On the IMF’s generosity to BB

Posted in economics by jrahman on September 14, 2009

The IMF has recently offered Bangladesh a $700m soft facility to assist with the  impact of the global economic downturn.  According to media reports, Bangladesh Bank governor Atiur Rahman said: “We received an e-mail from the IMF … saying it had decided to give the loan assistance to help Bangladesh face the adverse affects of the global economic downturn, and boost the economy.”  The central bank is reported to have received the money earlier this month. 

This post summarises some thoughts on the issue. 

Firstly, Bangladesh’s GDP is about $87b, so this is a rather sizeable loan.   Was this requested by Bangladesh Bank, or the IMF became kind and saw an opportunity to shovel down a huge loan?

I am not reflexively opposed to borrowing from IMF.  We have a budget deficit that needs to be financed, and if the IMF loan helps keep the interest rate or inflation down, then why not?

It seems that this loan is ‘soft’, which usually means loans with low interest rate (in addition, it sometimes means, with less conditionality regarding the areas to use the loan).  The BB Governor is reported to have said: “we do not need the loan right now” but “with a comparatively low interest rate, it will be helpful in facing the impact of the recession”.
Drishtipat Writer Syeed Ahamed suggests the following possible impacts for Bangladesh:
  • Positive: We mentioned in the budget analysis that the government may end up facing a double trouble by financing the budget deficit through high-rate loans which will at the end increase the expenditure in the subsequent years. A low-interest rate loan may help the government finance that deficit without worsening the situation much.  Also, it will help the government spend on those programs that most stimulates the economy.
  • Negative: Since it’s a lot of money, the government may get tempted to spend more on on block allocation  programs, raising risks of beef-barrelling. Plus, Bangladesh’s experience with global recession was not too bad, so an overzealous stimulus may jeopardise the monetary situation by boosting inflation and increase debt. 

This leads me to my next question.   It’s not the government that’s borrowing.  It’s the central bank.  Will the Bangladesh Bank then lend this money to the government?  What is the mechanism here?  The government will issue new bonds?  Or will BB buy government bonds from existing markets, driving up its price and lowering the interest rate?  Wouldn’t it have been less risky (for inflation) if the IMF gave the money directly to the government?  Or am I missing something here?

And if not for financing the deficit, why does the central bank need the loan?  BB has a lot of reserve (left chart), taka is not under threat (right chart), and there is no immediate sign of a balance of payment / current account crisis.



What’s going on here?


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