The post-Covid global recession and spiralling costs of fuel import triggered by the Russia-Ukraine war, put considerable strain on Bangladesh's foreign currency reserves. Having no other alternative, Bangladesh turned to the International Monetary Fund (IMF), seeking a loan.
In January 2023 IMF pledged to lend Bangladesh USD 4.7 billion on certain conditions, including that subsidy on the energy sector be lifted.
IMF gave Bangladesh directives to increase the foreign currency reserves, to increase the tax-GDP ratio by 0.5 per cent within June 2023, and to move to a formula-based price adjustment mechanism by December 2023 to fix the cost of fuel oil.
Also, in its first review in December 2023, IMF advised Bangladesh to take up a contractionary monetary policy to control the prevailing high inflation rate in the country and to follow a flexible exchange rate policy.
With the January 2024 election ahead, the government refrained from fulfilling those conditions. However, in order to avail the next tranche of the loan, this month it has left the interest rate entirely to the market and so increased the policy interest rate by 50 basis points to 8.5 per cent.
After taking up a flexible exchange rate policy, the exchange rate of the dollar was hiked by Tk 7 to the highest the country has ever seen, at Tk 117, under the crawling peg exchange rate system.
Also, a formula-based energy price adjustment mechanism was implemented for petroleum products. The donor agency IMF is satisfied with these financial reforms carried out by the government.
And the end of the second review this month, the IMF mission chief Chris Papageorgiou apprised the media of its satisfaction, saying there needs to be more reforms in the banking sector and emphasis must be placed on tax and revenue collection. He also stressed the need on curbing subsidies in order for the economy to turn around.
The matter that must be given due consideration is how much respite will this satisfaction of IMF offer the country, and how must relief will these reforms give the people for whom the loan has been taken.
Ever since this loan was taken from the IMF, the country has seen one record after the other. There has been a record in the hike of energy prices, the dollar rate has hit a record high, the reserves have hit a record low. And above all, the people are floundering under the record hike in the prices of essentials. IMF's satisfaction has offered the people no respite. It has simply served to increase their distress further.
On the eve of receiving the loan, in January 2023 Bangladesh's central bank authorities said that fighting against inflation was Bangladesh Bank's top priority and that they aimed to bring down inflation to 6 per cent that year. That aim was not met. The prices of essential continue to increase in leaps and bounds.
Even by taking the path shown by IMF and following their prescription, the projected inflation rate could not be achieved. On the contrary, it has increased. They reason for this increase, the say, is the global contractionary financial policies, high commodity and food prices in the international market, and internal weaknesses.
Inflation is increasing steadily for these reasons and foreign currency reserves are dwindling. This is increasing pressure on the economy and macroeconomic challenges are growing more complex.
When the country's economy is unsteady amid the uncertain and tumultuous global circumstances, and the financial sector is fragile, it is certainly extremely daring to take up a new method of determining the exchange rate and deciding on formula-based energy price adjustment.
A handful of Latin American countries took up this strategy to determine exchange rates, but many of them later moved away from this system.
On one hand there is the post-pandemic weak economy and the war-hit global market. On the other hand there is forecast of economic recession and fear of an extreme food shortage. Under such circumstances, serious thought must be given to whether the unknown and uncertain path shown by IMF will lead the country's economy to happier climes or pose as a risk.
IMF has greeted this daring decision taken by the government for financial reforms. Liberalising the interest rates and taking up a contractionary monetary policy will help in relieving the pressure of inflation caused by reforming the exchange rate.
It is clear that there are all apprehensions that financial reforms will create new pressures, adding salt to the wound of the people squirming under the pressure inflation. Reforms in the exchange rate have pushed the price of the dollar up by 6 per cent, which in simple math translates directly into a 6 per cent rise in the prices of import-dependent. By the same formula, the import costs of fuel oil will increase proportionately, leading to increased import expenditure.
The bottom line is, Bangladesh in undoubtedly facing challenging times. Attempting to salvage an economy in deep crisis by entangling it a web of reform conditions, is akin to trying to teach a drowning man to swim, rather than just pulling him out of the water. The results in both instances can be disastrous.
The increase in dollar rates means costs on foreign loans will go up. This multidimensional effect of increased dollar rates will put added pressure on foreign exchange reserves, and these reforms will push inflation up further.
Also, in post-war times, the economic depression in western countries can have an effect on Bangladesh's export revenue in the coming days. Meanwhile, the Middle East is in a state of unrest due to the Israeli aggression in Palestine, which may have a negative impact on remittance. These factors may lead to a drastic drop in foreign exchange reserves and the writing is already on the wall.
At a juncture where the country's financial sector is already unstable and fragile, leaving the interest rate to the market may make this sector even more unstable.
If interest rates go up, loan expenditure in the private sector and investment costs will go up. This creates apprehensions that investments may decrease in the market. That may lead to increased capital flight, and many workers may lose their jobs.
There are strong misgivings that these multidimensional contractionary financial policies will ultimately dash to the ground all hopes of a fall in inflation and a durable foreign sector.
There is no doubt that we are bound to a larger extent to follow the IMF recommendations or directives for financial reforms. But there are questions regarding the logic in the timing selected to implement these reforms. This is questioning the capacity and sovereignty of our financial sector.
We are in a flurry to meet the IMF conditions, but are we able to uphold the interests of the people of Bangladesh? Past experience has left a bitter taste in our mouths.
In the past, IMF has never been able to be anyone's real friend or guardian. A study of Oxfam reveals that in countries that have been transformed into high debt-ridden countries due to IMF loans, it becomes impossible to repay the loans at the same as time as investing in the education, health, social welfare and development sectors.
The bottom line is, Bangladesh in undoubtedly facing challenging times. Attempting to salvage an economy in deep crisis by entangling it a web of reform conditions, is akin to trying to teach a drowning man to swim, rather than just pulling him out of the water. The results in both instances can be disastrous.
How can this challenge be tackled? That's a million dollar question. But if domestic revenue is increased, stern austerity measures are put in place, corruption is clamped down upon and good governance is established, it will at least put some wind in the sails.
* Farid Khan is a professor at the department of economics, Rajshahi University. he may be contacted at faridecoru@yahoo.co.uk
* This column appeared in the print an online edition of Prothom Alo and has been rewritten for the English edition by Ayesha Kabir