Some Questions about the IMF Liaisons

Jyoti Rahman

Published in the Independent Weekend Magazine on 22 October 2010.

This piece discusses the IMF’s recent mission to Bangladesh.

Anoop Singh, the International Monetary Fund’s Director of Asia Pacific Department, recently visited Bangladesh.  He met the Prime Minister, the Finance Minister, and government officials.

After meeting Mr Singh, the IMF Mission Chief David Cower and Resident Representative Eteri Kvintradze, the Finance Minister is quoted in the media as saying: We’ve earlier sought IMF assistance for implementation of the Poverty Reduction Strategy-II (PRS-II). We hope to get US$ 1 billion from them in the next two to three months.

Shortly after the trip, Bangladesh Bank bought 10 tons of gold for $403m.

So, what’s going on?  Why are we buying gold, or borrowing money?

The first thing to note is, there is a lot conspiracy theory out there about the IMF being a tool of ‘American imperialism’ out to dominate poor countries like us.  And let me stress that such conspiracy theories are plain nonsense.  Whatever the consequences of specific IMF advice, they are not an ‘evil force’ out to subjugate anyone.

And a related matter is, even if they were trying to dominate us, the IMF actually doesn’t have much leverage over Bangladesh.  The IMF’s main job is to rescue countries with balance of payments difficulties — in English, this means if a country doesn’t have enough foreign currency to pay for its imports or meet payments on its foreign debts, the Fund will come and tell the country ‘here is some money, but you can only get it if you do what we tell you’ (the last bit is called ‘conditionality’ by wonks).

Bangladesh doesn’t have a high foreign debt burden.  It hasn’t faced any difficulty in repaying its debts or paying for its imports.  If the Fund says ‘here is some money, but you must do X’, and if we think ‘X’ is bad for us, we can simply say ‘no thank you’.

So, if anything bad happens because of our liaisons with the Fund, the fault is as much ours as it is theirs.

With that cleared up, let’s consider the liaisons that have actually come to pass.

First, we bought some gold.  The Fund is one of the largest holders of gold in the world.  It’s selling some of its reserves to pay for extra personnel needed to assist troubled countries like Greece or Pakistan.[1]

But why is the Bangladesh Bank buying gold?

Well, the Bangladesh Bank needs reserves to protect taka’s de facto peg against the dollar, and be the lender of last resorts should our private sector find itself in payments difficulties.  As it happens, the Bank has a lot of reserves — over$10b as of last December, enough to pay for five months of imports.  The thing is, most of this is in dollar.  And the outlook for dollar, and the euro, is uncertain to say the least.

Seen from that light, a modest diversification into gold isn’t a bad idea.

And we are, indeed, talking about a modest diversification here.  Last year, India bought 200 tons of gold from the Fund for example.  And the financial market seems to be unperturbed about the whole thing.[2]

So the gold purchase doesn’t seem to be a big deal.  What about the $1b?

The Fund’s official press release on the visit mentions no money.[3]

The first paragraph of the press release is simple statement of who visited whom.  The second paragraph is about the economic outlook and challenges.  It’s the third para, reproduced below with emphasis added, that is of interest:

Based on these discussions, IMF staff intend to work closely with the Government in the coming months on a reform program, in consultation with key development partners, which could be supported by Fund’s new low-income country lending facilities. This program would aim to embrace key elements of the authorities’ reform agenda on tax policy and administration, public financial management, the financial sector, and trade policy, creating the conditions for broad-based growth, including by catalyzing greater private investment and maintaining a stable macroeconomic environment.

Okay, there could be some money.  And for this, the IMF staff and development partners will help put together a ‘development program’.

This, however, raises two questions.

1. How does this ‘development program’ fit with the sixth five year plan or PRS-II or the government’s Vision 2021?

2. Exactly what role will the IMF staff and development partners have vis-a-vis public servants (from the Finance Ministry or the Planning Commission) and local consultants?

To stress, it’s not that there is a bunch of ‘evil IMF guys’ out to dominate us.  That’s nonsense.  Rather, it’s important to understand exactly who is responsible for drawing up this ‘development program’.

Controversies about economic policy might not be as exciting as, say, the private lives of our politicians.  But this is important stuff for our democratic accountability.

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