|dc.description.abstract||Norway has been requested by IMF to provide balance of
payment (BOP) support to Bangladesh, which is facing a critical
reduction in its foreign exchange reserves. This report,
which has been commissioned by NORAD, analyses whether
Norway should provide such support. It is argued that BOP
support and budget support have similar macroeconomic
impacts although the conditionalities put forward by the
donor may differ in the two cases.
There are severe imbalances in Bangladesh’ external as well
as internal accounts. We are arguing in this paper that external
conditions are the main explanatory factors for the
current crisis. Foreign reserves have been halved since 1995
and now cover only six weeks of imports. The growth rate
in exports has declined from 27 % in 2000 to a negative
growth of 11% in 2001. We expect the crisis to be more than
temporary, partly because exports of garments will face additional
structural problems when the Multifibre Agreement
is phased out in 2004. Bangladesh will therefore not move
easily out of its present distress, and is in strong need of foreign
exchange including BOP support.
We find that the reform programme and its conditionalities
put forward by IMF in Bangladesh make sense. The IMF
nevertheless needs to give a better justification for why a system
of flexible exchange rate is seen as a prerequisite for providing
a loan. Since the negotiation about a loan package
currently has broken down, Norway should at the present
stage not provide BOP support.
After completing an interim poverty reduction strategy in the
near future, bargaining for a loan package will be recommenced.
The report discusses conditions that NORAD should
apply for providing balance of payment support in the future.
We are emphasising the importance of a well-developed
poverty reduction programme and co-operating donor partners.||