What can Bangladesh do?

Whether Bangladesh will get or take the $4.5 billion loan from the International Monetary Fund (IMF) is solely dependent on the government higher-ups’ decision to agree or disagree with the conditions of the global lender, experts say.

Vested quarters will want the government to not agree to the terms, they said, but that the country may face a more severe economic crisis if it does not agree to the conditions and does not get the loan.

Talking to The Business Post, they said conditions like lifting the interest rate cap, fixing market-based exchange rates and reserve calculation with IMF’s formula can be met quickly if there is goodwill. However, they have suggested reducing subsidies to agriculture, energy and power sectors without raising prices.

Meanwhile, business leaders have strongly advised not to surrender helplessly to the IMF and not to lift the interest rate cap.

Former IMF official and Policy Research Institute of Bangladesh Executive Director Ahsan H Mansur said IMF’s conditions are not actually conditions. “They are expected reform issues, which we should address even if IMF doesn’t raise them.”

He pointed out that if the government does not accept the conditions and does not want to take the loan, the country will be in more danger. “Even if this loan amount is not enough to solve the crisis, IMF’s policy support is very important for us.”

However, according to FBCCI President Md Jashim Uddin, this loan cannot be taken by agreeing to all the conditions. At a recent event, he said, “They will give conditions but we must have the capacity to negotiate. Yes, we need the foreign currency but that doesn’t mean that we have to compromise ourselves for that.”

Ahsan said some vested quarters will not agree to the conditions to protect their interests. “Now we’ll just have to see how our leadership manages this situation.”

Zahid Hussain, the former lead economist at the World Bank’s Dhaka office, told The Business Post, “It is possible to implement the market-based exchange rate and lift the interest rate cap overnight. But some conditions will need some time before they are met.”

Reserve calculation

The IMF has already announced its position on having the foreign exchange reserve and assets calculated separately. This time around, it has asked the authorities concerned again to address and fix the issue.

The reserve position will decline to $27 billion if the new calculation is applied and $7 billion of the EDF loan from the reserve along with the $1 billion spent on other sectors are excluded from the present position, says the IMF.

Reforming foreign exchange reserve calculation is very easy, said Zahid. “It can start within a day. It will increase transparency and allow economists to better predict the course of the economy.”

Interest rate cap

Businessmen are against the IMF’s condition to lift the interest rate cap to control inflation.

FBCCI’s Jashim said that without raising the interest rate, banks can increase their capacity through the recovery of defaulted loans and reducing their costs. “A higher rate will only hurt private sector investment and jobs.”

Zahid disagreed and said that if the interest rate cap is lifted, credit costs will increase slightly but the economy will not be affected.

However, he suggested that the interest rate should be increased slowly instead of a sudden hike. “That may backfire.”

Ahsan said businessmen will stand against this to protect their interests. “Interest rates have increased in all countries of the world. There is no alternative to reducing inflation.”

Exchange rate

IMF has suggested allowing both exchange and interest rates to be flexible and determined by the market’s situation.

In this context, Zahid said, “If the exchange rate is left to the market, import costs may increase slightly but the dollar will be saved. We can choose this path.”

However, Ahsan pointed out that the price of the dollar may increase by Tk 5-7 if the exchange rate is fixed based on the market.

“But for how long the central bank will be able to pump over $1 billion as support from the reserve every month? Is it the better policy?” he asked.

Subsidies

IMF has emphasised reducing subsidies to the agriculture, power and energy sectors. However, experts feel that the best solution would be reducing the subsidy to decrease the capacity charge given to the power plants without directly increasing the price.

Zahid said, “If the subsidy is reduced by increasing the price, it will have a big impact on public life. But this can be done by reducing the capacity charge.

“However, it will take time. The government will wait until the expiry date because of the contracts with the power plants.”

But Ahsan advised, “Instead of waiting, the government should try and negotiate with the owners of the domestic power plants.”

“The best solution would be to reduce the subsidy by decreasing the capacity charges. The government should hold discussions with the domestic power companies to find a solution,” he added.

Defaulted loans

IMF has called for reducing the amount of defaulted loans and bringing changes to the definition of loan classification.

At present, a loan is treated as defaulted after 180 days of non-payment of instalments. Earlier, it was 90 days. The amount of defaulted loans in the banking sector stands at Tk 1,25,000 crore.

Zahid said that it is not possible to reduce the amount of defaulted loans overnight. “Also, changes in the definition are subject to the issuance of a circular. But we don’t know if there is goodwill yet to do that.”

The IMF has also called for tax reforms, quarterly calculation of GDP and updating the inflation calculation method. However, experts believe it will be a while before these happen as they are time-consuming matters.