The IMF-ECF loan: a bitter pill to swallow
If the pushy, inept and unprofessional IMF experts provided the same set of advices as they do here and suggested the same remedies as they enforce in this country in their own countries or a developed and more self-respecting country, they would be unceremoniously run out of town. It is a pity that we do not have the guts, confidence and good sense to do the same and reject the vicious trap, writes Omar Khasru
AFTER rigorous haggling and imploring, long wait and giving in to arduous, stiff and inordinate pressure and preconditions, and accepting a bitter prescription of gruelling reforms, cash-starved and foreign exchange strapped Bangladesh was granted the loan by the demanding and parsimonious global money lender International Monetary Fund.
The April 11 official announcement followed a 35-page meandering and mind-numbing letter of intent, dated March 27, 2012, from the Bangladesh government, addressed to the IMF managing director, which describes the policies Bangladesh intends to implement in the context of the financial support. This is the official Bangladesh assurance to adhere to tough and strenuous IMF conditions.
The executive board of the International Monetary Fund approved a three-year arrangement for Bangladesh under the extended credit facility in a total amount of $987 million, the largest loan ever to a country. The board’s decision will immediately enable the initial disbursement of about $141 million.
The three-year timeframe with low initial amount and the provision for higher disbursement later would imply that the IMF would retain the option and opening to exert persistent and even enhanced pressure on Bangladesh. It may withhold the latter instalments without total compliance, and even impose added pressure and stiffer conditions, based on the desperation of the borrower.
The professed goal of the ECF arrangement is to restore macroeconomic stability, strengthen the external position, and engender higher, more inclusive growth. In return, the authorities will promote fiscal discipline, reinvigorate the financial sector, and catalyse additional resources in order to boost social and development-related spending, tackle power shortages and the infrastructure deficit, and stimulate export-oriented investment and job growth.
As a matter of fact, the main goal of the loan is to cope with the ongoing balance of payments problem that put severe crimp in the foreign exchange reserve situation. The dangerously reduced reserve lately has been less than the threshold amount needed to pay for three months’ imports.
The granting of the IMF loan after a year of negotiation seemingly was a great relief and comfort to the government, troubled exceedingly by insidious foreign exchange woes. It pleased the governor of the Bangladesh Bank as well. He described the IMF credit approval as a welcome development for Bangladesh.
‘Other donors will now show positive attitude towards Bangladesh after the IMF’s credit approval. As a result, it will have a positive impact on foreign investment,’ the central bank governor said. ‘Using the loan, the balance of payments problem can be handled, which would advance Bangladesh in international credit rating, and promote the country’s image,’ he added.
This all sounds well and dandy. The IMF almost comes across as a generous donor, a true benefactor, charitable contributor and genuine well wisher. You may even want to thank it for generosity, altruism and a humanitarian gesture. But as the saying goes, ‘the devil is in the details.’
Before that, a valid question is how the country’s foreign exchange situation got so hopeless and desperate. The short answer would include ineptitude, mismanagement, wastage, faulty prioritisation and overblown projections and expectations.
The foreign exchange woes were reflected in the stiff rise in US dollar rate against local currency, when the dollar value has dwindled against most other currencies, in addition to shrinking foreign exchange reserve.
The reasons for foreign exchange shortfall are varied (please see: ‘Foreign exchange woes and a quick feasible remedy’, New Age, January 24). A few may be mentioned here.
The stock market debacle pushed numerous small investors into insolvency while making influential fat cats filthy rich from massive market manipulation. The credible conjecture is that these crooked exploiters smuggled the ill-gotten profits abroad after converting into foreign currency. That resulted in a run in the foreign currency.
Another shady transaction, reported by Chinese news agency Xinhua on December 12, 2011, identified large-scale money laundering to Malaysia, Singapore, United Arab Emirates, and Australia by rich and powerful bigwigs to gain immigrant status and to purchase apartments and properties in those countries. That required the transfer of a lot of foreign currency abroad.
The rapid decline in the official reserve, as already mentioned, below the safe $10 billion mark, dangerously low and less than the safety threshold of sufficient reserve to bear the cost of three months’ imports is a big problem. Particularly draining has been the doubling of furnace oil import in one year. Furnace oil is the input for most quick rental power plants that have been commissioned by the current regime.
The usual three million tonnes of annual fuel oil consumption rose to 4.8 million tonnes in 2010-11 because of the foolhardy commissioning of quick rental power plants to tackle pervasive load-shedding. With some 35 rental power plants to supply electricity to national grid by June 2012, the oil import is likely to increase to 6.8 million tonnes (Asia Times online, January 19).
