IMF irked as major conditions for loan remain unfulfilled

September 28, 2012

The lender may defer the second instalment of $1b
The IMF may defer the disbursement of the second instalment of its $1 billion loans for Bangladesh if the government does not fulfil all the related conditions, the lender said.
An IMF mission conveyed this message to the government as some of the major conditions were not met yet. The team left Dhaka yesterday after reviewing the implementation of the conditions and holding talks with the government for two weeks.
The second instalment or $141 million was supposed to be released by November.
A finance ministry official said the team of the International Monetary Fund expressed dissatisfaction at the amended draft of the VAT law and Banking Company Act.
The lender earlier approved $987 million for Bangladesh to help it overcome macroeconomic pressures and build a buffer reserve.
Bangladesh received one of the seven instalments last year.
According to officials, the IMF mission found major differences in the draft of the VAT law amendment proposal given to them and the one placed in parliament. They expressed serious concern about it.
The proposal was first placed in a cabinet meeting in March for further review.
Later a committee was formed with the Prime Minister’s Economic Affairs Adviser Mashiur Rahman as its head to further scrutinise the proposal.
On the basis of the recommendations of this committee, the proposal was again placed in the cabinet in July and it was approved.
Later the draft amendment to the VAT law was placed in parliament, which sent the draft to the parliamentary standing committee on the finance ministry.
The finance ministry official said the original draft to the amendment kept VAT at 15 percent in all stages of value addition but the rate was 5 percent in some cases in the final proposal.
The IMF also objected to another provision, which said the government may give VAT exemption to different sectors for public interest.
In case of the Banking Company Act, the lender wanted the government to cut the authority of the Banking Division and give more power to Bangladesh Bank.
According to the existing banking company law, the BB cannot exert full control over the state-owned banks.
The central bank can only dismiss the higher management and board members of the private commercial banks, but in case of state banks, the BB has no such power.
In such cases, the central bank can only advise the government. But when any irregularity takes place in the public sector banks, the BB has to shoulder the blame.
The IMF recommended amendment to this law to increase the central bank’s power.
The IMF told the government that they will not release the loan on time if the VAT law and the banking company act do not get passage in parliament by November incorporating the recommendations, according to the official.
The government will request the lender to waive a condition about the exposure limit of commercial banks in the stockmarket.
Earlier the IMF asked the government to keep such an exposure limit of a bank at 25 percent of its total capital.
But the government wants the exposure limit to be at 40 percent of a bank’s total capital. The existing exposure limit of a bank is 10 percent of its deposits.
The official said the IMF did not give any consent to the government’s request, but if the overall reform programme remains satisfactory the lender may entertain the request.
Before getting each of the six equal instalments, the government will have to fulfil a set of conditions of the Washington-based lender.
The government by this December has to meet 11 more conditions.
The IMF imposed another condition that the government cannot make hard-term borrowing beyond $1 billion. The government will not need to cross the limit by December. But the government’s various requirements next year may need around $3 billion.
The finance ministry official said the government plans to issue $750 million worth of sovereign bonds in the international market.
Besides, the government’s guarantee for the private sector power producers will require about $2 billion next year.
The official said the government has requested the IMF to increase the limit of hard-term borrowing for next year. The IMF has hinted that the limit could be raised to $1.5 billion.

-With The Daily Star input

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