Is IMF the saviour of Bangladesh economy?

Impressed with East Asia's economic success, in 1993 the World Bank published a book called 'East Asian Miracle'. But in 1997 East Asia's economy came crashing down like a card house. It began with Thailand on 2 July 1997. They were forced to devalue their currency, baht, on that day due to the dollar crisis.

Foreign investment has poured into Thailand to bring about the miracle. There were massive foreign loans. The pressure of having to repay those loans led to the devaluation of the baht and the dollar price went up by over 25 per cent overnight. Panic spread. Foreign investors began pulling out. The crisis spread in no time to neighbouring countries Indonesia, Malaysia, South Korea, the Philippines, Singapore, Hong Kong and the entire East Asia. The East Asian Miracle became the East Asian Crisis. This is considered the first economic crisis in modern economic history.

IMF arrives

Before devaluation, Thailand's central bank had made all-out efforts to keep the value of the baht steady. They sold large amounts of foreign exchange from their reserves. But that did not save them. As a result, embroiled in crisis, Thailand reached out to IMF for help on 2 July. After that, one after the other -- Indonesia, the Philippines and South Korea rushed to IMF to bail them out. Mahathir Mohammad's Malaysia was the only exception. Malaysia at the time stepped up its control on capital flight, cut down its links with international economy so that its currency system did not come under any further pressure. A year later this crisis spread on to Russia and Brazil. They too had to resort to IMF.

A country needs a bail out when it sinks to the level of bankruptcy. And that is when IMF arrives on the scene with a huge loan, but with a string of stringent conditionalities attached. IMF feels that if the haemorrhaging of an economy is to be stemmed, certain harsh decisions must be taken. This includes shutting down losing concerns and strict austerity. This was seen in the case of East Asia's economic crisis and the crisis faced by Greece in 2010. And now Pakistan and Sri Lanka are embroiled in never-ending negotiations over loan conditionalities.

On 5 August 1997 IMF first signed a USD 17 billion loan agreement with Thailand. The country had to close down 56 financial institutions and lay off 3000 officials to avail this loan. On 31 October of the same year, IMF signed a USD 40 billion loan agreement with Indonesia. The country had to shut down 16 banks and financial institutions, that were in a critical state and make a commitment to cut costs. In fulfilling IMF's conditions, the country had to face a strong student movement. The movement grew even further when subsidy was decreased on food and other sectors. And after a 32-year stint at the helm, President Surharto had to resign.

On 21 November the same year, South Korea also approached IMF for a bail out. The people of South Korea, however, were against resorting to IMF. Unable to manage the economy and in face of bitter criticism of the people, the country's president at the time, Kim Young-sam, apologised in the nation over television. He lost the election a month later. South Korea received a USD 57 billion loan from IMF. The main condition for Korea was labour market reforms. But in actuality that meant laying workers off. Thousands of workers lost their jobs. In protest, a two-day strike was observed on 27 and 28 May 1998 all over the country. The situation deteriorated to such an extent that on 28 July 1998, IMF was obliged to announce that it would relax some of the conditionalities.

Washington Consensus

The East Asian countries managed to emerge from the economic crisis, but only after going through gruelling times. Unemployment rates had spiralled and suicidal propensities increased. IMF was bitterly criticised for its harsh conditionalities. Nobel prize winning economist Joseph Stiglitz was the World Bank's chief economist at the time. In 1998, in his various speeches he sternly criticised IMF for its work method, the conditionalities it placed on various countries and other factors. He questioned the efficacy of the 'Washington Consensus'.

The question may arise, what relation is there between IMF's conditionalities and the Washington consensus? Let's first go back a bit into IMF's history. The institution was founded 78 years ago on 27 December 1945. Basically, the objective of the institution was to maintain a stable exchange rate in the post-World War economic order. And so it was also IMF's task to come to the rescue of any country that fell into a balance of payment crisis. France was the first recipient of IMF loans.

Researchers say that IMF's credit programme had been very successful at the start. The researchers pointed out that IMF had provided 69 countries loans from 1973 to 1988 and the results had been positive. It was after 1990 that the criticism against IMF emerged, along with the emergence of the Latin American economic crisis. IMF had changed its loan methods at the time. It fixed its conditionalities, coordinating with the Washington Consensus. And Washington consensus means the much-discussed structural reforms.

English economist John Williamson in 1989 came up with the concept of the Washington Consensus. He was an economist of the Washington DC-based Institute of International Economics. The Washington Consensus basically is a reform package of three Washington-based institutions -- the World Bank, IMF and the US Department of Treasury. These three institutions come up with various reform prescriptions at various times. The Washington Consensus is a package of these prescriptions which collectively protect the interests of these three institutions. These have 10 fundamental recommendations:

1. Fiscal policy discipline; 2. Redirection of public spending from subsidies towards investment in education, health and infrastructure sectors; 3. Tax reforms; 4. Letting the market determine interest rates; 5. Competitive exchange rates; 6. Trade liberalisation; 7. Liberalisation of foreign direct investment; 8 Privatisation of state enterprises; 9. Deregularisation, abolition of regulations that impede market entry or restrict competition; and 10. Legal security for property rights.

Is IMF the saviour?

First there was Covid-19 and then the Russian attack on Ukraine. As a result, many countries around the world faced extreme economic crisis. IMF's importance and influence increased. As a result, the loans of the countries facing crisis spiralled to record proportions. Till August last year, 44 countries took USD 140 billion from IMF. And the number of countries seeking loans is on a steady rise along with the size of the loans.

Generally speaking, relatively stricter conditions are imposed on countries who seek a bail out after falling bankrupt. And for the others, certain general conditions must be followed. Bangladesh is receiving USD 4.7 billion in loans from IMF, but not as a part of any bail out. Had that been so, then there would have been conditions to shut down weak financial institutions. The conditions in place include enhancing governance in the banking sector, reducing default loans of state-owned banks, increasing tax in proportion to the GDP, etc. As for leaving interest rates and exchange rates to the market -- that is all in the Washington Consensus.

So Bangladesh is having to meet quite soft conditionalities. The question is, will all of the crises of Bangladesh's economy be resolved simply by following IMF's prescribed reforms? Is IMF the saviour of Bangladesh's economy? India today stands as one of the strong economies in the world, and that all started with its economic crisis in 1991.

When the country took a loan of USD 2.2 billion from IMF on an emergency basis, their reserves at the time had dwindled to only enough from three week's import expenditure. Chandrashekhar's government toppled under the extreme economic crisis. Narasimha Rao became prime minister and Manmohan Singh finance minister. Armed with serious political commitment, they took up extensive reforms.

India's reforms yielded rapid results. IMF still uses India as an example of big success. However, India did not take the entire loan from IMF. When their economy reached a better condition, they stopped taking the rest of the loan in 1993. From then till now, India has not turned to IMF again.

IMF loan cannot salvage the economy, it can provide temporary respite. If the economy is to be fixed, reforms must be carried out on one's own terms and in accordance to one's own needs. This calls for strong political commitment and will. Bangladesh has failed to display that commitment so long. Will it be able to do so now, particularly before and after the election year? Or is temporary respite the target for the time being?

* This article appeared in the online edition of Prothom Alo and has been rewritten for the English edition by Ayesha Kabir