Mar 26, 2023
Bangladesh Leader Bets IMF-Mandated Rigor Will Pay Off in Polls
(Bloomberg) -- Government leaders across the world have often balked at implementing reforms agreed with the International Monetary Fund for fear of being penalized at the ballot box. Bangladesh Prime Minister Sheikh Hasina isn’t one of them.
Her quick execution of IMF mandates have stood out in South Asia where Pakistan is still fiddling with fuel subsidies just as it inches closer to reviving a bailout. Sri Lanka has delayed local municipal polls as it raised taxes and interest rates to clinch IMF funds last week.
Bangladesh, which in July became the last of the three countries to ask for IMF support, was the first to get loans approved after swiftly raising energy prices. Hasina, 75, made no apologies for the move.
“Gas and electricity supply can be provided if all agree to pay the purchasing costs,” she said a week $4.7 billion in IMF loans were secured on Jan. 31. “How much subsidy can be given? And why should we continue subsidies?”
Such comments are typically unheard of as elections approach: All three nations face key votes over the next 18 months. But unlike leaders in Sri Lanka and Pakistan, Hasina is widely expected to win a fourth straight term in national polls expected by January 2024 — not least because many of her opponents are behind bars or ensnared in legal cases.
“If the ruling party manages to maintain economic stability, that could preempt anger or public sentiment that works against the government,” said Michael Kugelman, director of the Wilson Center’s South Asia Institute. “Hasina certainly has the credibility to pull this off.”
In contrast, Pakistan Prime Minister Shehbaz Sharif polled low in a survey ahead of elections later this year and has been blamed by voters for the economic crisis. While Sri Lankan leader Ranil Wickremesinghe has pushed through reforms, he depends on the support of a party run by a powerful clan and will need to seek a new mandate in presidential elections due September 2024.
Hasina is banking on her government’s move to go to the IMF to show to markets and voters that she has prevented the $460 billion Bangladeshi economy from going the way Sri Lanka has with a default. Pakistan is also facing the prospect of a default.
Bangladesh went to the IMF as it grappled with an energy crisis with commodity prices soaring last year due to Russia’s war in Ukraine, while the rising costs of imports widened the trade deficit. The local currency depreciated by a fifth and reserves fell to the lowest in three years.
By winning access to IMF funds, Hasina’s government is gaining some time to fix the economy before the elections. Signs of a weakening economy could well trigger public anger against the premier who has overseen growth of more than 6% on average for the past 14 years though it slowed to about 3.5% during the pandemic.
The first review of the IMF program is set for the second half of 2023, and Bangladesh Mission Chief Rahul Anand sees the authorities “taking comprehensive steps” to unwind subsidies and move to a market-driven exchange rate.
Bangladesh has received $476 million under the facility so far. Further disbursements depend on the government ensuring reforms for the financial sector, ranging from the central bank pursuing an independent monetary policy to reducing non-performing loans and spurring climate change funding.
Others could be politically dicey. The nation has been tasked with boosting the share of tax revenue by 0.5% of gross domestic product annually for the next two fiscal years, with the current level estimated at 7.9%. While that ratio is the highest in South Asia, it’s still among the lowest in the world. The first milestone for that target is coming up in July — which marks the start of the fiscal year.
Then there’s slashing the subsidies that account for more than a tenth of Bangladesh’s total budget spend. Economists say reforms need to look at restructuring the power sector.
“The real problem is the wasteful capacity charge the government pays private power producers,” said Fahmida Khatun, executive director of the Centre for Policy Dialogue, a Dhaka-based think tank. “The government needs a strong political commitment to reforms because the beneficiary of weak governance is the rich people, not the poor.”
Consumer prices eased for five straight months after spiking to a decade high of 9.5% in August. It rose again in February in tandem with energy and food price hikes. Soaring living costs are a rallying point for the opposition who say the crisis has stemmed from the government.
They want Hasina to step down now and pave the way for a national vote under a non-partisan caretaker system, saying there shouldn’t be a repeat of the 2018 elections with reports of violence, vote fraud and a crackdown on the opposition.
Protests picked up steam in December with thousands of opposition supporters gathering at an open field in the capital Dhaka. But the momentum fizzled out just as quickly when riot police fired bullets and tear gas and security forces rounded up protesters.
Previous crackdowns have already pushed the largest opposition group, the Bangladesh Nationalist Party, into the wilderness and hundreds of activists and leaders are behind bars. While the government suspended jail sentences for BNP chief and former premier Khaleda Zia in corruption cases, her movement is restricted.
Senior BNP leaders recently met with European diplomats and said the party would not contest in polls if Hasina was still in power. They have vowed more street protests.
The BNP said a new government without Hasina should carry out the IMF reforms. “The revision of taxation, the financial and banking sector, budget management and trade policy is necessary,” BNP Secretary General Mirza Fakhrul Islam Alamgir said last month. “This requires a corruption-free system and a genuinely democratic government.”
©2023 Bloomberg L.P.