IMF
misses target with record Bangladesh
loan By Syed Tashfin Chowdhury
DHAKA - The International Monetary Fund's
approval this month of a US$987 million three-year
loan to strengthen Bangladesh's foreign currency
reserve and support the four "reform pillars" of
Prime Minister Sheikh Hasina's government fails to
address the problems of high fuel imports, slowing
export growth and unemployment, critics say.
The zero-interest extended credit facility
(ECF) loan is the "largest loan ever offered to a
member country under the IMF's reformed
concessional lending architecture", according to
IMF statements. About $141 million is to be handed
over immediately and the rest paid over six equal
installments. Bangladesh will repay the cash
after 10 years.
The government, rather
than accepting the IMF loan, should try to reduce
its dependency on fuel imports, which create trade
imbalances and have
dragged foreign currency reserves down to $9.2
billion as of the end of March from $10.9 billion
last June, say opponents of the decision. (The
reserves recovered to just over $10 billion as of
April 24). Bangladesh's trade deficit is likely to
reach $11.32 billion by the end of the current
fiscal year in June, up from last year's deficit
of $7.7 billion, the Unnayan Onneshan think-tank
said this month.
"We have already seen
sluggishness in export growth and an investment
slump because of tight monetary policy to tackle
inflation as per IMF recommendations," Rashed
al-Mahmud Titumir, at the economics department of
Dhaka University and chairperson of the Unnayan
Onneshan, told Asia Times Online. Hasina's "reform
pillars" will aggravate Bangladesh's decelerating
growth, leading to increased unemployment, he
said.
Economic problems faced by
Bangladesh since late 2010 include "a negative
terms-of-trade shock, rising oil and
infrastructure-related imports, and accommodative
policies" along with "a weakening in external
demand and a surge in oil prices", IMF deputy
managing director Naoyuki Shinohara said in a
press release. These are "hampering Bangladesh's
balance of payments and adding to fiscal and
inflationary pressures".
The release
implied IMF support for the government's reform
pillars, which are "broadly consistent with
Bangladesh's Sixth Five Year Plan" running to
2015.
Under its fiscal policy and reforms
pillar, Dhaka needs to raise tax revenues, contain
subsidy costs, and better target social safety
nets. The IMF also backs a reduction of aggregate
demand pressures through monetary and fiscal
policy, strengthened governance in the financial
sector, and "reductions in trade barriers and
distortions and improvements in the business
climate".
The status of draft laws on
income and value added tax (VAT), along with
removal of tax exemptions and concessions in the
budget to be delivered in June, are being
discussed this week by an IMF team, led by David
Cowen, deputy chief in Asia and the Pacific
department, in Dhaka for talks over disbursement
of the ECF fund.
If tax structures such as
VAT are set in accordance with IMF prescriptions,
"the country's sovereignty would be put at risk
while undermining parliament", Titumir said.
Finance Minister Abul Maal Abdul Muhith
said on April 18, in harmony with IMF views, that
the price of fuel oil "should be fixed in line
with the price in international markets". He
stressed that countries like India, Nepal and Sri
Lanka already have such a system.
Non-food
inflation will increase further, however, if
subsidies are cut, Bangladesh Institute of
Development Studies research director Zaid Bakht
told Asia Times Online. The government's proposed
policy will be wrong "politically and
economically", he said
Four fuel price
increases last year have already driven up
non-food inflation to 14%, its highest in 15
years, Bakht said. March inflation data shows food
inflation at a comparatively low 8.28%, bringing
general inflation down to 10.10%.
The
trade deficit rose to $5.7 billion in the first
eight months of this financial year through
February from $4.9 billion in the previous
corresponding period, with export earnings of $16
billion against $21. 7 billion of imports. The
bill for fuel oil imports increased about 50% in
the period to nearly $3 billion from $2 billion
previously.
The trade deficit may double
as a percentage of gross domestic product to
16.52% this financial year from 8.46% in the 12
months to June 2011, Unnayan Onneshan said in its
April 7 monthly economic update. Under present
circumstances, exports may rise this financial
year to just $24.2 billion, while imports rise to
$35.6 billion.
The final export value is
likely to fall short of the government's $26.5
billion target, and while overseas workers' and
other remittances, an import source of funds,
stood at $9.5 billion, the foreign currency
reserve may not exceed the $10.0 billion by the
June end of the financial year, Unnayan Onneshan
said.
The organization suggested the
government "embark on a mix of medium to long-term
policies to boost exports, generate employment and
accelerate development" by immediately harmonizing
fiscal and monetary policies.
Syed
Tashfin Chowdhury is the Editor of Xtra, the
weekend magazine of New Age, in Bangladesh.
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