Editorial

A similarly incredible environmental crime occurred in

Sonachhari in Sitakundu upazila where hundreds of trees
apparently for setting up a private ship breaking yard on
the land. The people of the locality did protest but the trees
had already been cut. The criminal elements of all variety
are nowadays targeting trees and thus making the country’s
fragile ecology more fragile. Environment laws are to be
made tougher so that the random cutting of trees would not
only be subjected to a probe but tried under rigorous laws.

Reformer needs reforms

The global financial crisis has laid bare not only the
flaws of the financial system but also the loopholes
of the mantra preached by the international
financial institutions, particularly the International
Monetary Fund. Although recommending reforms of
the financial system across the world, it is time that
this agency undergoes some substantial reforms of
its own, writes Meer Ahsan Habib

WHEN the monitor fails to

monitor, it certainly leads the
system to catastrophe or even
to collapse. As readers might
agree, there was hardly any
projection by the International
Monetary Fund, or by any other
monetary watchdog, about the
ongoing recession. Did they
really know anything or did they remain silent despite
knowing that a financial tsunami was likely to hit the world
economy that started rolling down from the heart of market
economy? During April 2009, when the recession had
already emerged with its real look, the International
Monetary Fund slashed growth forecasts for every major
country and urged governments to take forceful action to
recover from the recession.
Now let us have a look at the International Monetary
Fund’s role here in Bangladesh. The last caretaker
government planned to impose safeguard duties aimed
towards supporting local industries by restraining import
surge. It was halted by International Monetary Fund’s
intervention and disapproval which it apparently claimed
was against WTO rules. For least developed countries like
Bangladesh, safeguard duty has been a recognised
instrument, to protect local industries. In July 2007, the
monetary fund welcomed Bangladesh Bank’s contractionary
monetary policy which was an outcome of repeated IMF
pressure. Needless to mention, the International Monetary
Fund has always advocated for similar policies for other
Least Developed Countries. In a bid to further strengthen
its control over policy formulation, in September of the
same year, the multilateral agency proposed to introduce
joint audit system for income tax and value added tax
which was refused by the National Board of Revenue. Back
in April this year, the monetary fund recommended
devaluating the taka against the dollar which elicited sharp

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criticism from different quarters. In a statement in May

2009, the IMF’s Bangladesh Resident Mission termed
Bangladesh Bank’s decision to administer lending rates as
‘regrettable’ and said that such ‘rates should be determined
through market-based policy interest rates influenced by
the central bank’. Such observation is contradictory to the
IMF’s policy suggestion that governments should take
forceful actions to combat global recession. John Lipsky, the
IMF’s First Deputy Managing Director, in a speech in Paris
on June 26 said that ‘monetary policy should remain
accommodative for the time being’ and recommended clear
exit strategy ‘for government intervention in both the fiscal
and monetary areas’. The IMF has always sought for
contractionary monetary policy for countries like
Bangladesh. But when it fails, they seem to come up with a
common idea of being ‘accommodative’ for all.
Just a few days back the Sri Lankan trade minister GL
Peiris accused the monetary fund for politicising financial
aid when the latter’s executive board was delaying a $1.9
billion bailout fund. Sri Lanka, in a bid to meet her balance
of payments deficit in four years, negotiated the deal with
the International Monetary Fund. The agency did not make
any comment on Peiris’s claim that the bailout was being
delayed on the issue of Colombo’s all out war against the
Tamil separatists.
Now let us look back to the mid 1990’s when the soviet
communist bloc finally collapsed and the International
Monetary Fund took the driver’s seat in priviatising the
soviet industrial machine. This was viewed by the IMF and
its major shareholders as a success as they only wanted
Yeltsin to be re-elected. The election was highly
controversial which later awarded the capitalist backed
oligarchs to own Russia’s industrial assets. This resulted in
the emergence of a mafia syndicate which controlled
everything. Corruption scheme nearly cut national output
by half causing hunger and despair.
In April 2006, the IMF and the World Bank jointly
commissioned an external review committee headed by
Pedro Malan, former Brazilian finance minister to evaluate
the relationship between the two Bretton Woods
institutions. The report stated that the IMF was not well
equipped as a development institution and therefore,
suggested that the IMF should stop making development
loans to low-income countries, leaving that responsibility to
the World Bank. The Malan committee report justifies IMF’s
reform movement that started through initiation of policy
support instrument in late 2005. The IMF initiated the
instrument at a time when many low income countries were
about to complete their ongoing arrangements and the third
world countries had a relatively abundant stock of foreign
exchange. Needless to mention, the Poverty Reduction
Grant Facility and the Poverty Reduction Strategy served as
useful tools for the monetary fund to intervene into the
policy making process of low income countries. Bangladesh
was also offered to enter into an agreement to initiate the
policy support instrument but both the government and the
fund apparently backed due to the sharp criticism across
the country. Finally in September 2007, the caretaker
government announced that it was of the view that there
was no such need for policy support for Bangladesh at that
time.

