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Wednesday, May 29, 2024

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VIEWS

Faiz Ahmad Taiyeb
Mon May 27, 2024 11:00 AM
Last update on: Mon May 27, 2024 11:00 AM
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WHY ARE IMF POLICIES FAILING TO STABILISE OUR ECONOMY?

Faiz Ahmad Taiyeb
Mon May 27, 2024 11:00 AM Last update on: Mon May 27, 2024 11:00 AM
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During its latest partnership with the International Monetary Fund (IMF),
Bangladesh has been experiencing high inflation for the past 22 months, its
economic crisis worsening gradually. Financial account deficits have surpassed
$9.26 billion. With outstanding payments across various sectors like
electricity, aviation, fuel imports, and various digital sectors, the net
reserves have plummeted to just $13.8 billion, a situation reminiscent of nine
years ago. The continuous dollar crunch and dollar payment crisis have persisted
for the past 22 months, further strangling the country's business and employment
sectors due to LC's substandard control. 



Meanwhile, the government is also suffering from a local currency crisis. Being
unable to make due payments in taka, it decided to issue special bonds worth
nearly Tk 26,000 crore. Nearly half of the new foreign loans are being used to
pay the interest and principal on unscrupulous loans taken in the past. The
country has witnessed the highest depreciation in the value of taka during this
time. So, the question arises: Why does macroeconomic instability continue to
plague Bangladesh even after partnering with the IMF?

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FY2025 BUDGET CAN BE OUR CHANCE TO STABILISE ECONOMY

In my opinion, there are five major reasons: mismanagement of policies;
overlooking large-scale statistical discrepancies; failure to propose
research-based policies; the nexus between corrupt governance and institutional
incompetence; and, ultimately, the mindset of giving concessions to reform
policies. 



Despite Sri Lanka stabilising its economy within six to nine months of entering
a deal with the IMF, Bangladesh hasn't, raising questions about the
effectiveness of IMF engagement here.



While the first instalment of the lending package was granted a year ago,
inflation has continued to soar, with banking liquidity crises, money
laundering, weak bank mergers, and unresolved bad loan issues (NPLs) still
persistent. However, government expenditure hasn't been reduced, rather
development budgets (ADPs) have been slashed. IMF negotiations haven't
significantly impacted critical aspects of poor governance.

The implementation of the crawling peg method (which should have been done at
least a year ago) to control the dollar rate was mistimed. Policy rates have
been further increased when lending interest rates doubled within a few months.
The exchange rate against the dollar hasn't been realistically adjusted, and the
real effective exchange rate (REER) hasn't been followed in due course. After 25
percent depreciation over two years, the new step of taka depreciation by 6.3
percent has led to an increase in the total foreign debt position to nearly Tk
70 crore (about $6 billion). With the dollar rate rising by Tk 7, the
government's main burden of electricity capacity charges, fertiliser, and fuel
imports, especially electricity production expenses, will increase. As a result,
the country will directly experience a new wave of inflation.

The savings interest rates on deposits have not been adjusted at the right time.
Banks have created a messy window for swapping loans at low rates, causing
capital flight and deteriorating private sector investments. The Bangladesh Bank
failed to put a brake on the rise of politically motivated non-performing loans
(NPLs), nor could it restore depositors' trust.



The IMF has not really been critical about the mechanism of hiding billions of
dollars' worth of NPLs. Despite IMF engagement, there has been no pressure on
banks suffering with NPLs. Four state-owned banks alone have seen a 27 percent
increase in defaulted loans, reaching nearly Tk 63,000 crore in total at the end
of last year. The crucial issue is that there hasn't been any attempt to bring
the top loan defaulters to book. Thus, the IMF has not been able to address the
root cause of systemic economic issues.

All efforts to reduce inflation resulted in further increase in prices. Measures
like increasing interest rates, restricting capital flight and NPL, and halting
capital flow mechanisms have NOT been taken on time to combat inflation. 

Read more


WHY IS IT TAKING SO LONG TO STABILISE THE ECONOMY?

Zero incentive policy (the only motto of revenue increase) has triggered new
poverty, energy poverty and urban poverty. In particular, continuous hikes of
primary energy and electricity prices, import duty and VAT etc exacerbated
poverty among the poor and middle class. Rising fertiliser and diesel prices
caused very high food prices and fuelled hunger and malnutrition everywhere.
International markets have seen a stable or declining price for primary energy
over the past six months, yet due to IMF pressure, prices of energy and
electricity have not decreased in the country—rather, the opposite happened. 

