Bangladesh economic actions criticized, but IMF discipline questioned

November 23, 1981

The International Monetary Fund (IMF) is still twisting the arm of Bangladesh , trying to enforce economic discipline on the impoverished country. The IMF action, the suspension of IMF quarterly loan installments on a three-year $1 billion loan granted last December, occurred in July, less than two months after the assassination of President Ziaur Rahman by Army mutineers. Bangladesh was still reeling, the future of constitutional civilian government in doubt.

The suspension of quarterly payments, totaling $100 million to date, followed heavy government internal borrowing - in violation of the IMF loan agreement - to cover unexpectedly large budget deficits at the end of the Bangladesh fiscal year in June.

Economic analysts in the large foreign aid community here applauded the IMF suspension in economic terms, saying that stern action was necessary to halt an annual pattern of budget overruns followed by catch-up borrowing from the nationalized banks.

But at the same time they questioned the wisdom of the IMF crackdown during a period of intense political uncertainty, bureaucratic paralysis in all but routine decisions, and preparations for the presidential election that was finally held, after two postponements, on Nov. 15.

''The timing was terrible,'' grimaced a supporter of the IMF action, a short breath after citing ''gross fiscal irresponsibility'' of the government. A foreign assistance expert blamed Bangladesh for ''sheer mismanagement'' of its domestic credit, but said the IMF would have done better ''to unsheath the knife'' of a loan suspension rather than plunge it in.''

''Bangladesh must do more to observe financial disciplines for its own good, but at this very delicate moment too much external pressure may not be appropriate,'' he said.

At issue is the government's handling of its fiscal year-end deficit of 5 billion taka (about $268.8 million), including a 2 billion taka overrun widely and ironically seen as a success for the Bangladesh government.

Aid donors have long been urging the government to encourage greater food production by paying higher support prices to farmers, and to construct more and better grain warehouses to keep its grain stockpiles from spoiling. Last year it did both in the midst of an unexpectedly good harvest, running up 2 billion taka in debt. Aid community sources say that the IMF joined other donors in cheering the government on - and that the IMF would have readily overlooked that portion of the deficit.

The problem was the remaining 3 billion taka overrun, a product of both unrealistic estimates of how much foreign aid the country would receive and sheer overspending, particularly on Bangladesh's notoriously inefficient, money-losing publicly owned industries.

Despite Bangladesh's agreement with the IMF to hold down domestic credit, the government of acting President Abdus Sattar turned to the Bangladesh banks for credit to cover the deficit - at levels which triggered IMF warnings and then the loan suspension.

According to authoritative sources, the presence and stature of Zia, an avidly pro-development leader, was a major factor in the IMF's decision to lend funds to Bangladesh. They believe the loan would not have been suspended had Zia been alive - chiefly because Zia would have heeded the IMF warnings and cracked down on his own bureaucracy to avoid unacceptable deficits and domestic borrowing.

But Zia's assassination left Bangladesh with only an interim government - it was only Sunday that Sattar was elected President in his own right - preoccupied with calming the country and preparing for elections. Lost in the shuffle were the hard economic decisions needed to keep the IMF loan payments flowing.

To get by, the government has since drawn down its foreign exchange reserves, taking out $200 million in short-term loans from international commercial banks, and tightened up on imports to save hard currency. It has also tightened internal bank lending ceilings - one step toward satisfying IMF performance criteria and getting the suspended funds restored.

Still to be faced are policies to cut the public industries' losses - through such politically painful means as raising subsidized prices of their output - and cutbacks in overall government spending. The IMF is reportedly willing to patch up its loan agreement, resume payments, and even restore the suspended $ 100 million if Bangladesh signals its willingness to exert financial discipline.