One after another, events in July have forced Bangladeshis to focus on the state of their $415 billion economy. Calls to austerity emanating from the highest offices in the land, all sorts of creative little ideas for saving on energy or other forms of cost-cutting doing the rounds, and a form of rationing applied to project expenditure, keeping work at only the most essential ones going for the time being, all spoke to a very changed environment - both domestic and global - in which we found ourselves.

The mood today is almost unrecognisable from the fanfare and celebration that marked the opening of the Padma Bridge, the country's flagship development project, on June 25. Just eight days later, July 3, we experienced the 1500MW shortfall in electricity generation (in relation to demand) that served as the first notice to the public that times were about to get harder.

The return of loadshedding as a part of civic life, the sudden and quite rapid decline in foreign exchange reserves, inflationary pressures felt throughout the economy, and borne with considerable hardship by large sections of society, have all combined to put a real squeeze on the government. Top officials however, would always react rather defensively to any suggestion of vulnerability, determined not to admit to any failings or weaknesses that may provide a political opening for opposition forces ahead of elections due next year.

Last week, as a team from the International Monetary Fund wrapped up a visit to the country, Finance Minister A.H.M. Mustafa Kamal was asked rather politely by journalists appearing in a Zoom Call whether Dhaka was leaning towards asking the IMF for a loan, as it was being reported throughout the week that such a move was imminent.

Kamal didn't just deny it. He dismissed it with such disdain, that would have you looking for anyone sounding out that scenario to charge him or her with peddling fake, news. Out of sheer frustration, two of the country's leading voices on the economy, Ahsan Mansur and Mamunur Rashid, were forced to question the sourcing and intentions behind such reporting on national television. Nobody likes to be misinformed.

But then here we are a week later, and the request for support to the IMF is indeed a reality, as the finance minister himself signed off on a letter to the fund's managing director, Kristalina Georgieva, last Sunday (Jul. 24), seeking the loan as 'a balance of payment and budget support' as well as to mitigate the effects of climate change in Bangladesh.

Speaking to reporters after the weekly meeting of the cabinet committee on government procurement on Wednesday, the finance minister finally confirmed a formal proposal had been sent to the IMF seeking balance of payment support.

Kamal did not specify the amount Bangladesh was seeking and eventually told reporters that "how much loan will be available will depend on them." The IMF, which on the same day announced it was ready to engage with Bangladeshi authorities on loan program design, also did not comment on the potential amount, saying it "will be part of the program design discussions."

Explaining why the government had written to the IMF for the loan after saying loans were not needed only five days back, he said if the need was expressed too much in advance, the government would not be in a strong position to negotiate loan terms and interest rates with development partners.

Claiming that the country's economy was not in a bad state, the finance minister said, "If the economy is bad, why would the IMF give a loan? Rather, Bangladesh is a suitable country for IMF lending. Because Bangladesh has a good debt repayment system and there has never been a delay in debt repayment."

Prime Minister's Principal Secretary Ahmad Kaikaus, on the other hand, came across as much more forthright and assured, when he engaged with the press on the same issue, saying the current foreign exchange reserve of the country can meet all types of import expenditures for more than five months.

"We have import expenditure for more than five months in our reserve whereas it is said that having more than three months of import expenditure is the symbol of a strong economy. We do not have any risk," he said while briefing reporters at his office on some misleading news in newspapers and other media, reported our sister newsagency UNB.

He mentioned that as per the prediction from various organisations like IMF, World Bank, ADB and others, the world is likely to witness economic turmoil in the coming days.

"We have given a proposal to the IMF on how we could get possible funds from them as part of taking precautionary measures," he said. He also voiced a strong objection to the use of the term 'bail out' in some media reports. International outlet Bloomberg had used the term in their headline for a news item reporting the loan request.

"Why bailout, is the country in a deep crisis that we have to take the bailout?" he asked.

A bailout usually describes some sort of last resort, that is meant to just keep a country's finances afloat, or prevent a sovereign default. It is true that the funding sought by Bangladesh from the IMF in no way, shape or form fits that description.

Kaikaus mentioned that use of terms like 'bailout' hurts the country's dignity, as it is not in the kind of state to need one. He also requested the media to check with the IMF mission in Dhaka if needed, to learn whether Bangladesh has fallen into anything resembling a deep economic crisis like Pakistan or Sri Lanka.

"This was a regular discussion between the Finance Ministry and the IMF," he said, about the move to get funds from the IMF. He stated various types of assistance Bangladeshi governments had availed in the past from the IMF, including in 1993, 2003, 2012 and 2020.

"We are taking funds from IMF, ADB and World Bank on a regular basis," he said.

But he mentioned that Bangladesh is getting budgetary financing now, not the project financing, from them as they have faith in the country's ability to utilise the funds more efficiently.

"This time we sought budget assistance, this is for meeting the deficit in the balance of payment, not bail out. It is the money that we need as foreign currency to spend for our development activities," he said.

Talking about the power situation, he said that the government is also concerned like others about power so that it does not become a crisis in future.

"That's why we are saving our power now for the coming days," he said.

Kaikaus also condemned a recent news report regarding India's Adani Group and a Meghna Ghat power plant as 'just baseless'.

"Why are you making horror stories? Tell the truth," he requested of the media. He mentioned that these types of news will be harmful to the country and its possible investments from abroad.

The principal secretary also informed that the recent move by the government to save power through area-based load shedding has been effective and there is no need to increase it.

