Time to dissociate from debtors in debt

NewAge, August 27, 2007

The entire basket of foreign assistance has remained below three per cent of the GDP for quite a few years now, which means that the farmers, garment factory workers and the businessmen have contributed much more to the sustenance and growth of the country than the handful of lenders. Thus any government should find it compelling to heed the
words of those who contribute most to the economy, writes
Tanim Ahmed*

THE multilateral lending agencies, the World Bank and the International Monetary Fund, have made a major shift in their lending instruments, coming away from the much-criticised structural adjustment plans, and begun to lend under a different programme styled Poverty Reduction and Growth Facility. The executive board of the IMF approved a three-year arrangement of almost half a billion dollars on June 23, 2003. Under this arrangement, and as part of the conditionalities set out for Bangladesh, subsequent governments since then have had to swallow one bitter recommendation after another only in order to secure a few million dollars of funds at a time. These include increases in prices of fuel, gas and power, corporatisation of the nationalised commercial banks. The military-driven interim government also reduced import tariffs of luxury items but increased the tariffs of industrial raw material and industrial machinery. Even in the midst of the unfolding economic crisis, caused by spiralling inflation and rising unemployment, the interim government considered raising the prices of fuel, power and urea, to ‘adjust’ them with the international prices, presumably at the insistence of the monetary fund. Although the government later backed down in the face of public criticism, the incumbents are about to sign another deal for a new lending arrangement with the IMF, according to reports. The arrangement will surely be accompanied with more conditions that will be harmful to the national economy.

IMF prescriptions have proved to be disastrous for its clients many a time. Its conditionalities, as many statesman and politician have said publicly, put its clients through much hardship and misery. Besides, it has been proved that the countries not following their neoliberal diktat but adhering to a more protectionist regime have developed faster and achieved a more equitable growth. Most of the developed countries practised protectionism on their path to economic prosperity. Meanwhile, during the tenure of the loan arrangement, between 2003 and now, the IMF has lost ground all over the world. It lost large clients, internal evaluations cried foul over its activities in Africa, and finally it itself run into losses. Thailand parted ways with the agency in 2003; Brazil and Argentina, two of its four largest debtors, in 2005; and Bolivia, Serbia and Indonesia in 2006. Uruguay and Philippines have made similar announcements while Turkey is rumoured to be considering a similar path.

It is all the more ironic that the IMF is itself in financial crisis. Its losses are set to cross $100 million in the current fiscal year and expected to cross $365 million by 2010. It is ironic because this agency is expected to assist countries facing difficulty in their balance of payments, that is to say countries that have to spend more than they earn. The purpose of the IMF since the time of its inception has been to assist countries with a ‘balance of payments’ crisis besides ensuring stable exchange rates. According to paragraphs four and five of its articles of agreement, its purpose is ‘to promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation’ and ‘to give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with the opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity’. The IMF website, justifying the necessity of its conditionalities, states that its ‘loans are generally conditional on the adoption of appropriate policies to resolve a country’s balance of payments difficulties, and to enable the government to repay the Fund. Conditionality also gives confidence to the borrowing country by clarifying the terms on which the IMF will continue to make its financial resources available.’

About its policies on the client countries, it says the policies ‘should be designed not just to resolve the immediate balance of payments problem but also to lay the basis for sustainability and economic growth over the longer term by achieving broader economic stability—for example, measures to contain inflation, reduce public debt, or strengthen financial systems.’ It becomes quite apparent from the kind of policy prescriptions and its lending arrangements that the monetary fund has long ago overstepped and deviated from its mandate of assisting balance of payments crisis. In the case of Bangladesh, the country currently boasts a foreign reserve of about $5 billion with a fairly stable and floating exchange rate. These preclude any reason for the monetary fund to lend to Bangladesh. The agency, however, is not the only one overstepping its mandate; the military-driven regime, unrepresentative as it is, is borrowing from the foreign lenders and further indebting the nation at large, for which it will not have to take any responsibility later on. Currently, the per capita debt stands at an equivalent of about Tk 10,000 and further borrowing will naturally increase the burden and at the same time compromise the sovereignty of Bangladesh in setting its own economic policies, as pointed out by many eminent economists.

The ill-effects of IMF prescriptions are apparent in the rising inflation, with food inflation over the double-digit mark, as the government follows a precautionary monetary policy impeding investment and growth. On the other hand, and once again at the behest of the lending agencies, the incumbents continue to shut down state-owned factories resulting in further unemployment which would in turn lead to misery of the people. These job cuts, falsely styled golden handshake, would be financed from the funds from the agencies which would only increase the country’s debt. Furthermore, the government has also chosen to depend on substantial borrowing from the banking sector to finance its own budget deficit which would further limit the potential for investment as funds that might otherwise have been available for private investment will now be going to the government. The end result would be that fewer employment opportunities would be created. Since the current regime has taken over, it has consistently taken one decision after another that has increased unemployment and destroyed livelihoods of thousands but has done little to effectively create further job opportunities.

The government’s policies have been severely criticised by the leading chamber bodies and business lobbies of Bangladesh recently. But the incumbents appear to be quite impervious to such opinions and are brazenly continuing on a path that has been proved to be disastrous for other countries previously and need not be tested again. Currently, Bangladeshi expatriates send in remittance worth some $5 billion per year and the garment sector alone accounts for three fourths of the country’s export earnings while the last lending arrangement with the monetary fund saw the country receive a little below a half billion dollars in the last five years. Put it differently, a few thousand expatriates have provided ten times in one year that the monetary fund gave in the last five. The entire basket of foreign assistance has remained below three per cent of the GDP for quite a few years now, which means that the farmers, garment factory workers and the businessmen have contributed much more to the sustenance and growth of the country than the handful of lenders. Thus any government should find it compelling to heed the words of those who contribute most to the economy. On the other hand, the budgetary allocation for interest payment to these lenders increases every year. This year the allocation for loan servicing, at 13.5 per cent of the entire budget, would be the single highest allocation for any one sector.

This was understandable during the tenure of political governments when the incumbents were too eager to receive loans from foreign lenders as development assistance as a large part of those funds would find their way into the pockets of bureaucrats and politicians in the form of consultancies or bribes. Research papers have found that a rather small percentage of these foreign loans eventually go directly to the people the funds were meant for. It was apparent that the foreign funds were another source of income for the party coterie and cadres as well as the politicians. Now, however, with an apolitical interim regime, apparently committed to the cause of rooting out corruption and the pervasive culture of bribery, those reasons, one must presume, do not exist. The countries that have refused to renew their arrangements with the IMF are doing rather well in terms of growth, economic prosperity and human development. The incumbents, should they refuse to follow the proven path to development, must explain themselves adequately and to the satisfaction of the citizens. It should also explain why it chooses to ignore the opinions of the garment girls or the farmers or the businessmen and instead submit to the lenders’ whims and fancy.

Contact Author: tanimahmed@gmail.com


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