Dogmatic IMF’s questionable moral authority and competence

Anis Chowdhury

Anis Chowdhury

As per media reports (e.g., the Daily Ittefaq; 10 Dec. 2024), representatives of the International Monetary Fund (IMF) have termed the Bangladesh Bank’s recent decision to print 22 thousand crore (22.5 billion) taka to save weak banks and to ease liquidity crisis amidst inflationary pressure as “suicidal”.

They have also “expressed strong anger over the weakness of the central bank’s policies and the incident of money laundering using fake documents”.

They also alleged, “failure to take effective action against associates involved in loan fraud and bank fraud is an indication of negligence on the part of the central bank and the concerned banks”.

These may be valid concerns. But what moral authority and competence does the IMF have to raise these issues now?

IMF’s duplicity Didn’t the IMF know of the misdeeds of the fallen Sheikh Hasina regime when its Executive Board approved its US$4.7 billion bail-out package in 30 January 2023 for Bangladesh?

Wasn’t it informed that the corrupt regime machinated forcible take-overs of profitable private banks by its cronies and stacked the management boards of state-owned banks with its buddies? Didn’t it see the compliant and politicised Bangladesh Bank (BB) was printing money to enable its cronies to rob banks? Wasn’t it aware of the extent of loan defaults, wide-spread corruptions, robbing of banks and illicit siphoning of billions of dollars out of the country by the kleptocratic regime’s cronies?

If the answers to the above questions are no, then we can safely say, the IMF is totally incompetent. If the answers are yes, then the IMF has been complicit.

Incompetent or complicit, the IMF seemed happy with the policies and actions of the politically compromised BB. It didn’t have any problem when it approved the release of the programme’s 3rd tranche, amounting US$1.1 billion on 24 June, 2024, less than a month before the country began revolting against 15 years of misdeeds by a regime that ruled by theft and hanged on to power through gross violations of human rights and suppression of democracy.

IMF’s irresponsibility The IMF was also irresponsible when it approved its bail-out programme for Bangladesh. It was widely known that the regime hanged on to power through unprecedented elections manipulations, suppression of democracy, gross violations of human rights and politicization of State institutions, including the BB.

The regime’s only claim of legitimacy was mega infrastructure investment-led high growth. However, with the kleptocratic regime’s increasing dependence on its cronies, tax evasions became wide-spread. Laxed tax efforts saw the tax-GDP ratio decline from around 10% in 2010 to 7.8% in 2023 – lower than the developing countries’ average (15%), and significantly lower than neighbouring India’s 12%, Nepal’s 17.5% and Bhutan’s 12.3%. Thus, it was not at all surprising that regime’s meg-infrastructure projects had to be financed by borrowing. So, external debt accumulation accelerated since 2010 within a year of the Hasina regime’s coming to power, rising from around US$23 billion in 2008 to over US$100 billion in 2023.

But it should not have been difficult for the IMF to see that most of these debt- financed meg infrastructures were driven largely by political considerations and their cost were inflated many folds to enable corruptions by politically connected officials and contractors. This is the perfect recipe for debt unsustainability.

Lending to a country which was “irresponsibly” borrowing and hence facing debt unsustainability was itself an “irresponsible” act. The IMF violated the United Nations principles of responsible lending when it agreed to the request of the sinking Hasina Government to bail it out.

IMF’s dogma

The IMF team not only believes that printing money to support weaker banks is “suicidal”, but also is “anti-people” as it could worsen the inflation situation. It recommended further monetary tightening and interest rate hikes.

The IMF thinks inflation is enemy number one, and is more dangerous than the lack of confidence in the banking sector, and bank runs.

The IMF’s anti-inflation stance is ideological. It cannot provide any evidence that moderate inflation in the range of 10-12% retards growth. Nor can it prove that such inflation, if allowed, quickly accelerates beyond the threshold (40%) deemed harmful for an economy.

In fact, trying to suppress moderate inflation by hiking interest rate is costly as it slows growth, as one former World Bank economist, Surjit Bhalla, said, “Let’s kill GDP, inflation will fall”. Higher interest rates are distressing for small and medium enterprises (SMEs) and hence cause job losses.

The IMF would utter the familiar slogan, “short-run pains for long-term gains” to justify its anti-inflationary policy template. However, research – some by IMF staff economists – shows that anti-inflationary contractionary policies permanently damage countries’ productive capacity and leave lasting scars in the labour market.

Research by social scientists and public health specialists also note adverse social, health and phycological impacts of austerity and contractionary policies. They have reported increased incidents of suicides,  marriage breakdowns, domestic violence and mental disorders due to job losses during economic slowdowns.

Therefore, they suggest alternative measures for easing cost of living pressure due to rising price of essential items. This includes removing supply bottlenecks by facilitating SMEs, public provisioning of essential services and distributing of basic food items of reasonable quality, enforcing anti-monopoly regulations, punishing unscrupulous business cartels and strengthening domestic resource mobilisation to fund these measures.

In recommending harsh anti-inflationary measures, the IMF team displays its inability or unwillingness to learn from its historic failures such as in the case of the 1997-98 Asian financial crisis. Indonesia, which was forced to swallow IMF’s bitter pill, experienced worst decline in its GDP by about 14% in one year. Higher interest rates pushed SMEs out of business that snowballed into failures of even healthy banks as SMEs defaulted loans en masse.

On the other hand, Malaysia, which ordered IMF out, recovered reasonably quickly. 

Malaysia implemented its own unorthodox policies, which included capital controls and a pegged exchange rate.

The IMF’s dogmatic anti-inflation stance violates its own Article of Agreement. The preamble of Article IV clearly says: “each member shall: (i) endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances”.

Note the emphasis on ‘orderly economic growth’; ‘reasonable price stability’ and ‘due regard to [a country’s] circumstances’.

The IMF also ignores the advice of its Independent Evaluation Office (offered in 2006) to be cautious while targeting a lower inflation rate. It warned such policies may entail loss of output and government revenue.

IMF’s expiation

The IMF has no moral authority to provide policy advice to the currently reconstituted BB which is trying its best to rebuild the banking sector which was completely destroyed by the previous corrupt regime that the IMF helped survive with its US$4.4 life-line.

If the IMF wants its credibility restored then instead of lecturing it should be humble with remorse. To expiate its sins, the IMF should be providing debt-relief by swapping Bangladesh’s debt owed to it for rehabilitating those maimed, and for compensating the families of those killed by the illegitimate regime that it helped survive by brutal repressions.

(Anis Chowdhury, Emeritus Professor, Western Sydney University, Australia. Held senior United Nations positions (Economic & Social affairs) in New York and Bangkok.)