The IMF paradox looms over Bangladesh

In the modern history of economic policymaking, few institutions evoke as much debate as the International Monetary Fund. Bangladesh, in the aftermath of its 2022 dollar crisis and the ensuing economic turbulence, has once again become a testing ground for this old paradox.

Between 1981 and 2014, a landmark study by two Greek economists, Michael Kletsos and Andreas Sintos, examined countries that received IMF loans with stringent conditions.

Their findings revealed an unambiguous pattern: Employment fell, unemployment rose and uncertainty deepened across those economies.

Countries forced to privatize state enterprises, cut deficits, and reduce spending did not emerge leaner and stronger; they emerged more unequal and fragile. Decades later, that same pattern appears to be repeating itself in South Asia, with Bangladesh standing in the crosshairs of conditional reforms.

When the previous government turned to the IMF in late 2022, it did so amid a storm of soaring inflation, a severe dollar shortage, dwindling reserves, and an ailing banking sector. The 4.7 billion dollar loan package was meant to be a lifeline, but it has begun to feel more like a leash.

More than 50 conditions were attached to the program, touching nearly every aspect of fiscal and monetary management. These included subsidy withdrawal, interest rate liberalization, energy price hikes, credit contraction, and reduced development expenditure.

In theory, these measures were designed to restore macroeconomic stability. In practice, they have squeezed the arteries of growth. The rise in fuel, gas, and electricity prices, justified as “rationalization,” triggered a domino effect across industries, raising production costs and suppressing domestic demand.

The removal of the 9% cap on bank lending rates further tightened liquidity, making credit more expensive for entrepreneurs. Private investment, already cautious in a volatile climate, virtually froze.

By mid 2024, employment generation had slowed to a crawl, particularly among the youth who once symbolized Bangladesh’s demographic dividend.

These figures, however, only hint at the deeper structural consequences. For three consecutive fiscal years, Bangladesh Bank has maintained a contractionary monetary stance to control inflation. Yet inflation, stubborn and supply-driven, has refused to retreat meaningfully.

Instead, the tightening has choked private credit growth, which is the lifeblood of investment and job creation. In June 2024, private sector credit growth dropped to its lowest point in history.

By July, it had entered negative territory as total private credit fell from Tk 17,47,687 crore to Tk 17,42,634 cr, a net decline of Tk 5,530 cr..

This decline was not a mere statistical blip. It signified the first time in the country’s banking history that private credit had actually contracted rather than grown. For a developing economy reliant on industrial expansion, such a reversal is alarming.

Factories have begun operating below capacity, new ventures are postponed, and the demand for loans, once a barometer of business optimism, has almost disappeared.

The stagnation in government development spending has compounded the problem.

Revenue shortfalls persist, with a Tk 3,727 cr deficit recorded in August alone. These indicators reflect an economy caught in paralysis, defined by restraint at a time when stimulus and public investment could have cushioned the blow.

Bangladesh is not alone in facing this dilemma. Pakistan, Sri Lanka, and Kenya, all recipients of IMF loans in recent years, have experienced similar contractions. In Pakistan, the IMF’s fiscal consolidation drive contributed to record unemployment and a collapse in small and medium enterprise activity.

In Sri Lanka, austerity measures deepened social unrest and pushed poverty levels to new highs. Kenya also witnessed widening income inequality and reduced social protection as public spending cuts took hold. The logic may differ by geography, but the outcome remains eerily consistent: Stabilization without growth, correction without recovery.

Human Rights Watch captured this global pattern in its report Bandage on a Bullet Wound, documenting how 33 countries undergoing IMF backed programs after Covid-19 adopted measures such as hiring freezes, wage cuts, and suspended social benefits. The result was not just macroeconomic adjustment but also social strain.

The irony is unmistakable. The IMF was established to stabilize economies, yet in its contemporary form, it often destabilizes employment, the very foundation of stability in developing societies.

The organization’s defenders argue that the fault lies not in its prescriptions but in the timing, since countries seek IMF help only after exhausting all other options.

This is true for Bangladesh, but that reality makes the issue even more critical. When a nation turns to the IMF out of desperation, it loses much of its bargaining power. The negotiable becomes non-negotiable.

The only tangible benefit was inflation control, with an average decline of 70%. But what use is low inflation in an economy where factories close and young people cannot find work?

The IMF’s Bangladesh program, initially valued at 4.7 bn, has already expanded to 5.5 bn after an additional 800 million was approved. The term, originally set to end in 2026, has been extended by another six months. As the IMF mission prepares to visit Dhaka again later this month, the question is not whether Bangladesh can fulfill the remaining conditions; it almost certainly will. The more pressing question is what will be left when it does.

The country’s macroeconomic narrative now resembles a loop of restraint without recovery. Interest rates are high, but confidence is low. The currency is weaker, yet exports are stagnant. Subsidies are gone, but fiscal space remains narrow. The austerity-first model, though applauded by technocrats, fails to account for the social and developmental trade-offs.

Every closed factory, every delayed project, and every unemployed youth represents not only an economic cost but also a moral one.

There is also a deeper philosophical contradiction. The IMF’s conditions assume that the market, once liberalized, will self-correct, that efficiency and discipline will attract capital and spur growth.

Markets are not moral organisms. They do not heal societies; they optimize returns. In fragile democracies where governance deficits, corruption, and infrastructural bottlenecks persist, the invisible hand often becomes an invisible chokehold.

The future of Bangladesh’s economy will depend on whether it can rebalance this equation. Stabilization without employment is not stability; it is stagnation disguised as prudence. Fiscal discipline cannot be a substitute for productive dynamism.

The lesson from four decades of IMF history is clear: Structural reforms imposed from outside can steady the books but rarely ignite the engine.

As Bangladesh moves forward under an expanded IMF program, policymakers must reclaim agency over their economic choices. Conditionality should not become dependency. The purpose of reform is not to please creditors but to empower citizens, especially the millions whose livelihoods depend on factories, farms, and small enterprises.

Unless the government can restore private sector confidence, revive development spending, and protect social welfare from the scissors of austerity, the current recovery may become a textbook case of what economists call a stabilization trap, characterized by balanced accounts but broken aspirations.

The IMF can offer loans, but not livelihoods. That task, as history shows, belongs only to nations that remember that stability without employment is merely survival, not progress.

HM Nazmul Alam is an academic, journalist, and political analyst of Bangladesh. Currently he is teaching at IUBAT.