"We are saving 2000-3000 MW electricity and we are under our target," he said.

Responding to a question regarding the import of fuel oil from Russia, he said, "If other countries can import, why can't we?"

Better now, than later

Most economists were supportive of the government's decision to go to the IMF now, in order to head off any potential crisis before it emerges. The example of Sri Lanka inevitably comes up, although here specifically for delaying their request to the IMF for what eventually will be more along the lines of a bailout.

They also agree that for now, the IMF money would mainly be used to meet the large trade deficit that has opened up in the country's balance of payments, and to stabilise the exchange rate of the Taka against the dollar (by selling dollars). They also point out that the loan arrangement has not yet been finalised, and before receiving this money, the government would have to take several steps to show they are responsible in the eyes of the IMF. Loans from the so-called Bretton Woods institutions (the IMF and World Bank, so-called after the location in New York where they were conceived in the aftermath of the Second World War) are famous of course, or rather infamous perhaps, for coming with certain preconditions attached. These would have to be met for the arrangement to be agreed, and after that, they would also be closely monitored before disbursement of each tranche or instalment.

Asked about the possible IMF conditions and reform initiatives they may seek, Dr Debapriya Bhattacharya, honourary fellow at CPD, said: "The exchange rate of Taka should be floating and based on the market. The incentives given by the government to the foreign currency now may need to be adjusted. Monetary policy should be harmonised with fiscal policy. In that case, a level has to be specified in the subsidy in order to control the expenditure. Besides, the role of the central bank should also be strengthened. And in that case, there may be conditions for the recovery of defaulted loans."

Some of the conditions the IMF would likely attach are actually what many independent economists have been advising the government for a long time, mostly to no avail. The good news is that even if these reform measures are taken now, they will be good for the economy. It is not yet too late.

Why now?

Economists expressed concern just after Bangladesh's foreign exchange reserves slipped below $40 billion earlier this month, even though that should be capable of meeting almost six months import payments, based on imports for the immediate past fiscal.

Such concern was not seen 12 years ago, when Bangladesh's forex reserves were only $10.60 billion in the FY2010 (2009-10 fiscal). That is roughly the same level, since imports back then were also lower, at around $23 billion, meaning the reserve was enough to cover 4-5 months.

What is worrying now is a surge in imports driven by both demand for raw materials by export-oriented industries and growing consumption among the domestic consumers.

That, allied to an energy crisis caused by both domestic and international factors, is causing significant downward pressure on the forex reserve. Bangladeshis were used to hearing about the reserve rising gradually, reaching a peak of $48 billion a year ago.

These two factors have combined to bring the reserve down quite rapidly below $40 billion, and it is likely even lower, given that exporters have started defaulting on dollar loans taken out of the Export Development Fund, which is funded out of the reserve. Many economists now believe that foreign exchange reserves in Bangladesh have gone to dangerous levels.

Some of them contend that the reserves have fallen well below $40 billion dollars (see next story), with which it is not possible to cover more than three months of import expenses.

Talking with UNB, Dr Debapriya Bhattacharya said how much in foreign exchange reserve is secure for a country depends on the price of energy and commodities in the global markets, dollars required in a month to meet import payments, and whether the demand for import will go up in the coming months or not.

Though the Bangladesh Bank (BB) is showing forex reserves near $40 billion, unencumbered reserves is actually around $31 or $32 billion after excluding dollar support to the export sector (the Export Development Fund is worth $7 billion), he said.

Dr Debapriya said the government is taking the right measures to face the situation, but it is not enough considering the global and domestic situation. He suggested a loan amount of $1.5 -2 billion from the IMF as a cautionary step to avert any worsening situation.

Debapriya also pointed out that the depreciation of taka would create some opportunities to boost exports and encourage expatriates to send remittances. But the overall macroeconomic stability has undoubtedly weakened. There is a danger of slowing down the ongoing development activities in the country.

The government does not consider the situation to be critical yet. To reduce the pressure on reserves, several cost-effective measures, including load shedding in the power sector, have been taken so that the cost of fuel imports can be kept under control. The central bank is also dismissing economists' concerns about current forex reserves.

Md Serajul Islam, executive director and spokesperson of BB, said that if the reserves are enough meet the import expenses for three months, there is no danger.

"The reserves we have now will cover more than three months of import expenses. Now we have increased the import duty on all luxury goods. Hopefully, we will reap the benefits," he added.

Bangladesh's import expenses grew to over $80 billion in the immediate past fiscal, but even then, $40 billion should be enough to meet the Bangladesh Bank benchmark of 3 months, and possibly up to six months (half a year). The inward remittance flow also slipped to $21 billion in FY 22 from $24.77 billion in FY 21.

The real concern stems from the fact that there are now issues beyond the government's control at play. With gas reserves dwindling fast, Bangladesh has suddenly become highly dependent on energy imports, and their prices have been rising to record levels in the international market, with a pandemic-ending rally exacerbated by the war in Ukraine.

Bangladesh was forced to sit out two rounds of purchasing LNG on the international market recently due to exceptionally high price, and that directly led to the country's energy crisis, as production of gas from the country's own gasfields is nowhere near enough these days to meet demand. That led to the return of load shedding.

There is also the issue of export income not being fully repatriated to the country. Besides, the garment sector also imports 60 percent of its export volume. In the face of all this, the government's steps to cut imports of luxury goods is also a step in the right direction. But whether they will be enough, only time will tell.

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