Is IMF stepping beyond dotted line?
Monday, 6 August 2007
Shamsul Huq Zahid
THE International Monetary Fund (IMF), which is known for promoting the interest of the private sector across the globe, of late, has soured its relationship with the Bangladesh business community.
The leaders of the main trade bodies in a joint statement late last week accused the IMF of poking its nose in the country's economic management and imposing conditions that, what they claimed, were hurting the interest of the businesses as well as the common people. The leaders requested the government to ignore the IMF's 'uncalled for' advice.
What has, apparently, annoyed the local businesses most is the IMF's continuous pressure on the government to hike fuel oil prices and gas and power tariffs. The IMF brought the situation to a head when it, reportedly, wrote a letter recently to the finance ministry asking it to resist a move for constituting a ' safeguard body' headed by the chairman of the Tariff Commission. The IMF felt that constitution of such a body would further strengthen the trade protection measures.
Surprisingly, Finance Adviser Mirza Azizul Islam trashed the joint statement of the business leaders and supported the viewpoints of the multilateral donors that Bangladesh was still a highly protected market in South Asia region. The statement of the finance adviser came following his meeting with the visiting South Asian Executive Director of the IMF Adarsha Kishore Thursday. Kishore told reporters that IMF only put forward suggestions and the ultimate decision maker was the government, none else.
The statement of the finance adviser must have pained the business leaders much. For, the statement would strengthen the IMF persistent move to remove incentives to the domestic industries.
There is no denying that protection, in the form of tariff or otherwise, promotes inefficiency and low productivity in domestic industries. It is also illogical to force the consumers pay more just to protect domestic industries.
But the preachers of free trade at home and abroad do need to prove it first that trade liberalization has helped the domestic industries in a poor country such as Bangladesh achieve higher level of efficiency, productivity and competitiveness and contributed to the generation of more employment opportunities.
One cannot expect a country like Bangladesh having low capital as well as industrial base would be as open as a developed or an emerging developing market. India until recently was a highly protected market and it used to lag behind Bangladesh so far as brining down the tariff rates is concerned.
The multilateral donors while dishing out advice to open the Bangladesh market to finished goods from outside tend to overlook the ground realities. Their pleas for withdrawing supports to domestic industries do contradict the observations that they very often make about high cost of doing business, infrastructural bottlenecks, bureaucratic complexities, high level of corruption etc. It should first advice the government to create conditions in which the domestic industries can operate efficiently and earn competitive edge. Any suggestion to liberalise trade further prior to the creation of such conditions would amount to asking the domestic industries to engage in an uneven battle. And the IMF and the like do know well the outcome-slow and painful death of domestic industries.
One cannot blame the businesses for urging the government to ignore IMF advice. The 1997 Asian financial crisis is an oft-cited example of opening of financial markets too fast in line with the advice from so-called multilateral lenders. However, there is at least one piece of IMF advice that instead of helping the government here to achieve the desired objective has created distortions in the economy. The central bank at the insistence of the IMF has been pursuing a contractionary monetary policy for more than couple of years with the objective of taming soaring inflation. But the inflation, which is very much cost-push in nature, instead of going down has now touched the double-digit level, the highest in more than one and a half decades.
Neighbouring India was also experiencing inflationary pressure a few months back. The Reserve Bank of India (RBI) without any advice from outsiders had put in place some restrictive monetary policy and got the results almost instantly. The RBI without changing its key lending rate raised the cash reserve ratio to a near six-year high. The rate of inflation fell from end-March level of 5.9 per cent to 4.4 per cent in the middle part of the last month. The main reason behind the RBI getting quick result was that the Indian inflation had been demand-driven, not a cost-push one.
However, it is not that the Bangladesh Bank has been wrong in choosing a restrictive monetary policy. Under the prevailing circumstances, any central bank would have tried similar measures to help contain inflation.