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In May 2006, the IMF commissioned a committee

comprising of eminent persons that included among others
Alan Greenspan, former chairman of the US Federal
Reserve Board, Guillermo Ortíz, governor of the Bank of
Mexico and Jean-Claude Trichet, president of the European
Central Bank. This committee was headed by Andrew
Crockett, president of JP Morgan Chase International. The
objective of this committee was to study ‘sustainable long-
term financing’ of the multilateral lending agency i.e. to
suggest alternative income sources for the crisis-torn IMF
with a projected budget shortfall of $370 million by 2010. It
is to be mentioned here that in 2007, the IMF had an
operational cost of about $980 million. Large borrowers, for
example Brazil, Argentina and Indonesia have cleared their
dues indicating no further inclination to renew their
arrangements with the agency. The only large borrower is
Turkey with two-thirds of IMF’s total lending. The IMF, as
the Economist referred to it, has now virtually become ‘The
Turkish Monetary Fund’. The Latin American countries are
planning to set up a new bank ‘Banco del Sur’ —Bank of the
South— under Venezuelan leadership. Thailand and the
Philippines have said ‘NO’ to IMF and aim to form Bank of
Debtors by excluding the IMF; China and India hardly have
any relation with the IMF. Rejecting the IMF and World
Bank’s prescriptions, Asian countries like Malaysia,
Thailand, South Korea, and the Philippines have been very
successful in shaping their economies.
The IMF needs to remain relevant in the changing global
financial system and needs to redefine its role as an
international financial institution. China has emerged as a
major player in the global economy and even making
investments in many countries. With an aim to find
alternative to the international financial institutions,
particularly the International Monetary Fund, fast growing
economies of Brazil, Russia, India and China have formed
BRIC, aimed at finding alternative instruments or modify
the existing ones. BRIC in a recent move announced that
they were ready to buy a total of $60 billion worth of IMF
bonds that would boost the role of Special Drawing Rights in
international finance. There is, therefore, a solid risk that
international financial institutions will lose their control over
borrowers, particularly the least developed countries.
In September 2006, Nouriel Roubini, a professor of the
Stern School of Business at New York University delivered a
lecture at the IMF where he warned that the US consumers
were about to ‘burn out’. The IMF in an in-house newsletter
covered the story under the headline ‘meet Dr Doom’. Again
in September 2007, the IMF organised a seminar on ‘The
Risk of a US Hard Landing and Implications for the Global
Economy and Financial Markets’ which was addressed by Dr
Doom among others. However, Roubini has by now become
a prophet for the fund and not quite the Dr Doom as he was
initially slated to be. Even after being cautioned about a
probable recession, the IMF did not make any indication
that a financial tsunami was likely to hit the global
economy. Particularly the IMF failed to foresee and prevent
outbreak of major financial crisis. The self correcting
mechanism theory of the IMF which has always avoided the
avenue of stronger market regulation has failed. Yet it is
too early to say whether the IMF will lose its relevancy. If

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the IMF wants to remain relevant in the global economy,

however, it must reform itself and reform without delay.
Meer Ahsan Habib works for the Centre for Policy
Dialogue, a research organisation. ahsan@cpd.org.bd
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EDITOR: NURUL KABIR

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