IMF loan and its ramifications

When does a country seek loan from IMF? According to media sources a country seeks IMF loan when it is in economic distress viz. balance of payment crisis, high inflation or huge government debt. IMF provides loan to overcome these problems and restore economic stability and asks doe implementing reforms to address the root causes of financial problems. It can be seen as a responsibility to address economic crisis and restore stability. Inversely, it can be analysed as incompetence of government which produce a negative image of a country.

There is a common perception that no country really benefits from an International Monetary Fund. Due to different problems related to global situation and monetary policy Bangladesh is also taking loan from IMF. Already first instalment amounting to $ 47.62 crore has been released. Question arises that will this loan bring Bangladesh out of economic problems?

Dr, Zahid Hossain, former chief of The World Bank, Dhaka Office, thinks that it is certainly a good programme. Dr. Salehuddin Ahmed, former governor of Bangladesh Bank, has said that it will give a positive message to foreign investors and encourage other investment partners. It will create optimism in total economy but dollar crisis will not end soon. It will not have much impact on balance of payment. IMF calculates some standards. For example, reformation of banking sector is necessary but subsidy on agriculture must continue.

Dr. Mainul Islam, Professor of Economics of Chittagong University, says that it is normally thought that the conditions given by IMF for taking loan are against common people. They ask to reduce subsidies, to raise interest rates, to reform other government policies. These are not public-friendly. After 2012 Bangladesh has not taken IMF loan. The government has taken this loan because there was no other option. Pressure on foreign exchange reserves due to money laundering and the trend of reserve decline due to lack of efficiency has not been addressed properly. If there is no change here, problems in economy will continue.

IMF always has a pro-capitalist bias. As a result, income inequality increases and wealth of the rich increases. In Malaysia, Mahathir Mohamad did not take IMF loan in 1997. In crisis they did not accept IMF prescriptions. They reformed themselves and got released. Efficiency is the main factor.

He said that Instances are very rare that IMF loan has resolved economic crisis of a country. For example, Indonesia took IMF loan in distress. Initially, IMF prescriptions turned their economy upside down. After a long time now they have overcome the crisis. It cannot be said that they are back in good condition with IMF loan.

Recently, after taking a loan from IMF, Argentina's situation has worsened. It is not just because of IMF loan and their conditions, there was widespread corruption in their financial management. Apart from anti-public terms like not giving subsidies, IMF places some good conditions also viz.: reforming financial sector, increasing revenue etc. So, it is not always justified to criticise IMF flatly but their priority is repayment of loan they give. Condition of our economy, good or bad, is not their concern.

According to Prof Islam, we have taken the IMF loan under compulsion. If decline of foreign exchange reserves cannot be stopped, this crisis of economy can’t be solved easily. The question is, whether IMF's $ 4.70 billion loan will solve our crisis or not. Before that we should know the causes of decreasing reserve. Mainly there are 4 reasons - over-invoicing of import, under-invoicing of export, non-repatriation of export proceeds and huge amount of loan taken from banks being laundered through hundi.

We have not looked into these matters, even not till now. IMF loan will not save us if this trend of inattention continues. Notice that these four reasons are not included in conditions of IMF. These have not increased in one day. Our exchange houses play a role in hundi. Many exchange houses should be closed. What is the need for so many houses in Bangladesh?

IMF's priorities are elsewhere. They are talking about reforming the banking system and getting tough on bad loans. Bangladesh has not taken strict measures against default loans in recent years. Biggest defaulters have been removed from defaulters’ list by depositing 2 per cent. As all leading defaulters have done the same thing, their names have not been included in the list of 20 top defaulters published by finance minister. If IMF says to reform financial sector and stopping banking sector irregularities, it also includes all issues including default loan.

Bangladesh Bank says that the amount of defaulted loans is 1 lakh 34 thousand crores whereas according to IMF the amount will be 2.5 to 3 times more than that. I support the IMF's stand in this regard. But the IMF has not given condition to take tough action against defaulters.

Regarding money laundering he said that government can certainly stop it. In these days of information technology it is very easy to find out the price of anything in the world market. If Bangladesh Bank forms a strong committee, if the committee verifies each LC, does not allow under-over invoicing, then it can be prevented. Around 15 billion dollars is being over- invoiced every year from our country. This is the main reason of decreasing our foreign exchange reserves.

According to Prof. Islam, the government says that IMF has given us loan which proves that our economic position is good. Sri Lanka or Pakistan did not get loans because of their bad situation. Economic condition of Bangladesh is definitely much better than that of Pakistan or Sri Lanka. But within one year our reserve has decreased by $ 22 billion, from 48 billion dollars to $ 32 billion as claimed by government but to $ 24 billion as per IMF report. We are heading towards dangerous situation. It must be stopped. Due to lack of skill it could not be stopped. If IMF gives loan, it is good, if not, then it is not good –it is not right to think like this. Our problems are identified but action is not being taken.

Economist Wahiduddin Mahmud said, “Will default loan be reduced by signing the paper? It is purely a political matter.” Dr. Abdul Mazid, former chairman of NBR, thinks that this loan will increase confidence in overall economy. Let us be hopeful that our economy will gain confidence without any interference. Not only in paper but reforms will be materialized in practice.

The writer is a former Commissioner of Taxes. He can be contacted at [email protected]