News and Update: IMF not to sign PSI with Bangladesh now

Shahariar Zaman and Tanim Ahmed, NewAge, September 19, 2007. Dhaka, Bangladesh

The International Monetary Fund has decided that entering into a new arrangement under its Policy Support Instrument programme with Bangladesh would not be appropriate at the moment.

Thomas Rumbaugh, head of a visiting IMF mission and also adviser to the lending agency’s Asia Pacific region, said regarding the delegation consultations with the interim government, ‘Both the sides have agreed that a PSI would not be the appropriate tool for Bangladesh right now.’ He made the statement at a news conference on Tuesday at the Bangladesh Bank and said among other options for the lending agency to provide assistance to Bangladesh was another arrangement under its Poverty Reduction and Growth Facility programme since the first one has expired.

There had been wide speculations that the two-week mission would pressure the government to enter into a new arrangement, which would very likely be a Policy Support Instrument, which does not involve any loans but involves six-monthly assessment of the economy by the Bretton Woods institution.

A clean chit of health following the assessment would act as a ‘signal’ for other lenders and donors that the country is creditworthy. Critics pointed out that the arrangement was no different from the agency’s regular programmes that include loans and credits.

Rumbaugh, however, indicated that the lending agency would continue to pursue its efforts to enter into an arrangement with Bangladesh over the course of the year when there would be further consultations through which it will remain involved in the country’s economic policy making. When asked about his opinion about the critics of the International Monetary Fund, Rumbaugh said they were a bunch of ‘ill-informed rabble-rousers’ who do not have their facts right. He said the environment was ‘rich’ and thus has resulted in debates regarding the role of the Bretton Woods institution. Rumbaugh pointed out, however, that the critics, including the politicians, trade and business bodies, bankers and economists took such a position due to misunderstanding the IMF at a basic level. ‘I think everyone should verify the facts first.’ But Rumbaugh emphasised that the IMF would continue to have discussions and consultations with the government regularly over the next year.

Regarding a recent case at the High Court questioning the legal authority of the interim regime to sign a new agreement, Rumbaugh said, ‘It is a legal question and the courts will answer that.’ When referred to a report of an internal committee — appointed by the former managing director and headed by Andrew Crockett — that observed that the IMF had a ‘perverse nature of incentive’ since its financial well-being depended on its being unsuccessful, Rumbaugh said, ‘Our goal is that all countries graduate to a level where they do not require our assistance.’ When it was pointed out to him that an increasing number of countries across the world were unwilling to accept IMF programmes and were in fact relieved to be rid of its conditionalities, Rumbaugh claimed that it further proof of the IMF’s success that so many countries did not require its assistance and were in fact doing quite well.

Regarding criticism of the IMF in those countries, he said, ‘I cannot comment on hearsay and about statements made by third parties in other countries.’ Rumbaugh squarely blamed the economic slowdown — which he apprehended would result in lesser growth than last year — on the lack of business confidence. He noted that there is sufficient liquidity but low demand for loans, which he said was its indication. But his statement also endorsed the ongoing anti-corruption drive. He said that the economic slowdown was ‘associated, in part, with uncertainty related to the government’s concerted anti-corruption drive, a drive that should lay the foundation for a fairer and more transparent business climate and stronger growth in the future’.

The statement of the IMF advocates continuation of the contractionary monetary policy to contain inflation. ‘The Bangladesh Bank should continue to absorb excess liquidity.’ There are also implicit directions for further liberalisation and privatisation of the public sector as the IMF suggests that the losses of the state- owned enterprises ‘generate quasi-fiscal costs of 1 to 2 per cent of the GDP per year.’ In the case of the financial sector, it states that further reform will ‘be important for Bangladesh to reach its full growth potential.’

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