IMF First Review: Optimism & Uncomfortable Truth

Despite cautious optimism about the economy, It still screams in agony.

Last week,IMF published first review report of its $4.7 billion credit dealings with Bangladesh. Key takeaways of this report are:

• GDP growth has been slowed down (projected 6% in FY-24 from 6.5%).Private demand may decline further. Food inflation stands out the prime reason for pushing up the general price levels.
• Current Account Deficit improved ,became 0.7 % of GDP at the end of 2023. Budget deficit is 5.2% of GDP.
• Poor revenue collection, fall in private consumption, and import shrink cause tax-to-GDP ratio to decline to 7.4%. Public debt rose to 39.8% at the end of 2023.
• Net International Reserve was $15.9 billion on October 31,2023. It fears further downward pressure on reserve in near future but remains optimistic about maintaining 4-month worth of reserve in the long run.
• The joint IMF-World Bank debt sustainability analysis finds that Bangladesh’s risk is low in case of any debt distress situation.
• Bangladesh Bank so far implements interest corridor, market determined exchange rate, reporting forex reserve as per BPM-6 manual and publishes amount of true non performing loan in annual financial stability report.
• Bangladesh has yet to introduce the Finance Company Act 2020.
• Bangladesh introduces new income tax act and digitization of tax system along with other reforms that will likely increase the revenue collection by 0.5% of the GDP.
• Nonperforming loans cast shadow over growth in medium term. And state owned commercial banks suffer liquidity crisis to meet the capital adequacy ratio. Despite the 9.1% credit growth to private sector, private sector credit has not reached yet the pre-COVID level.
• Subsidy to GDP ratio is still high,2% of GDP. Govt is contemplating market based fuel price adjustment.
• Bangladesh Bank continues monetary tightening policy. Policy rate has been increased by 200 basis points since the start of credit negotiation. An interim crawling arrangement with band corridor suggested till the country fully moves towards flexible exchange rate regime.

Despite the fact that debt situation of Bangladesh is not worrisome, we have to keep in mind that the central bank remains the sole authority to issue assets like treasury bond and legal tender. There maybe no demand for bonds in the market,government may artificially create need for it in a bid to legitimize printing money. Remember, public debt is rising. And government has the power to redefine the status of bad loans. The point is our true loan could be more than the official figure and resources at the hands of government may not be true resources. In addition, spill over effect of the crisis in the Middle East and US threat of economic sanctions cast shadow over our external sector,which still remains a beacon of hope. It is also remarkable to see that allowing flexibility in exchange rate put monetary policy into work. Flexible exchange rate mechanism is a precondition for using monetary policy as a policy instrument. This IMF credit programs also unfolded some uncomfortable truths:

1. An IMF letter to central bank objecting non-monetary use of reserve assets led to exposure of $7 billion misuse.
2. First instalment negotiation revealed that government for far too long shown interest spending on National Savings Certificates as social security spending. It was unjust and gave an erroneous swollen estimates of social security spending.
3. Recently, a news report divulged that a state body PetroBangla has not cleared its VAT obligations of TAKA 220.84 billion to NBR for the last 12 years. In fact, PetroBangla deposited money on several accounts in the banking system but avoided NBR payments willfully. Another news report claimed visiting IMF team raised the issue with the govt.
4. Newly formed Universal Pension Scheme authority decided to invest part of the pension fund to treasury bond while inflation was higher than the bond rate. It was clearly a loss project for the pension funds.
5. IMF suggestion led to publication of GDP data quarterly instead of annually. It helps stemming leakages and showing policy impact at ground level.

IMF exercised cautious optimism throughout the first review report. However, the level of economic governance we are witnessing leaves little room for optimism. Crop yield may be very good, food prices in international market may come down but bringing trust and confidence in the economy is the vital thing.