The International Monetary Fund came to an agreement with Bangladesh on a $4.7 billion loan package quite quickly because the country was not in danger of defaulting on its debts, says trade economist Zaidi Sattar.
“Bangladesh went to the IMF to request some IMF support as a pre-emptive measure to tide over the balance of payments pressures that came externally,” he said in an interview with bdnews24.com’s Inside Out.
“It wasn't something that was created from inside, it was the Russo-Ukraine war, the supply chain disruption; the spike in food and fuel prices brought about the import surge that took place in Bangladesh.”
The import surge led to balance of payments pressures due to the widening current account deficit, he said. But, Bangladesh has fared better than some of its neighbours because of its 'prudent' macroeconomic management over the past 25-30 years.
“Sri Lanka, even Pakistan and other developing economies, really had a very difficult time. Some went bankrupt, some became defaulters on their payments. Sri Lanka, Pakistan, Ghana - I can name three countries that are defaulting, if not close to default. So Bangladesh was nowhere near in that situation. In fact, in the EU, World Bank and IMF debt sustainability analysis which took place in FY 22, they found Bangladesh's debt carrying capacity to be moderate.”
As such, the deal went rather smoothly, said Sattar, a founder and chairman of the Policy Research Institute think tank.
“IMF did not take much time to commit $4.7 billion - which is not much - to Bangladesh in about 15 days of [their negotiations with] Bangladesh government policymakers.”
“There are 60 plus other countries that were also knocking at the IMF doors and they didn't all get the money they wanted. And we know our neighbours in South Asia...Pakistan still hasn't got it. Sri Lanka has got some commitment. Bangladesh did not have to face that. It was fairly straightforward."
The IMF deal will create a buffer that will give Bangladesh some time to adjust to global economic headwinds without losing momentum, Sattar said.
The video of the interview is available on bdnews24.com and its Facebook and YouTube pages.
Bangladesh currently has about $30 billion in foreign currency reserves, which can pay for about five to five-and-a-half months of the import bills, according to the trade economist.
But, in order to stabilise reserves, Bangladesh must allow the exchange rate of the taka to fluctuate, he said.
“Flexibility in the exchange rate is the technical requirement for having stable foreign exchange reserves.”
“If you try to stick to an exchange rate, you will have to lose foreign exchange reserves, which is exactly what happened. They had to sell a lot of dollars from their foreign exchange reserves in order to keep the exchange rate at Tk 85 per dollar, you know, back in [FY21-22].”
Another issue was the sharp rise in imports, which the central bank has since tried to curb, Sattar said.
“Imports are down by almost eight to 10 percent by the end of the year. So imports have been controlled, but it's not the perfect way to control imports. Basically, it has been done through controlling [the opening of letters of credit] and other what we call quantitative restrictions. But that is not the best way to curb imports. The ideal way to curb imports would be to let the exchange rate depreciate.”
While the government has since allowed the taka to depreciate, it could probably depreciate further, Sattar said.
While the dollar remains the currency of international trade and reserves, concerns have been raised by what some people have described as the ‘weaponising’ of the dollar to take aim at Russia over the Ukraine war, Sattar said.
“We all accepted the dollar as a payment system as a reserve currency, but that was partly on the basis of its credibility that the United States government would not freeze accounts and things like that. But geopolitical systems have led to the latest argument that 'okay, we should think of an alternative to the dollar, because the government which prints the dollar, which owns the dollar, has not lived up to the expectation that they will not weaponise the dollar'.”
However, the alternatives put forward by India and China of engaging in trade in the rupee or the yuan are not feasible for Bangladesh, Sattar believes.
“It all depends on if there's a balanced trade. [If trade was balanced] between Bangladesh and India, between Bangladesh and China, it wouldn't have been a problem. They could have said 'okay, we export $2 billion, I import $2 billion, we can trade in yuan, you can trade in Bangladesh taka'.
"However, the situation is much different. India and China are the two largest trading partners of Bangladesh. Bangladesh, in [FY22] imported $16.5 billion (worth of goods) from India, but exported only $2 billion.”
“[As] for China, Bangladesh imported $24 billion and exported only $1 billion.”
Even if Bangladesh reached an agreement to trade in the rupee or the yuan, it would have to sell dollars to buy enough rupee or yuan to make up the massive gulf in the trade deficit between Bangladesh and these two countries.
For the moment, Sattar said, the world is still left looking for more reasonable replacements for the greenback.