The reported IMF opposition to the constitution of a safeguard body by the government is sure to come as a surprise to many. For, the Agreement on Safeguards that sets forth the rules for application of safeguard measurers pursuant to article XIX of GATT 1994 allows member countries to constitute such bodies to conduct investigations in accordance with established rules to see whether conditions for application of safeguard measures exist or not. Besides, the investigating bodies are required to maintain procedural transparency. They have to publish detailed analysis of a case seeking imposition of safeguard measures and hold public hearings so that all interested parties (importers, exporters, producers) can present their views and respond to views of others to the matters being investigated.
Moreover, a WTO member cannot apply safeguard measures arbitrarily. It has to notify the Committee on Safeguards of initiations of investigations and findings. Besides, a member desiring to impose such measures will be required to provide adequate opportunity for consultations with other members who have substantial interests as exporters of the product. Members applying safeguard measures are also required to enter into agreements through consultation on compensation payments with members affected by such measures.
So, imposition of safeguard measures, it seems, is not that easy. Moreover, constitution of a safeguard body is an issue beyond the jurisdiction of the IMF. India since 1995 has initiated the largest number of safeguard measures (15), followed by Chile and Jordan (11 each), and Turkey and the USA (10 each). Did the IMF ever ask any question about the safeguard initiations by those countries?
While accusing the government of being subservient to multilateral donor, one should not miss one very important point that the government does need budgetary supports. In the backdrop of inadequate resource mobilization, it is left with no option other than seeking external assistance to meet the resource gap. The businesses that are critical of both government and the donors could help the government to a large extent if they desire so. They should pay to the government exchequer the right amount of value added tax (VAT), income tax and avoid over- and underinvoicing of their import and export cargoes. A report published in the FE last week can be cited as an example here. The report quoting authoritative sources said the annual rate of VAT collection is about 15 per cent of the potential amount. Last fiscal, the VAT collected by the NBR men amounted to Tk 124 billion as against the potential amount of Tk. 820 billion!
If all including businesses remain true to their payment obligations relating to taxes and other revenues to the public exchequer, the government would be far less dependent on aid, resulting in far less 'interference' in economic management by the outsiders.
THE International Monetary Fund (IMF), which is known for promoting the interest of the private sector across the globe, of late, has soured its relationship with the Bangladesh business community.
The leaders of the main trade bodies in a joint statement late last week accused the IMF of poking its nose in the country's economic management and imposing conditions that, what they claimed, were hurting the interest of the businesses as well as the common people. The leaders requested the government to ignore the IMF's 'uncalled for' advice.
What has, apparently, annoyed the local businesses most is the IMF's continuous pressure on the government to hike fuel oil prices and gas and power tariffs. The IMF brought the situation to a head when it, reportedly, wrote a letter recently to the finance ministry asking it to resist a move for constituting a ' safeguard body' headed by the chairman of the Tariff Commission. The IMF felt that constitution of such a body would further strengthen the trade protection measures.
Surprisingly, Finance Adviser Mirza Azizul Islam trashed the joint statement of the business leaders and supported the viewpoints of the multilateral donors that Bangladesh was still a highly protected market in South Asia region. The statement of the finance adviser came following his meeting with the visiting South Asian Executive Director of the IMF Adarsha Kishore Thursday. Kishore told reporters that IMF only put forward suggestions and the ultimate decision maker was the government, none else.
The statement of the finance adviser must have pained the business leaders much. For, the statement would strengthen the IMF persistent move to remove incentives to the domestic industries.
There is no denying that protection, in the form of tariff or otherwise, promotes inefficiency and low productivity in domestic industries. It is also illogical to force the consumers pay more just to protect domestic industries.
But the preachers of free trade at home and abroad do need to prove it first that trade liberalization has helped the domestic industries in a poor country such as Bangladesh achieve higher level of efficiency, productivity and competitiveness and contributed to the generation of more employment opportunities.
One cannot expect a country like Bangladesh having low capital as well as industrial base would be as open as a developed or an emerging developing market. India until recently was a highly protected market and it used to lag behind Bangladesh so far as brining down the tariff rates is concerned.
