What does the Fund say?
At school, macroeconomics is all about fancy arse mathsy jazz. But at work, it’s really about telling stories with charts. And no one does it better than the IMF. So, what stories are they telling us for their billion?
Over the fold are some tid bits from the Fund’s assessment of Bangladesh’s economy that accompanied the loan agreement.
In late 2011, there was a lot of concerns about rising government debt. The story going around has been that the government was buying expensive electricity from the rental power suppliers and selling to the households cheaply at a subsidised price, widening the budget deficit; meanwhile, the power suppliers were getting subsidised fuel from Bangladesh Petroleum Corporation, which was buying it at market prices from overseas, and in the process putting downward pressure on the taka. While the story was internally consistent, and very worrying, I couldn’t find any smoking gun evidence from the data I had in April.
Of course, the Fund economists have better data, and one hopes they can do more sophisticated analysis than this lowly blogger. In Box 1 — Managing macro-distortions amid energy decompression and subsidies — of their report, the Fund confirms the story.
And how will problem be solved? Here is what the Fund expects:
the losses of the BPC—which has a monopoly on fuel imports—and the BPDB will need to be contained through further adjustments to retail petroleum and electricity prices, with the expectation that Bangladesh will close the diesel price wedge with neighboring India by the end of the first year of the ECF-supported program …. reforms to the trade and investment regime will be stepped up over the medium term … tapping domestic energy resources (namely coal, natural gas, and bio-fuels), supported by more FDI in this area.
In English — cut subsidies now, and allow multinationals to dig up coal and gas. Hardly the stuff of populist, anti-imperialist socialism.
In fact, all the policy recommendations by the Fund economists — tax reform, subsidy cuts, administrative reforms in tax and budget bureaucracy, reform of central bank and financial authorities, tariff reforms — are stuff of straightforward textbook Washington Consensus. Yes, overall I think they are good ideas, though there is devil in the implementation details. More importantly, the government has agreed to the programme — the Fund report also contains a letter signed by Finance Minister MA Muhith to the effect.
And if the government can implement the standard reform package, what does the Fund think will happen?
This chart compares the Fund’s assessment of growth rate over the coming years (dotted line) with the 2012-13 Budget forecasts (thick line).
Whereas the government is expecting a sharp acceleration, my interpretation of the Fund forecasts is that these reforms are needed to simply maintain the growth rates we experienced in the 2000s.
The next chart compares investment-to-GDP ratio forecasts in the Fund report (green line) against the Budget forecasts (red line).
These reforms, the Fund claims, will boost investment, but much more modestly than what the government expects.
Where the government and the Fund seem to agree is that the reforms will boost revenue.
This is shown in the last chart, where the Fund’s projections are the black dots, and the Budget forecasts are red dots.
Let me end with some charts that I can’t replicate because the data is behind a paywall. One hears a lot of conspiracy theory that our Arab murubbis are unhappy with the government, and are taking it out own the workers, and remittance is collapsing. These charts refute that story.