Then-Bangladesh Prime Minister Sheikh Hasina speaks at the United Nations General Assembly 76th session General Debate at United Nations Headquarters in New York City, New York City, September 24, 2021.(John Angelillo/Pool via Reuters)
By Steve H. Hanke & Caleb HofmannNovember 20, 2024 6:30 am
By granting Bangladesh a loan last year, the IMF only prolonged the misrule of Sheikh Hasina’s administration.
After being embroiled in one controversy after another, the long-serving Bangladeshi prime minister Sheikh Hasina was forced into exile in August. With each passing week, new complaints about her autocratic administration come to light. The most recent and most spectacular allegation is that associates closely linked to Sheikh Hasina, including business tycoon Mohammed Saiful Alam and members of the Directorate General of Forces Intelligence — the country’s military intelligence agency — stand accused of orchestrating takeovers of leading banks and funneling $17 billion out of the domestic banking system during her time in office.Although Alam denies the charges, the accusation comes from none other than the central bank’s new governor, Ahsan Mansur, who called it the “biggest, highest robbing of banks by any international standards” and claimed that “it was state-sponsored and it couldn’t have happened without intelligence people putting guns [to former bank CEOs’] heads.” Today, thanks to Sheikh Hasina, Bangladesh is in economic arrears. The Adani Group, which supplies Bangladesh with 10 percent of its electricity, asserts that Bangladesh is late on $800 million in payments; it’s calling the situation “unsustainable.” In Bangladesh, the lights may go out soon.
At this juncture, a typical “solution” for a developing country such as Bangladesh is to plead its case to the International Monetary Fund (IMF) and hope for a credit line to avert a balance-of-payments crisis. The IMF, invariably, will grant such a credit line, a big show of structural reform will be made, and, shortly thereafter, the developing country will be back with the begging bowl. This has been the sad story for decades.
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A key feature of this narrative is the policy conditionality of IMF programs. This means that, in order to be approved for an IMF loan, a country must agree to implement certain stabilization policies. These policies typically include quasi-debt ceilings, tax hikes, and government wage ceilings. Ostensibly, the IMF claims that these policies “[encourage] the return of private investors” and “protect the most vulnerable population.” In actuality, these “reforms” only serve as a mask of legitimacy for the IMF, and they have allowed it to enable the bad behavior of authoritarian regimes in the developing world for decades.
Bangladesh is a particularly telling representation of this phenomenon. Just one year ago, when Sheikh Hasina was still comfortably in power, the IMF granted Bangladesh $3.3 billion ($2.5 billion in special drawing rights, or IMF units of account) across three types of credit facilities: its Extended Fund Facility, Extended Credit Facility, and Resilience and Sustainability Facility. These credit facilities supposedly came with sophisticated strings attached; the IMF stated, “Structural reforms to create conducive environment to expand trade and foreign direct investment, deepening the financial sector, developing human capital, and improving governance to enhance the business climate are needed to lift growth potential.”
In reality, the IMF has no mechanism of enforcement to ensure that any of these reforms see the light of day. Each of the three credit facilities granted to Bangladesh are governed by “ex-post” policy conditionality. In essence, it means that as long as Bangladesh says it will implement reforms, it can be granted a loan. Spoiler alert: Bangladesh did. If (or when) the reforms get buried, the only risk that Bangladesh faces is the prospect of not being granted a new loan at some point in the future. It turns out that Bangladesh’s failure to implement the agreed-upon reforms was not a hindrance. Just last month, an IMF team flew to Dhaka to initiate a new multi-billion-dollar loan. This would be Bangladesh’s 16th IMF program — talk about recidivism.
But the IMF is guilty of a graver sin. By granting Bangladesh a loan last year, it only prolonged the reign of Sheikh Hasina’s administration. Somehow, while conducting its safeguard assessment of Hasina’s monetary authorities, it failed to detect what might be the largest Bangladeshi bank heist in history. It also failed to accurately assess the quality of Bangladesh’s leadership. From 2000 to 2021, and under Sheikh Hasina, Bangladesh’s Human Freedom Index ranking plummeted from a gloomy 91 to a dismal 130 (out of 165 countries). By 2023, when the IMF granted the loan, it was clear that Hasina had engineered significant democratic backsliding through the nexus of her security state. Today, her whereabouts are unknown. Last week, Bangladesh requested that Interpol issue a red notice for her arrest. By financing her regime, the IMF helped Hasina assuage economic conditions in Bangladesh that might have otherwise hastened her downfall. Ironically, the loan was small in comparison to what the thieves stand accused of stealing.
As Harvard professor Robert Barro put it, “The IMF doesn’t put out fires, it starts them.” By granting loans to developing countries with corrupt and authoritarian leaders, the IMF does far more harm than good. Bangladesh is just another page in a volume of IMF failures.
Steve H. Hanke is a professor of applied economics at the Johns Hopkins University and a senior fellow at the Independent Institute in Oakland, Calif.
Caleb Hofmann is a research scholar at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.
