Written by: Asif Khan Ullash and Anisur Rahman Kiron
What is the IMF?
The IMF (International Monetary Fund) is a special organization of the UN. The IMF prioritizes advancing international trade, job creation, and economic growth globally as well as fostering multilateral monetary cooperation, ensuring financial stability, and facilitating and promoting international trade. The IMF performs three key tasks: funding, capacity building, and monitoring economic development.
What is an IMF loan?
The IMF oversees the global financial system. Most of the money used by the IMF comes from its members, largely in the form of payment quotas. According to the size of each member nation’s GDP, the IMF assigns each one a quota. When a country joins the IMF, it pays 1/4 of its membership quota in widely recognized foreign currencies and 3/4 of its membership quota in its own national currency. It offers governments short-term lines of credit at interest rates below market levels so they may fulfill their present debt commitments and make payments to their creditors, a financial boost sometimes referred to as a bailout.
Why countries don’t like IMF loans?
The IMF strongly recommends nations to pursue specific measures to repair their fiscal balance sheets and restore their access to financial markets in order to retain their solvency and guarantee that countries make good on their repayments. They are known as austerity measures and are frequently harsh. Furthermore, these conditions—such as reducing government spending, liberalizing trade, removing barriers to the flow of capital, privatizing state-owned businesses, reducing subsidies, raising taxes, etc.—remain largely constant regardless of the nation’s economic situation. The structural modifications frequently involve actions that the borrowing nation should have taken on its own, such as expanding the tax base and fortifying its institutions, like the central bank. However, even the justified changes come as a shock. Countries are expected to do what they have been battling to achieve for decades in a few years. The economic health of a nation can occasionally deteriorate in order to meet IMF requirements, leading to recessions, increases in poverty rates, and increases in unemployment. Hence, governments often do not seek financial assistance from the IMF. Even while IMF loans are meant to be temporary aid, the organization hasn’t been able to guarantee that the loans it makes to less developed nations are in fact only meant to last a short while. Long-term reliance has instead been more likely to result from these loans.
The IMF receives its money back every time. The lender of last resort, as the name implies. No one will lend you money if the IMF, the world’s lender of last resort, is not paid back.
How IMF conditions hurt the common people:
The criteria set by the IMF do not address the fundamental economic inequity in the existing political economy of the indebted nation. It is inevitable that what harms the general populace is implemented, such as a sharp devaluation, rather than measures that would annoy the governing elite class, such as bringing the wealthy into the tax system. For instance, the IMF frequently imposes the requirement to cut subsidies. Subsidy reduction lowers government spending, but on the flip side, rising commodity prices and inflation from devalued sectors will impact the general public more than the wealthy, governing upper class.
Many less developed nations’ governments continue to spend heavily on state-owned enterprises that aren’t viable, which frequently results in enormous budget deficits. Therefore, it may be necessary for a nation to lower its budget deficit in order to be eligible for loans from the IMF. The issue is that this nation may attempt to comply by increasing taxes or tariffs to boost income or by depreciating its currency by printing more money, which would lead to more inflation. Rarely do these strategies alleviate foreign debt or budget deficits. Instead, they cause economies to become even more stagnant.
The structural reforms included in IMF loan agreements tend to increase unemployment, decrease government income, raise the price of essential services, and restructure taxation, pensions, and social security programs, all of which serve to keep more people in the cycle of poverty. A more flexible labor market and equalizing income tax rates under regressive tax reforms are also likely to worsen poverty.
As the IMF imposes criteria without taking into account political or economic injustice in order to transform the economy quickly, these requirements harm the general populace and make the poor even more impoverished.
IMF loan and Bangladesh:
Bangladesh and the International Monetary Fund (IMF) have a long history. Bangladesh achieved its membership in 1972 and has been an active participant in its programs since 1974. Since then, Bangladesh has received IMF loans ten times. The IMF has played an important role in transforming Bangladesh’s economic policy to stabilize the economy. Last time, in 2012, Bangladesh received more than a billion dollars.
