Bangladesh should redirect subsidy money to help poor: IMF deputy to Nikkei Asia

Bangladesh’s government should cut a range of subsidies and redirect the money to more targeted assistance for the poor, the International Monetary Fund’s deputy managing director said in an interview with Nikkei Asia during her recent visit to Dhaka.

“A gradual reduction of fuel oil, electricity, gas and water subsidy is necessary to lower pressure on government spending,” Antoinette Monsio told the world’s largest financial newspaper. “These subsidies benefit rich people disproportionately more.”

According to the Nikkei Asia report, the IMF DMD’s remarks show what the IMF expects as it weighs board approval for a $4.5 billion loan to Bangladesh. Sayeh, who arrived in the country on Saturday, was scheduled to wrap up her visit on Wednesday. She held a string of meetings with the prime minister, finance minister, central bank governor and other top officials to assess the country’s commitment to economic reforms before the loan is granted.

Sayeh said the IMF’s board will consider approving the loan on Jan 30.

Bangladesh was the third troubled South Asian country to approach the IMF last year -- alongside Sri Lanka and Pakistan -- amid a significant fall in foreign currency reserves and a swelling current-account deficit. Forex reserves stood at $32.5 billion in January 2023, compared with $48 billion in August 2021, and are showing little sign of recovery despite some positive glimmers in the economy at the end of 2022.

Sayeh said the money saved by reducing subsidies could create fiscal space for helping the poor, from mitigating the impact of inflation to spending more on education and health. In addition, the additional resources could be directed at infrastructure. All this could help Bangladesh navigate its challenges and create more jobs, she argued.

“Subsidies take up a significant part of the budget,” Sayeh said, adding that Bangladesh also needs to increase efforts to generate revenue. She conceded that there may be some subsidy programs the government needs to continue for the sake of poorer segments of society, such as in the agricultural sector, but she stressed that Bangladesh should not provide a subsidy “that benefits the rich.”

She said that the IMF focuses on how policies impact the poor, and that without its presence, countries would have no other source of funding and would only have to pare down spending even more drastically.

“So, we are very much focused on making sure the reforms that we encourage the governments to implement have focus on the distributional impacts and are really seeking to achieve the objectives of the [lending] program without aggravating the situation of the poor and, ideally, improving it,” the deputy managing director said.