On the Fund’s billion
The IMF’s Extended Credit Facility (ECF) “provides financial assistance to countries with protracted balance of payments problems. It’s the Fund’s “main tool for providing medium-term support to (Low Income Countries) LICs, with higher levels of access to financial resources, more concessional financing terms, more flexible program design features, as well as streamlined and more focused conditionality”. The facility was created as part of the IMF reforms of the past few years. The reader can find out more here.
Recently, Bangladesh became the recipient of around $1 billion under the ECF — the largest program under the facility in its short story. What’s the loan for? Should we care?
Well, let me begin with the reason why we shouldn’t care.
There is a lot conspiracy theory out there — not just in Bangladesh — about the IMF being a tool of ‘American imperialism’ out to dominate poor countries. I consider such conspiracy theories as plain nonsense. Whatever the consequences of specific IMF advice, they are not an ‘evil force’ out to subjugate anyone.
The IMF’s main job is to rescue countries with balance of payments difficulties — in English, this means if a country doesn’t have enough foreign currency to pay for its imports or meet payments on its foreign debts, the Fund will come and tell the country ‘here is some money, but you can only get it if you do what we tell you’ (the last bit is called ‘conditionality’ by wonks).
So, is Bangladesh in need of rescuing? Did we have a balance of payments crisis?
Not quite. The official press release says that the loan is to help Bangladeshi authorities cope with tough reforms that will help stave off a potential crisis. So this is really a ‘preventative programme’. The relevant bit:
Macroeconomic pressures have intensified in Bangladesh since late 2010 due to a negative terms-of-trade shock, rising oil and infrastructure-related imports, and accommodative policies. More recently, a weakening in external demand and a surge in oil prices have further weakened Bangladesh’s balance of payments and added to fiscal and inflationary pressures.
The authorities’ program focuses on policy adjustments and structural reforms aimed at restoring macroeconomic stability, strengthening the external position, and promoting higher, more inclusive growth. The authorities are committed to these objectives and stand ready to take additional measures, as appropriate, to ensure the success of the program.
The government will get $1 billion for three years, with $141 million disbursed immediately. The loan will incur no interest through to 2013. And what will the government need to do in return? Again, from the press release:
Under the program, upfront tightening of macroeconomic policies are being undertaken, supported by structural reforms to strengthen tax policy and administration, public financial management, and financial sector oversight. A moderate fiscal consolidation path will be underpinned over the medium term by a modernization of the tax regime and rationalization of subsidy costs, in order to create fiscal space for more social and development spending and to contain public debt. Monetary policy has been tightened, supported by greater exchange and interest rate flexibility. The central bank is committed to further policy measures if needed to bring inflation firmly under control. The authorities also aim to accelerate trade liberalization and improve the investment climate.
This press release, issued after a recent IMF mission to Bangladesh, provides more clue:
Looking ahead, we urged the FY13 budget aim for moderate deficit reduction in order to contain domestic bank borrowing, consistent with program targets. It would also help reinforce monetary restraint, as necessary to tame inflationary pressures and stem reserve losses, will leave ample space for private sector credit growth.
To achieve these goals, we anticipate decisive actions in the FY13 Finance Bill to strengthen tax administration and policy in order to broaden the tax base and raise overall revenues, supported by a new VAT law and reduced tax expenditures. While we foresee subsidy costs will remain large in FY13, their containment rests on further price adjustments, as needed, and well-anchored fertilizer subsidies to avoid crowding out high impact spending. It is, of course, also necessary to have accompanying steps to strengthen social safety nets to mitigate the impact of energy and food price increases on the poor.
While the media reports debate whether the coming budget will be ambitious or not (see this, for example), it seems to me that the IMF loan implies ‘decisive actions’ on the tax front and more cuts to subsidies. About a year of election and a tricky political situation — this really can’t be something the government will want to do.
And yet, that’s what the Fund is expecting the government to do. As Anoop Singh, the Fund’s Director of Asia Pacific Department, told the media recently:
among all the steps the government is taking, they are building up now the process of having a value added tax, together with other tax reforms. So, I will say steps are being taken.
The Fund’s formal analysis of the economy is here — will do a separate post on it shortly. The important thing is, while there are clear pressure points in the economy, this isn’t a country that is forced to take IMF diktats. The government doesn’t need to take these painful steps.
Let’s quickly think about what these steps will mean. I think the immediate impact in 2012-13 will be pretty harsh on the urban classes — electricity or transport costs will go up as subsidies are cut, and increased VAT will hit the pockets too. But smaller deficit will mean less borrowing by the government, which will mean more funds for the private sector, and less general inflation. In the longer term, the benefits will outweigh the pain. But there is a very high likelihood that the immediate impacts will not be liked by the politically vocal urban classes.
Don’t get me wrong. I think, on balance, cutting subsidies to the urban affluent classes is a great thing, as is broadening the tax base. And I want the government to reduce its deficit. I want tight money. Call me a neoliberal or right wing supply-sider or whatever, but I would love to see these happen. So I am not complaining about this program. If the coming budget pushes for these, I’ll gladly welcome it. And if the Bangladesh Bank supports the fiscal consolidation, I’ll support that too.
But none of this explains why the government is signing up to these difficult reforms at this point in political cycle. A year out of the election where you risk a bloodbath (figuratively, if not literally) is not usually when you take hard policy choice.
Indeed, the plot thickens when you consider the fact that the government has been after this billion dollar loan as far back as 2010.
Let me put forward a conjecture.
It would appear that for nearly two years, econocrats at the Finance Ministry, Planning Commission and Bangladesh Bank, working with some technical assistance mission from the Fund, have put together a fiscal reform package based on standard IMF prescriptions (which, let me stress again, I personally think is a great idea). It’s just that the both Bangladesh government and the Fund’s bureaucracy moves slowly, and by the time the deal will come into play we will be in the last year of the government’s term.
I have no idea whether the above conjecture is true. What I do know is that the steps required under the IMF programme are not the stuff of populist politics.
Of course, the government could loose nerve during the year and fail to meet the programme requirements. What happens if the government ends up with not cutting the subsidies, or giving tax breaks to its crony businessmen?
I guess then the IMF will charge a big fat interest on the billion dollar, which will have to be serviced by the taxpayers a few years from now, perhaps under a post-AL government.