The country’s current trade imbalance is the largest in Bangladesh’s history at 3,086 crores of dollars. Since import expenses increased and remittance revenue has declined, the current account deficit has increased to $1,723.3 crore. Bangladesh has never had a rate higher than this. Overall, the transaction shows a deficit of 371 crore dollars, compared to a surplus of 750 crore dollars in the previous fiscal year. The government must devalue the taka to reduce the payment deficit, despite the fact that the dollar is getting stronger against it every day. Taka’s value decreased by 11% from January, 2022 to July, 2022. All these are affecting the national reserve alarmingly. Now that the financial crisis has presented itself, Bangladesh has formally asked the International Monetary Fund (IMF) for a $4.5 billion loan to help resolve it.
The Bangladesh government has implemented a number of reforms in recent weeks in order to qualify for the loan. They increased the fuel price up to 52 per cent & the fertilizer price up to 37.5 per cent. The rising price has caused significant hardship for many people in Bangladesh, as it is widely used for transportation and agricultural purposes. The prices of the essential commodities have also gone up because of this. This has caused a lot of inconvenience to the people. On the other hand, the government can save a lot of subsidies for fuel & fertilizer. They can spend the amount on other important measures, especially to reduce the budget deficit. Bangladesh is facing a 2,45,064-crore budget deficit.
As we previously mentioned, an IMF loan has severe standards, and most of the time, regular people struggle in the process of satisfying them. The cost of all everyday necessities is increasing at an exponential rate, and inflation is at its greatest level in recent memory. There might be a worldwide recession soon. If the IMF sets its standard criteria in this dire scenario and the government follows them, the agony of the common people would know no boundaries. The governing elite class incurs debt, which is then painfully repaid by subsequent generations of average citizens. Many would say this is a good time to reform the Bangladeshi economy, which heavily relies on two volatile sectors, namely RMG and remittance, but at what cost? Economic reforms should be implemented in a methodical and determined way rather than in a rush to pay off debts. If Bangladesh agrees to the supposed IMF conditions, then the poverty rate will rise and the country will go into a long-running recession. Obviously, these won’t affect the governing elite class as much as they will affect the middle class and the lower class.
Instead of opting for the IMF debt trap, the Bangladesh government should take immediate and decisive action against those evading taxes in different sectors, and go after those who have been transferring billions and billions abroad (the amount, by the way, is much bigger than the amount the government wants to borrow from the IMF). If the government can levy the deferred loans and bring back the cash that had been laundered illegally, the IMF loan won’t be necessary.
Featured Image Courtesy: The Daily Sabah
References:
- Hasnat Abdul Hye | (14 Jan, 2022) | The subsidy dilemma in Bangladesh | The Financial Express | https://thefinancialexpress.com.bd/views/the-subsidy-dilemma-in-bangladesh-1642173002|
- Biglaiser, G., McGauvran, R.J.| (07 Jun, 2022) | The effects of IMF loan conditions on poverty in the developing world. J Int Relat Dev (2022). https://doi.org/10.1057/s41268-022-00263-1
- Mark Weisbrot | (27 Aug, 2019) | The IMF is hurting countries it claims to help | The Gurdian | https://www.theguardian.com/commentisfree/2019/aug/27/imf-economics-inequality-trump-ecuador
- শওকত হোসেন । (২৮ জুলাই, ২০২২) । আইএমএফের ঋণ কেন লাগছেই । প্রথম আলো । https://www.prothomalo.com/business/analysis/o0n9avg0pr
- ফখরুল ইসলাম । (২৭ জুলাই, ২০২২) । ঋণ পেতে আইএমএফকে চিঠি দিয়েছে বাংলাদেশ । প্রথম আলো । https://www.prothomalo.com/business/xg52gcu16t
- Bryan Johnson | (06 May, 1997) | The International Monetary Fund: Outdated, Ineffective, and Unnecessary | The Heritage | https://www.heritage.org/report/the-international-monetary-fund-outdated-ineffective-andunnecessary
- Usman Hayat | (13 July, 2021) | Why is the IMF so unpopular? | Dawn | https://www.dawn.com/news/1634688
- Meraj Mavis | (26 July, 2022) | Bangladesh seeks $4.5bn loan from IMF | Dhaka Tribune | https://www.dhakatribune.com/business/2022/07/26/economists-govt-needs-responsible-reforms-in-financial-sector-to-get-imf-loan
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