The import price of petroleum products is likely to rise in 2011-12 to Tk 600 crore from Tk 360 crore in 2010-11 mainly to meet the increased demand for furnace oil.
The shortage of official reserve puts severe crimp on the government’s ability and flexibility with respect to foreign currency. With briskly growing foreign imports, it severely impedes other official priorities and options. That made the government increasingly desperate for foreign currency.
According to Bangladesh Bank data, import expenses increased by 25 per cent, with fuel oil figuring in prominently, whereas export earnings increased by 17 per cent during the last half of 2011. Trade deficit surged to $3.65 billion during July to November period, up from $2.75 billion in the same period a year earlier. The trade deficit, or the difference between imports and exports, widened by 41 per cent during the last fiscal year.
Foreign aid dropped drastically and utilisation of the aid plummeted. With the suspension of the significant Padma Bridge funding by the World Bank due to allegations of high-level corruption, project aid has also been hard hit.
The promised billion dollar loan from India to upgrade the infrastructure in order to facilitate trans-shipment through Bangladesh has not yet seen the light of day even though India has enjoyed free transit in the meantime.
Fresh direct foreign investment is insignificant due to unfavourable infrastructure situation including decrepit roads, lack of gas and electricity, bureaucratic red tape, image problem and political turmoil. The shortfall in trade balance, plunging foreign investment and inadequate foreign aid are usually made up by enhanced NRB remittances.
Remittance, the shining light along with the reserve in the last few years, has shown a sharp downward trend in recent years. The growth has been 23 per cent, 13 per cent and 6 per cent in the last three years, indicating a precipitous rate decline.
All these and more added up to create alarming foreign exchange situation, verging on a crisis. The government, seeking to restrain the growing trade deficit and depreciation of the local currency, is trying to discourage imports of non-essential and luxury goods.
The government needed a big foreign currency infusion to stabilise the situation, to allay fear and ease the pressure. The options are limited and unpleasant. Following the credo ‘desperate times call for desperate means’, it was forced to seek the nearly $1 billion loan from the International Monetary Fund under extended credit facility, to help ease the foreign exchange shortfall.
The four main reform pillars under the programme objectives are:
Moderate fiscal consolidation and sound debt management, supported by tax and public financial management reforms;
A restrained monetary policy, anchored by sound fiscal performance and exchange rate and interest rate flexibility;
Strengthened financial sector governance centred on proper managerial and operational controls in banks, clear oversight responsibilities and strong risk-based supervision; and
Trade and investment reforms in terms of reductions in trade barriers and distortions and improvements in business climate.
The IMF advice is to raise the interest rate, shrinking bank loans and retrenchment, thereby escalating the misery index and reducing economic activities. If the interest rate is raised, this will make borrowing money more expensive and will put a dent and damper in the investment climate, reducing economic activities and job creation.
Some of the other negative end results will be widening of tax net and tax increase, reduction in subsidy and frequent and recurring stiff rise in the prices of gas, electricity, fuel oil and fertilizer that would surely induce the prices of almost everything to rise.
Further opening up of our market to foreign import may adversely impact domestic production, increase in the foreign currency rate. These will hurt almost all consumers, low income and fixed income groups more severely than the well to do.
The farmers particularly will face the heat. With the increase in electricity and fuel oil prices, cost of irrigation will jump. With sharp rise in fertiliser prices the cost of growing crop will increase. This will be a nasty one two punch on the farmers.
Similarly consumers, especially the middle and lower income groups, will have to withstand the double whammy of utility price hike combined with food grain and produce price rise. Already reeling from soaring food and commodity prices, this will make matters much more unbearable.
If the pushy, inept and unprofessional IMF experts provided the same set of advices as they do here and suggested the same remedies as they enforce in this country in their own countries or a developed and more self-respecting country, they would be unceremoniously run out of town. It is a pity that we do not have the guts, confidence and good sense to do the same and reject the vicious trap.
Renowned Indian author Arundhati Roy said: ‘… the World Bank, the International Monetary Fund … the Asian Development Bank virtually write economic policy and parliamentary legislation. With a combination of arrogance and ruthlessness, they take sledgehammers to fragile, interdependent, historically complex societies, and devastate them. All this goes under the fluttering banner of “reform”.’
We will see a living example of this in the coming days and years as an outcome of the IMF loan. And it will not be very pleasant at all. The people in this country are in for insufferable misery and suffering. The nation will have to pay through the collective nose because of the harsh and stringent conditions. All in all, it will be a bitter pill to swallow.
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