IYANATUL ISLAM |
Local and international media reports have highlighted the news that Bangladesh has sought financial assistance from the IMF. A widely cited figure is that the scale of the assistance amounts to USD 4.5 billion. No agreement has yet been reached.
Bangladesh becomes the third South Asian country―after Sri Lanka and Pakistan―to seek support from the IMF. This has created the impression that Bangladesh is in an ‘economic crisis’ akin to Sri Lanka which is debt-stricken and wracked by political instability. Bangladesh might also be perceived to be rather similar to Pakistan which is in a precarious economic position. Such an impression, as will be argued here, is superficial and even misleading.
Countries often approach the IMF as a last resort when faced with sharply eroding foreign exchange reserves that hobble their capacity to finance imports reflecting a precarious balance of payments position. This situation is typically combined with an unsustainable fiscal position, high inflation, faltering growth, and labour market distress.
Here, for example, is the IMF’s latest assessment of Pakistan.
“Pakistan is at a challenging economic juncture. A difficult external environment combined with procyclical domestic policies fuelled domestic demand to unsustainable levels. The resultant economic overheating led to large fiscal and external deficits in (2022), contributed to rising inflation, and eroded reserve buffers.”
On Sri Lanka, the IMF paints a bleak picture. (June 30, 2022)
“Sri Lanka is going through a severe economic crisis. The economy is expected to contract significantly in 2022, while inflation is high and rising. The critically low level of foreign reserves has hampered the import of essential goods. During the in-person visit, the team witnessed some of the hardships currently faced by the Sri Lankan people, especially the poor and vulnerable who are affected disproportionately by the crisis.”
An IMF financial assistance package (usually entitled ‘lending arrangements’) contains multiple elements (a) monetary, exchange rate and fiscal policies to restore macroeconomic stability (b) structural policies to promote growth, and (c) social protection policies to shield the poor and the vulnerable from adverse economic circumstances. The funds are disbursed in a phased manner contingent on the national authorities carrying out multi-faceted policy actions that demonstrate measurable progress towards the goals embedded in (a), (b) and (c) listed above.
There is a long and contested literature on whether countries that are supported by the IMF are able to reach their goals. Delving into this literature will entail a distracting detour. Instead, the discussion focuses on Bangladesh to suggest that it does not necessarily fit the standard narrative of a country forced to seek IMF assistance because of an economic crisis. Countries can also seek IMF assistance on precautionary grounds because the national authorities might fear that temporary economic disruptions caused primarily by externally driven factors should be pre-empted from becoming overwhelming. Such a precautionary strategy of harnessing external support to bolster domestic resources can make sense for a country with a track record of good macroeconomic performance regardless of long-standing microeconomic inefficiencies.
The Fund commends Bangladesh on its long-term economic performance:
“Since independence, Bangladesh has achieved impressive economic growth and social development, making steady progress in reducing poverty and significant improvements in living standards”
“Directors commended the authorities for exercising fiscal prudence and maintaining a low risk of debt distress, while noting that Bangladesh’s capacity to repay the Fund remains sound.”
This represents a sharp contrast to the assessments that the Fund has provided for Sri Lanka and Pakistan. Of course, one could argue that economic events have moved rapidly over the last few months and that the Bangladesh economy is now poised at a critical juncture. Thus, its foreign exchange reserves have reduced by about 12% between June and July, inflation is threatening to get out of control, the exchange rate has depreciated significantly. Growth might falter as food, fertilizer and energy prices register sharp increases in the wake of the Russia-Ukraine war and the severe sanctions imposed on Russia.
It is also well known that Bangladesh has long-standing structural deficiencies reflected in unsatisfactory growth of good jobs, rising inequality, conspicuous environmental degradation, financial sector vulnerabilities, poor infrastructure, inadequate human capital, and low domestic revenue mobilization. Tackling these deficiencies will in turn require a long-term development agenda that seeks to mobilize resources to invest in infrastructure, human capital, improving labour market performance and enhancing resilience to climate change. These in turn will lay the foundation for Bangladesh to meet its aspiration to become an upper middle-income country by the early 2030s.
One of the outstanding paradoxes of the Bangladesh development story is that it has had commendable macroeconomic success despite long-standing structural deficiencies. The medium-term projections for the 2022-2027 period for growth and inflation appear rather robust relative to its South Asian neighbours of Pakistan and Sri Lanka as can be seen in Figures 1 and 2. Equally important, Bangladesh has good fiscal indicators and a satisfactory current account position. Sri Lanka is the one that appears to be debt-distressed (Figure 3) and is endowed with a precarious BOP position that is projected to improve over time.
Figure 1: Real GDP growth (Annual percent change), 2021-2027
Figure 2: Inflation rate, average consumer prices (Annual percent change), 2021-2027
Figure 3: General government gross debt (Percent of GDP), 2021-2027
Figure 4: Current account balance, percent of GDP (Percent of GDP)
One of the widely used indicators of external sustainability is the level of foreign exchange reserves expressed in terms of import coverage with three months considered as the lower limit of a safe threshold. As Figure 5 shows, Bangladesh is still comfortably placed with more than five months of import coverage (as of May 2022) despite evidence of notable decline relative to June 2021. It represents a sharp contrast to the highly vulnerable cases of Pakistan and Sri Lanka which in recent months have had foreign exchange reserves that are well below the recommended prudential threshold.
Figure 5: Forex reserves in terms of months of import coverage, June 2021 vs May 2022
In sum, it would be a mistake to conflate Bangladesh with the challenging cases of Pakistan and Sri Lanka. The government appears to have approached the Fund as a precautionary strategy rather than being driven by unsustainable macroeconomic imbalances. One suspects that, in any negotiation with the Fund, Bangladesh will have to engage in delicate discussions on its structural deficiencies with the Fund and how the government seeks to resolve them. Whether the national authorities will do so remains to be seen as long as the country’s macroeconomic success prevails over time. Medium-term projections of core macroeconomic indicators suggest that this optimism might not be misplaced, despite the external shocks emanating from the Russia-Ukraine war. On the other hand, the uncomfortable ramification of this optimism is that a much-needed development agenda that can sustain resilient and inclusive growth might remain unaddressed.
Iyanatul (Yan) Islam is an Adjunct Professor at the Griffith Asia Institute and former Branch Chief, ILO, Geneva.
This blog was written in the author’s capacity as Visiting Fellow, South Asian Network on Economic Modelling (SANEM), Dhaka, Bangladesh. The author is grateful to Professor Selim Raihan, Executive Director, SANEM, for sharing his thoughts on this highly topical issue. See Raihan, S (2022) ‘Global economic slowdown and the Bangladesh economy’, SANEM, Thinking Aloud, Vol.9, Issue 2, July, 2022.
The views expressed here are strictly personal.