The multilateral donors while dishing out advice to open the Bangladesh market to finished goods from outside tend to overlook the ground realities. Their pleas for withdrawing supports to domestic industries do contradict the observations that they very often make about high cost of doing business, infrastructural bottlenecks, bureaucratic complexities, high level of corruption etc. It should first advice the government to create conditions in which the domestic industries can operate efficiently and earn competitive edge. Any suggestion to liberalise trade further prior to the creation of such conditions would amount to asking the domestic industries to engage in an uneven battle. And the IMF and the like do know well the outcome-slow and painful death of domestic industries.
One cannot blame the businesses for urging the government to ignore IMF advice. The 1997 Asian financial crisis is an oft-cited example of opening of financial markets too fast in line with the advice from so-called multilateral lenders. However, there is at least one piece of IMF advice that instead of helping the government here to achieve the desired objective has created distortions in the economy. The central bank at the insistence of the IMF has been pursuing a contractionary monetary policy for more than couple of years with the objective of taming soaring inflation. But the inflation, which is very much cost-push in nature, instead of going down has now touched the double-digit level, the highest in more than one and a half decades.
Neighbouring India was also experiencing inflationary pressure a few months back. The Reserve Bank of India (RBI) without any advice from outsiders had put in place some restrictive monetary policy and got the results almost instantly. The RBI without changing its key lending rate raised the cash reserve ratio to a near six-year high. The rate of inflation fell from end-March level of 5.9 per cent to 4.4 per cent in the middle part of the last month. The main reason behind the RBI getting quick result was that the Indian inflation had been demand-driven, not a cost-push one.
However, it is not that the Bangladesh Bank has been wrong in choosing a restrictive monetary policy. Under the prevailing circumstances, any central bank would have tried similar measures to help contain inflation.
The reported IMF opposition to the constitution of a safeguard body by the government is sure to come as a surprise to many. For, the Agreement on Safeguards that sets forth the rules for application of safeguard measurers pursuant to article XIX of GATT 1994 allows member countries to constitute such bodies to conduct investigations in accordance with established rules to see whether conditions for application of safeguard measures exist or not. Besides, the investigating bodies are required to maintain procedural transparency. They have to publish detailed analysis of a case seeking imposition of safeguard measures and hold public hearings so that all interested parties (importers, exporters, producers) can present their views and respond to views of others to the matters being investigated.
Moreover, a WTO member cannot apply safeguard measures arbitrarily. It has to notify the Committee on Safeguards of initiations of investigations and findings. Besides, a member desiring to impose such measures will be required to provide adequate opportunity for consultations with other members who have substantial interests as exporters of the product. Members applying safeguard measures are also required to enter into agreements through consultation on compensation payments with members affected by such measures.
So, imposition of safeguard measures, it seems, is not that easy. Moreover, constitution of a safeguard body is an issue beyond the jurisdiction of the IMF. India since 1995 has initiated the largest number of safeguard measures (15), followed by Chile and Jordan (11 each), and Turkey and the USA (10 each). Did the IMF ever ask any question about the safeguard initiations by those countries?
While accusing the government of being subservient to multilateral donor, one should not miss one very important point that the government does need budgetary supports. In the backdrop of inadequate resource mobilization, it is left with no option other than seeking external assistance to meet the resource gap. The businesses that are critical of both government and the donors could help the government to a large extent if they desire so. They should pay to the government exchequer the right amount of value added tax (VAT), income tax and avoid over- and underinvoicing of their import and export cargoes. A report published in the FE last week can be cited as an example here. The report quoting authoritative sources said the annual rate of VAT collection is about 15 per cent of the potential amount. Last fiscal, the VAT collected by the NBR men amounted to Tk 124 billion as against the potential amount of Tk. 820 billion!
If all including businesses remain true to their payment obligations relating to taxes and other revenues to the public exchequer, the government would be far less dependent on aid, resulting in far less 'interference' in economic management by the outsiders.