A primer on the International Monetary Fund (part two)
The first of two pieces in this series (DS, Nov 5) discussed what the IMF is and why it was created, how the IMF is governed, and how the IMF is funded. This second piece covers the work of the IMF, both internationally and specifically in Bangladesh.
The work that the IMF does can be broken down into three major components, each of which I elaborate on below. These are economic surveillance; programs to support countries with a balance of payments need; and technical assistance in areas in which the IMF has particular expertise. To support its work in these areas the IMF also carries out a substantial amount of economic research on the global and regional economies and compiles international economic and financial statistics.
The articles of agreement of the IMF commit all member countries to the promotion of global economic stability through multilateral cooperation. Article IV provides the IMF with the mandate of overseeing the international monetary system and monitoring the economic and financial policies of each of its 185 member countries in order to ensure that global economic stability is maintained. This activity is known as surveillance, and is achieved through what are known as Article IV consultations with each member country.
Article IV consultations are held on a regular cycle (of either 12 or 24 months) with each member country. In practice, these consultations start with IMF staff visiting each member country and holding discussions with government officials, members of civil society, academia and the business community; and bilateral and multilateral donors.
Following the country visit, the staff prepare a report to the IMF Executive Board, and papers on selected economic issues relevant to the member country. The Article IV consultation concludes with a discussion of these documents at the IMF Executive Board. At that meeting, the member country for which the consultation is taking place has the opportunity to make a formal statement on its economic policy priorities and objectives. A Public Information Notice (PIN) summarising the Article IV discussion is issued on the IMF website, along with the staff report and other board documents.
The most recent Article IV consultation for Bangladesh concluded on June 22. The PIN and all board documents associated with that consultation are available to the public on the IMF website at www.imf.org/external/country/BGD/index.htm.
Program support and lending operations
Every member country of the IMF has the right to avail itself of financial resources available through the Fund if that country faces a balance of payments need. A balance of payments need arises when a country is unable to obtain sufficient financing at affordable rates in international capital markets to finance its international payments and maintain an appropriate level of international reserves.
This situation may arise for many reasons, among which are erosion of export earnings due to a loss of competitiveness and sudden shifts in the terms of trade arising from external shocks like rapid oil price increases.
Financial assistance from the IMF enables countries to rebuild their international reserves; stabilise their currencies; continue paying for imports; and put in place conditions for strong economic growth. Unlike development banks, the IMF does not lend for specific projects or for financing the budget.
IMF loans are usually provided under an agreement, or "arrangement" in IMF terminology, that stipulates the specific policies and measures a country commits to implement to resolve its balance of payment problem. The economic program underlying an IMF arrangement is formulated in discussions between the member country and the IMF, and the country's commitment to implement policy changes and economic reforms are presented to the IMF's Executive Board in a "Letter of Intent." Once the board approves an arrangement, the loan is released in phased disbursements as economic reforms are carried out.
Virtually all IMF lending to low-income countries -- and all lending to Bangladesh -- is on highly concessional terms, using funds made available through the Poverty Reduction and Growth Facility (PRGF). There are no commitment fees or service charges on loans provided through the PRGF. The interest rate is 0.5 percent per annum. Repayment of any particular disbursement begins five and a half years after the disbursement and must be completed within 10 years after the disbursement. Bangladesh has had three lending arrangements with the IMF. These have been from 1987-90; 1990-93; 2003-07.
Under the PRGF of 2003-07, Bangladesh borrowed SDR317 million ($494 million at the current $/SDR exchange rate) out of a total of SDR 400 million available under the arrangement. The economic program underlying the recent PRGF arrangement with Bangladesh concentrated on the introduction of the flexible exchange rate regime and the strengthening of the foreign exchange market; the development of the government debt market; reforms and restructuring of the financial sector, especially of the Nationalised Commercial Banks; tax administration reforms; and budget and monetary policies consistent with low inflation and strong growth.
Technical assistance is a major benefit of IMF membership. It is provided free of charge to any requesting member country, though the timing and scope of assistance is subject to resource constraints within the IMF. Approximately 90 percent of IMF technical assistance goes to low and lower-middle income countries. The goal of IMF technical assistance is to help countries develop the human resources and institutional capacity to design and implement on their own appropriate macroeconomic and financial policies and regulations.
Technical assistance visits to countries are complemented by a broad range of IMF training courses offered at IMF headquarters and in seven regional training institutes established jointly with IMF member countries.
The IMF has a number of core areas of expertise in which it provides technical assistance. The core areas of expertise are macroeconomic policy; tax policy and revenue administration; expenditure management; exchange rate systems; financial sector stability; and macroeconomic and financial sector statistics.
Efforts in recent years to strengthen the international financial system has also led member countries of the IMF to ask it to work on comprehensive assessments of countries' financial systems; the development of recognised international standards and codes for fiscal transparency, financial management, and statistics; and ways to strengthen measures to combat money laundering and the financing of terrorism.
Experts in all of the fields above work on the IMF staff and are sourced by the IMF from panels of experts comprised of current and former staff of central banks and ministries of finance from a wide range of countries.
Bangladesh has received extensive technical assistance from the IMF in recent years. This assistance has been in foreign exchange market development and management; tax administration and tax policy; central bank accounting and internal audit; government debt market development; and macroeconomic statistics. To complement this in-country assistance, a large number of Bangladesh government officials have in recent years attended IMF training courses in macroeconomics, financial sector analysis, combating money laundering and the financing of terrorism, and many other topics.
I would once again like to encourage readers to share their thoughts and opinions on issues related to the IMF through the blog spot comment window on our local website at www.imfbd.com. I hope that this will lead to a productive dialogue on the IMF's role in Bangladesh and on macroeconomic policy issues.
Jonathan Dunn is IMF Resident Representative, Bangladesh.