US embassy cable - 05DHAKA362

C O N F I D E N T I A L DHAKA 000362 
 
SIPDIS 
 
E.O. 12958: DECL: 01/29/2010 
TAGS: EAID, ECON, PGOV, BG 
SUBJECT: IMF REP FEARS BDG IS LETTING PRGF PROGRAM DIE 
 
Classified By: P/E Counselor D.C. McCullough, reason para 1.5 b. 
 
 1. (C) Summary.  The IMF rep says the BDG has decided that 
letting the PRGF die is cheaper than the political and huge 
financial costs of privatizing the first state-owned bank. 
He wants key embassies to urge the BDG to reconsider but is 
not hopeful that the PRGF can be saved.  End Summary. 
 
2. (SBU) On January 27, we met with Jonathan Dunn, the 
recently-arrived IMF Resident Representative, to discuss the 
status of Bangladesh's Poverty Reduction and Growth Facility 
(PRGF) program. 
 
3. (C) The IMF team visit to Bangladesh in October went well, 
Dunn recalled.  Reforms in tax administration were 
progressing and the BDG committed to proceeding with the 
privatization of Rupali Bank, the first and smallest of the 
four public sector banks slated for sale.  But in December, 
"the Bangladeshis got sticker shock."  They realized that to 
recapitalize the bank fully in preparation for sale, after 30 
years of mismanagement and corruption, it would cost USD 500 
million, about twice what they had expected.  Another 
problem, Dunn said, is BNP MP Hafiz Ibrahim, a Bank minority 
shareholder whose brother is a friend of Tariq Rahman, the 
PM's son.  Ibrahim, valuing his access to the bank's cash 
flow generated largely by remittances, is adamantly against 
the privatization, and obtained a court injunction against 
BDG "interference" with the bank.  "They're generating new 
bad loans every day," Dunn said.  "If there were a run on 
these state banks, the government would fall.  They would 
need USD 700 million that they don't have." 
 
4. (C) Dunn said that the finance secretary told him Finance 
Minister Rahman has concluded that this is not a deal he 
could sell to the cabinet.  In addition to the huge 
recapitalization cost, there would be the political pain in 
the run-up to an election of laying off one third of the 
bank's staff. 
 
5. (C) The BDG, Dunn believes, has thus consciously decided 
it prefers to lose the PRGF and associated budget support 
financing from other donors than paying the price and 
implementing the reforms needed to sustain the PRGF.  Revenue 
collection in recent months is also faltering, and there will 
be great political pressure on the BDG to award new pay 
recommendations from the civil service pay commission that it 
cannot afford.  "And there's no more scope for bank lending," 
he said. 
 
6. (C) Dunn asked the USG to urge Finance Minister Rahman to 
reconsider his decision.  He doubts Rahman would budge, but 
fears that without BDG movement before the next IMF team 
comes at the end of February, the PRGF would start a slow 
death until its formal expiration in June 2006.  Asked about 
his own future, Dunn noted that the IMF has had an office in 
Bangladesh since 1972, with or (usually) without a Fund 
program, so he has every expectation of serving a normal tour 
of duty. 
 
7. (C) According to Dunn, if the PRGF goes off the rails, 
World Bank project financing would continue but direct budget 
support would stop. 
 
8. (C) Comment: Dunn's concerns about the PRGF and his 
approach to key donor embassies have made the local press. 
He gives the Finance Ministry credit for being honest about 
its inability to proceed, but is clearly disappointed by 
recent developments.  In appropriate BDG meetings, we will 
underscore the PRGF's value to Bangladesh and express the 
hope that the BDG can find a way to keep it alive. 
THOMAS