Concerns persist that policy inconsistency and conflicts will not get in the way
of ensuring macroeconomic stability in Bangladesh. Triggering all accelerators
of inflation at the same time must be avoided; logical sequencing and order
management are needed.

Mistimed currency devaluation under the crawling peg method will not curb
inflation. Over the past two years, the effect of "new money injection" has
fuelled new inflation—i.e. the flow effect of printing reserves is still
ongoing. Inflation will continue due to import LC blockade. Although private
banks had a higher closing dollar rate of Tk 117 compared to the state-run
banks' Tk 110, costly imports will exacerbate inflation. The plan to increase
electricity prices four times a year over three years will raise inflation. All
logical expectations for inflationary growth will also increase prices in the
market.

The IMF's policy to reduce incentives, centred around electricity accounts, is
flawed; the policies are not research-based. In reality, Bangladesh loses
billions of dollars from manipulated power sector capacity charges. Political
malpractice in the power sector includes corruption in large circles, false
hardware capability, capacity charges, faulty power plants, inefficient power
plants, renewal of inefficient ageing power plants, high system loss, and other
systemic flaws. Analysis of unit-wise production in 2023 shows that despite
23-25 percent unit mechanical failures in electricity production, revenue is
obtained through capacity charges and overbilling. The Bangladesh Power
Development Board (PDB) is procuring electricity production capacity from plants
that are sitting idle through billion-dollar electricity purchases. All of these
are absent in the IMF's "policy proposals." The pressure to reduce
administrative expenses (austerity) is not visible. 

IMF's policy on waivers is contentious. Despite failing to meet the three main
conditions (dollar rate, net reserve limit, and percentage of NPLs) during the
second instalment, Bangladesh received a waiver, which was delayed in other
countries for the same reason. Despite the dollar crisis, the country has
maintained regular debt servicing (payment of interest and principal on foreign
loans), which may be why the IMF has brought flexibility into its policy here,
adjusting its lending business to the government's terms. The June 2024 target
for forex reserves has been brought down to $14.76 billion from $20.10 billion.
Not only that, but the IMF has also reduced the government's revenue target. The
question is, has the IMF not conducted sufficient research and preparation? Or
does the Bangladesh mission lack enough expertise and the knowledge of local
data manipulation?

Read more


IMF PRESCRIPTION TO RAISE ENERGY PRICES IS ANTI-PEOPLE, ILLOGICAL

One of Bangladesh's major problems is misinformation, and the IMF remains
indifferent to that. According to IMF studies, the actual amount of defaulted
loans is twice the government's figure. There are discrepancies not only in
population data, but also in per capita income data. There's uncertainty whether
the new exchange rate will adjust the dollar value of the GDP. In the past year,
despite a nearly 25 percent decrease in the value of the taka, there has been no
trustable adjustment in the dollar rate for GDP. Despite inflating GDP at 9.5
percent inflation rate, a nearly 30 percent decrease has happened in the value
of money over the last 1.5 years. There should be a drop in GDP and per capita
in terms of dollars, and a sharp rise in debt-to-GDP ratio.

Based on its own information, the Bangladesh Institute of Development Studies
(BIDS) found a 15 percent food inflation in a recent survey. But the Bangladesh
Bureau of Statistics (BBS) reported a 10.22 percent food inflation in April
2024. The deviation between the two surveys is 46.77 percent. This level of
misinformation and/or information discrepancy has crossed all limits.
Controlling inflation is crucial as a means to restore macroeconomic stability
in the country. If the inflation data remains misleading, the effectiveness of
the proposed IMF reform policies will remain under question too.

--------------------------------------------------------------------------------

Faiz Ahmad Taiyeb writes on sustainable development and is a public policy
critic. He has several books to his credit, including 'Fourth Industrial
Revolution and Bangladesh,' 'Bangladesh: Development Trajectory And Democracy
Deficit,' and '50 Years of Bangladesh Economy.'

--------------------------------------------------------------------------------

Views expressed in this article are the author's own.

--------------------------------------------------------------------------------

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Related topic:
IMF policies for Bangladeshhigh inflation in BangladeshBangladesh financial
account deficitBangladesh power sector capacity chargesBangladesh total foreign
debt positionnon-performing loans (NPLs) in Bangladeshfood inflation in
Bangladesh
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