Washington DC approved the Bangladesh’s request for the credit package of US$4.7 billion to be delivered over the next three and a half years. The IMF board approved the loan packages for Bangladesh after a series of high-profile visits and discussions with the government high-ups.

The IMF is of the view that the main risk to the loan programme is limited scope to relax fiscal or monetary policy in the event of additional adverse real shocks, given narrowing fiscal space, high inflation, and reserve losses. IMF has attached conditions for reforms in the revenue, fiscal and financial sectors with its package to Bangladesh. The IMF in its statement said that the domestic revenue mobilisation strategy relied on both tax policy and revenue administration reforms. Bangladesh government is working to gradually implement almost all conditions of the International Monetary Fund (IMF) to get the agreed loan.

Bangladesh earlier took loans from IMF in 12 occasions since becoming member in 1972. The first loan was taken in 1974 and the loan was of USD 987 million in 2012. That was the highest loan taken from IMF. This time Bangladesh will get USD 4.50 billion. Out of this amount, USD 3.20 billion will be received under the extended credit facilities (ECF) and remaining USD 1.30 billion be available for tackling risks induced by the climate change.

IMF has the type of conditions is almost the same for most the loans extended to the member countries. But the lender does not release loans at a time. Bangladesh mainly has to take five types of steps--building financial capacity of the government, modernization of monetary policy structure to lessen inflation, strengthening the financial sector, improving the business environment and enhancing capacity to tackle the risk induced by the climate change.

These are among a set of time-bound to-do lists the global lender has prescribed for government agencies for 12 months to help Bangladesh increase fiscal space for priority spending, increase exchange rate flexibility and enhance policy-making capacity.

Bangladesh tackles these immediate challenges, addressing long-standing structural issues remains critical, including threats to macroeconomic stability from climate change. IMF of the opinion that “To successfully graduate from Least Developed Country status and achieve middle-income status by 2031, it is important to build on past successes and address structural issues to accelerate growth, attract private investment, enhance productivity, and build climate resilience.”

The IMF also said that fiscal reforms were imperative to strengthen the management of public finance and investment while the debt programme would improve spending efficiency, governance and transparency.

IMF wanted a wider reform in the financial sector to reduce financial sector vulnerabilities, strengthening oversight and enhancing governance and the regulatory framework. It has also asked for structural reforms to create conducive environment to expand trade and foreign direct investment, deepening the financial sector, developing human capital and improving governance to enhance the business climate so that country’s growth potential could be realised.

The central bank should publish banks’ distressed assets in the annual financial stability report before the end of June to support non-performing loan resolution and enhance transparency in the banking sector.

One of the key conditions is an increase in revenue mobilization efforts of an additional 0.5 per cent of GDP annually in FY24 and FY25 and 0.7per cent of GDP in FY26. That is, the IMF stipulates that Bangladesh’s tax-GDP ratio should rise from the current 7.8per cent of GDP to 8.3per cent in FY24, to 8.8per cent in FY25 and finally to 9.5per cent by FY26.” According to the condition of the IMF’s $4.7 billion loan package, to meet this target, the Bangladeshi government needs to raise the revenue by at least an additional Tk65,000 crore by the end of FY24.

To achieve this target and fulfill IMFs conditions, economists are saying that major structural reforms are needed as early as possible. A recent Policy Research Institute (PRI) analysis shows that increasing the tax-GDP ratio by 5 percentage points (i.e., to fulfill the 8th FYP target) could increase economic growth by up to 3.3 percentage points and reduce the poverty headcount rate by up to 2.2 percentage points.

IMF also wants the Bangladesh Bank to compile and report official reserve assets as per the BPM6 definition – IMF’s balance of payment guideline – and use market-determined exchange rate for official forex transactions by June this year. The net forex reserve also must not drop below $26.8 billion by the end of this year.

As per the conditions, Bangladesh Bank (BB) will leave control of the Bangladesh currency’s exchange rate with the US dollar to the floating market. The BB also includes allowing the private sector to import fuel and increasing electricity prices at the retail level.

To enhance monetary operation, the central bank should adopt an interest rate corridor system by the middle of this year while the finance ministry needs to submit to Parliament the Bank Companies (Amendment) Act 2020 and the Finance Companies Act 2020, drafted in line with best practices, by September to upgrade legal and regulatory framework for the financial sector.

Besides, a long-term plan will be made to make the prices of imported goods, including energy products, use-based and these steps will increase the tax-GDP ratio. Meanwhile, the state minister of power and energy has said the price of fuel oil will be adjusted every month. Price of water, power and gas will be adjusted simultaneously as the government has to cut subsidies in these sectors. This is the main condition of the IMF and fuel price already been increased.

Among the proposed structural benchmarks, to be initiated within 12 months after the IMF Board’s approval of the loan package, include developing a plan by this December to reduce net national savings certificate issuance to below one-fourth of total net domestic financing by FY26.

They have suggested that Bangladesh Bureau of Statistics will take steps by this December to publish quarterly GDP data.

The IMF also proposed 11 reform measures under the Resilience and Sustainability Facility to be completed in the next two years: adoption of a national disaster risk financing strategy while integrating social assistance measures, updated PPP policy and framework that integrates climate-related risks and developing relevant guidelines and updating the Policy on Green Bond Financing by the end of 2025.

At present the subsidy has been estimated to be 2.3per cent of GDP. Bangladesh currently use indiscriminately but it must be carefully evaluated and should immediately be brought down to a much lower level. IMF suggested reducing the tax exemption although it is not possible to stop tax exemptions in all cases as per the terms of the IMF; a comprehensive study is needed on tax incentives or exemptions about the required area, its percentage and an explanation of why it’s given in the budget documents. The government should also give the correct calculation of this tax exemption. It should be mentioned how much the country’s revenue is being lost due to this exemption.

Among these, some conditions have been implemented by the government before starting loan negotiations. The main condition of the IMF loan is the reduction of subsidies. In order to reduce the subsidy, the government increased the prices of electricity, fuel, gas, and fertilizers from the middle of 2022.

Another condition of the global lender was to open the import of energy products. At present most of the fuel is imported by the government. As part of IMF conditions, the private sector got permission for LNG import.

In fulfilling the condition of the IMF, the government is formulating a policy to import energy, gas, and oil through the private sector.

The global lender also proposed reforms in macroeconomic management and sought pledges for efficient use of resources in the health sector. Bangladesh has already started formal talks with the IMF to obtain a loan to help meet the deficit budget for the current fiscal year (2022-23).

The major structural reforms are needed as early as possible. But this reform is not just because the IMF says so. We must have our own capacity to identify the problem and what reform is necessary for us. Bangladesh already initiated some of the reforms and IMF also responding positively. Bangladesh is slow in reform of revenue and banking sectors although these sectors need rapid reform to accelerate economic development. Bangladesh may consider evaluating the weakness of economy, develop strategy and implement it as our homegrown agenda.

The writer is Non-Government Adviser, Bangladesh Competition Commission. He can be contacted at mssiddiqui2035@gmail.com