The International Monetary Fund (IMF) occasionally makes headlines in Bangladesh, the most recent being in June this year. But it already seems like a long time ago. And their work at that time appears to have been overshadowed, at least to some extent, by recent events.
It may be recalled that against the backdrop of several challenges facing the economy (ie, balance of payments deficit, dwindling foreign exchange reserves, Dhaka devaluation and inflation), the government went for the easy solution. A loan from the IMF. A loan plan of $4.7 billion was agreed in January 2023. 42 months loan to be disbursed in seven installments—subject to satisfactory review by the agency. In June this year, the second review was successfully completed and the third tranche of $1.15 billion was released.
The loan, of course, came with conditions including a certain amount of foreign exchange reserves (four months of imports), raising tax revenue, periodic changes in the prices of petroleum products and electricity, abolishing the fixed interest rate regime, moving. Market determined exchange rate, etc.
As part of the second review of the loan program, the IMF came up with a risk assessment for the economy, which identified nine risk factors at both local and international levels. Such assessments are useful even in normal situations. And the harder it is, the higher it is. So, the assessment is welcome.
However, given the multifaceted challenges, the complexity of the situation and the expectations from a partner like the IMF, some questions arise. For example, what is the value of exercise? Focusing on key issues and prioritizing them? How well are they addressing the major challenges facing the economy? More importantly, have real risks been identified and ways to address them explored? Some of such risks are structural (to be discussed presently), while some come as unexpected shocks—as in the current situation—that have structural roots.
Interestingly, risk assessments of the type performed by the IMF are not usually undertaken by governments, although it would be preferable to undertake an indigenous exercise that more closely reflects national context and priorities.
To be effective, a review of the challenges and risks facing the economy must be cast against their origins and evolution. It is now well known that wrong policies have been followed over the years in the fields of exchange rate fixing and interest rates. They helped keep imports and capital cheap. Exporters were compensated in various ways. Low interest rates encourage capital flight. Uncertainty in the business environment has led exporters to park their export earnings overseas.
Not only were the wrong policies followed, but the necessary corrective measures were adopted – and some half-heartedly – with considerable delays. Even now, the uncertainty in the policy environment is not fully resolved.
The situation is complicated by political economic forces and the interests of influential groups. Valuable time has been lost ahead of the national elections in 2023. Even then, concrete steps to reform the exchange rate peg were taken only in May 2024. The real danger to the economy lies in the government’s continuation of such policy stagnation and protectionism for its allies. Also include the possibility of sudden shocks from unexpected events.
In order for the economy to come out of the current abyss and return to growth, the crisis of confidence must be overcome and the basic conditions for growth must be urgently restored. For that to happen, foreign exchange reserves must begin to rise, and in turn, not only export flows, but immediate and full return of export earnings and normal flow of remittances will be critical. Only then will the import contraction regime lead to normal business and growth. It is also required to fight inflation, which is a major concern.
The inflation rate has been rising gradually since 2021, and the annual inflation rate has been close to double-digit numbers for some time. Inflation can be caused by various factors operating from the demand and supply sides and Bangladesh is no exception. Indeed, the latest IMF review of the economy (June 2024) acknowledges this and estimates that half of recent price increases can be attributed to the „pass through” effect of exchange rate depreciation. Nevertheless, the system recommends monetary tightening as a necessary measure to combat inflation.
Bangladesh Bank abandons policy of fixed interest rates – even if the decision comes later than warranted. It initiated a monetary tightening policy in 2023 and continues with that stance. But it does not seem to have the desired effect on the inflation rate. Proponents of this approach cite the delay in adopting the policy as a reason for its ineffectiveness, and recommend further tightening. Voices for practical solutions to the problem are drowned out under the loud chorus created by the group’s policy analysts and international proponents of the approach. We forget that even economists like Olivier Blanchard and Ben Bernanke claim that inflation is both demand and supply side factors.
In Bangladesh, it has become customary to cite other countries and say that they have succeeded in controlling inflation by raising the policy rate, and that Bangladesh has not succeeded because it did not use the tool at the right time. In doing so, we forget that one size does not fit all. Among the major developed countries, for example, the success achieved by the United States does not match that of Europe and the United Kingdom. Also, the latter could not avoid stagnation in their economy and stagnation in activity. Even in the case of the United States, the extent to which monetary policy has contributed to combating inflation is debated by researchers. In India, although the policy rate has been raised significantly in 2022 and 2023, it has not had an adverse effect on credit growth due to various factors.
While dealing with macroeconomic issues of immediate importance, key structural issues such as employment—especially jobs for youth and first-time job seekers—and the livelihoods of low-income earners have been neglected or relegated to the „more” category. The danger of such narrow attention is ignored by external agencies and governments. And when issues do come to the fore, the usual response is to bury them under the refrain of „forces of destruction.” The shock to the economy from the current situation illustrates the danger of doing so.
Unfortunately, the government of Bangladesh has not brought clear thinking to macroeconomic issues like inflation or the jobs and livelihoods of poor and low-income people and approaches to combating such evils. The real risks here are continued dependence on (or acceptance of) „policy advice” from outside, half-hearted and unilateral actions, ignoring shocks that may arise from deep discontent, and lack of a clear and coherent approach. On the part of the Govt.
Dr Rizwanul Islam He is an economist and former Special Adviser to the Department of Employment at the International Labor Office in Geneva.
The views expressed in this article are the author’s own.
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