IMF deals: Making the correct choice
Wednesday, 19 September 2007
The International Monetary Fund (IMF) delegation at the end of its two-week long Poverty Reduction Growth Facility (PRGF)-exploratory mission in Bangladesh held its concluding meeting with the central bank. After the meeting, the central bank governor told the press that he was against adopting a tighter monetary policy to check inflation, because that might lead to further slowing down of the economy. On the contrary, despite the high inflationary pressure, which the IMF warned may exceed 9 per cent on average this fiscal, he favoured rather expansionary monetary policy to facilitate post-flood rehabilitation and address high rate of unemployment and sluggish growth.
For tighter monetary policy means higher interest rates on lending and less encouragement to the banks to assist the entrepreneurs in the private sector to go for investment in a big way. One can easily guess the impact of a contractionary monetary policy at a time when the banks are sitting on idle money on the one hand, and the economy needs a boost through more investment, on the other.
What are then the options before the government? To adopt IMF prescription of still stricter monetary policy and allow the private sector growth to suffer, or refuse to comply with its recommendations?
But there are other implications of going against the dictates of the IMF. As one of the least developed economies having a large section of its population still living under abject poverty, Bangladesh is yet to wean from the donor support, more particularly from the multi-lateral ones like the World Bank and the IMF. To implement its poverty reduction strategy, which is part of its annual budget, Bangladesh is entitled to the funds provided by the donor agencies, though upon fulfilment of certain conditions. With the expiry of the last Poverty Reduction Growth Facility (PRGF) deal with IMF in June last, the multilateral lending agency has come up with three alternative options.
Those include negotiating a new PRGF programme, going for the Staff Monitored Programme (SMP) through signing the much talked-about Policy Support Instrument (PSI), and engaging with IMF though its regular surveillance. The IMF delegates, however, suggested that continuation of the PRGF was the best option before Bangladesh.
The IMF conditionalities, on their part, are tied to the entire range of issues that define the relationship of a recipient nation with donors in general. If Bangladesh chooses to opt for an independent course of action, it runs the risk of a chain reaction regarding its relationship with other donors, whether bilateral or multilateral.
One cannot be oblivious here of the fact that the government will now have to go for implementing its Tk. 265 billion Annual Development Programme(ADP). To generate employment for the poor, the development projects under ADP, for which donors have committed funds, have to be activated. But to ensure that the donors may not go back on their earlier commitments or shy away from the future ones, accord with the IMF and its conditionalities may prove to be crucial for the country. The incumbent government will have to take all these factors into consideration before taking a position of talking down to the IMF.
Meanwhile, the various civil society bodies and individuals have made strong pleas against adopting IMF policy instruments to tide over its present crisis manifested through a general stagnation in the economy marked by sluggish growth, which is further compounded by a high inflationary pressure. One may well call it a case of stagflation.
Under the circumstances, so far as the question of making the right choice is concerned, this is a desperate predicament for Bangladesh.
For tighter monetary policy means higher interest rates on lending and less encouragement to the banks to assist the entrepreneurs in the private sector to go for investment in a big way. One can easily guess the impact of a contractionary monetary policy at a time when the banks are sitting on idle money on the one hand, and the economy needs a boost through more investment, on the other.
What are then the options before the government? To adopt IMF prescription of still stricter monetary policy and allow the private sector growth to suffer, or refuse to comply with its recommendations?
But there are other implications of going against the dictates of the IMF. As one of the least developed economies having a large section of its population still living under abject poverty, Bangladesh is yet to wean from the donor support, more particularly from the multi-lateral ones like the World Bank and the IMF. To implement its poverty reduction strategy, which is part of its annual budget, Bangladesh is entitled to the funds provided by the donor agencies, though upon fulfilment of certain conditions. With the expiry of the last Poverty Reduction Growth Facility (PRGF) deal with IMF in June last, the multilateral lending agency has come up with three alternative options.
Those include negotiating a new PRGF programme, going for the Staff Monitored Programme (SMP) through signing the much talked-about Policy Support Instrument (PSI), and engaging with IMF though its regular surveillance. The IMF delegates, however, suggested that continuation of the PRGF was the best option before Bangladesh.
The IMF conditionalities, on their part, are tied to the entire range of issues that define the relationship of a recipient nation with donors in general. If Bangladesh chooses to opt for an independent course of action, it runs the risk of a chain reaction regarding its relationship with other donors, whether bilateral or multilateral.
One cannot be oblivious here of the fact that the government will now have to go for implementing its Tk. 265 billion Annual Development Programme(ADP). To generate employment for the poor, the development projects under ADP, for which donors have committed funds, have to be activated. But to ensure that the donors may not go back on their earlier commitments or shy away from the future ones, accord with the IMF and its conditionalities may prove to be crucial for the country. The incumbent government will have to take all these factors into consideration before taking a position of talking down to the IMF.
Meanwhile, the various civil society bodies and individuals have made strong pleas against adopting IMF policy instruments to tide over its present crisis manifested through a general stagnation in the economy marked by sluggish growth, which is further compounded by a high inflationary pressure. One may well call it a case of stagflation.
Under the circumstances, so far as the question of making the right choice is concerned, this is a desperate predicament for Bangladesh.