IMF Assistance & Gradualism

Central Bank picks gradualist policy, To fight inflation and stabilize the currency. Past management and sources of tax Expose economy’s hidden cracks.

Last week, International Monetary Fund formally disclosed that Bangladesh sought assistance from it. $4.5 billion worth assistance package may come from several fund facilities offered by the IMF. This is for the first time Bangladesh sought assistance from Sustainability and Resilience trust fund ,reserved for mitigating adverse challenges posed by climate-change,apart from Balance of Paymey support fund¹.Earlier Finance minister had stressed that Bangladesh would not take loan from IMF if the conditions were not favorable.

Unprecedented inflationary pressure with rising import bills worsened by Ukraine war and record current account deficit prompted the government to seek such assistance. Though government projected the inflation rate below 7.5%,NGOs apprehend the inflation may cross the double digit figure, incapacitating further the cash-strapped government’s ability to spend.

Prior to IMF announcement, govt raised the policy rate by 50 points basis, raising the interest rate to 5.5 %. This will eventually curb the money flow,easing the inflation. The latest MPS also envisages to encourage import substitution industry through incentives.

As the policy rate is increased, lending rate of commercial banks should be raised accordingly. But govt is reluctant to raise the lending rate and willing to maintain the ongoing 3% spread between deposit rate and lending rate. Even a 1% increase in deposit rate will not offset the inflationary pressure. Moreover, ahead of election year when the government is poised to carry through projects that will create jobs,any increase in lending rate will be greeted with bitter reactions.

In key export markets of Bangladesh(USA,Canada,EU), central banks raised policy rates. This insinuates consumption in these countries may shrink in future, resulting in fewer orders. In addition, rising defense spending in these countries cuts spending on other sectors. That poses serious doubts about further obtaining assistance and funds for humanitarian grounds. Not only that domestic companies' borrowing from overseas also gets costlier.So it could be another stumbling block for the local industries that eye for foreign credit.

Falling demand in Occidental countries and rising interest rate is expected to improve current account deficit by reducing the import bill. But to stop Taka's depreciation, govt needs to do more. Bangladesh inked several strategic agreements with Middle Eastern countries. Why does Bangladesh not approach these countries to do some favors in this critical time? Bangladesh could propose them to accept Taka in exchange of oil or to defer the oil payments by half a year or a year at a discounted exchange rate. Similarly, Bangladesh could make request to other friendly countries to trade with Bangladesh in Taka. This growing demand for Taka could at least peg the Taka at some fixed value against major currencies.

Govt's past record in utilizing climate fund is not good. Anti corruption bodies published detail accounts about this. Luckily ,central bank is responsible for using the credit this time. But government is implementing the budget, so mismanagement of budget support fund still looms large.

Bangladesh’s internal revenue generation still hinges on indirect taxes. Tobacco and telecommunications are the key sources of indirect tax revenue². Without increasing the tax revenue, this IMF support may come less handy at the end of the day. Public credit growth outweighs the private sector credit growth. Private sector is struggling to get credit. In this backdrop,how the government could attain MPS goal of employment generation through import substitution industry is indeed a puzzling one.

Notes And References:

1. “IMF says It Is Ready To Support Bangladesh After Loan Request”, Business Standard, July 27,2022. For more read at https://www.tbsnews.net/bangladesh/imf-says-it-ready-support-bangladesh-after-loan-request-466422
2. “Dosh Company Dilo Chollish Percent VAT(10 Companies Account For 40% VAT Payments)”,Jahangir Shah,Prothom Alo(P-13),July 27,2022