Borrowing rates

IMF calls on Bangladesh to remove ceilings on lending and borrowing rates to fuel credit flows

The International Monetary Fund (IMF) suggests that Bangladesh phase out ceilings on lending and borrowing rates in order to strengthen monetary transmission as a cornerstone of the economic recovery process.

“Limits on lending and borrowing rates limit policy space and should be phased out to strengthen market-based pricing, improve credit allocation and money transmission,” said Rahul Anand, head of division of the IMF’s Asia and Pacific Department, during a press briefing held Sunday in a hotel in Dhaka to conclude their economic reassessment mission.

All planned banks have been urged to apply a single-digit interest rate of 9.0% on all types of loans except credit cards, in accordance with government guidelines since April 1, 2020. The rate bank deposit is set at 6.0%.

Mr. Anand, who led the IMF’s Article IV consultation, made the remarks at the end of a 15-day mission to Dhaka.

Speaking to FE, Syed Mahbubur Rahman, former chairman of the Bangladesh Bankers Association (ABB), said: “While we understand that the government caps the rate on loans and sets a floor rate for deposits at term of individuals, is extended indefinitely, the market will not mature. “

“We are now a middle-income country and aspire to be a developed nation. We need to improve the efficiency of the market. As a result, the market should be allowed to set its own tariffs,” said Mr. Rahman, also managing director. and CEO of Mutual Trust Bank Limited, explains.

The Washington-based global monetary watchdog has also slightly improved economic growth projections for Bangladesh, advising relevant authorities to closely monitor inflation.

The IMF has reset its projection for Bangladesh’s economic growth to 6.6 percent for the current fiscal year, 2021-2022, from 6.5 percent in October.

Still, the projection is below the government’s target of GDP (gross domestic product) growth of 7.2 percent for fiscal 22.

Earlier on October 12 of this year, the IMF slashed Bangladesh’s economic growth to 6.5 percent for the current fiscal year from its April projection of 7.5 percent, mainly due to the worsening the dynamics of the coronavirus pandemic.

“We believe that economic activities have resumed …” The IMF official said while explaining the upward revision of GDP growth.

He also says that exports are doing very well as many orders have been diversified from different countries including Myanmar, Vietnam, China and even India. “Exports are the main engine of growth in Bangladesh, but it is time to diversify exports.”

As the external environment improves and the national immunization program progresses, growth is expected to reach 7.1 percent in fiscal year 23, according to the IMF official.

A note of caution, however, resonates with its economic reassessment. The uncertainty surrounding the outlook remains high and the risks are tilted to the downside, he said.

Reflecting inflation in non-food prices and recent increases in fuel prices, inflation is expected to be slightly above the authorities’ target, he noted.

Given the possible inflationary pressures on the economy, the IMF advises Bangladesh Bank (BB), the country’s central bank, to support the ongoing economic recovery, but to be very cautious or vigilant in the face of inflation.

“… .The BB’s position is appropriate and they are fully aware of the risks of inflation to the economy,” Mr. Anand said in response to a question.

The latest IMF observations come against the backdrop of an upward trend in inflationary pressures on the economy in recent months that are making life difficult for multitudes.

Inflation as measured by the Consumer Price Index (CPI) rose to 5.70% in October 2021, from 5.53% a month earlier on a point-to-point basis, according to the latest Bureau data. Bangladesh statistics. It was 5.36% in July 2021.

“With the economy rebounding, the central bank should closely monitor inflationary pressures and be ready to normalize,” the IMF official noted.

He believes that greater exchange rate flexibility, coupled with safeguarding foreign exchange reserves, will help cushion external shocks.

“Higher exchange rate flexibility is always welcome as it is a damper in the system,” Mr. Anand said in answering another question.

The IMF also predicts that the country’s current account deficit could widen in FY22 due to the expected pick-up in imports of capital goods, industrial raw materials and commodities.

At the same time, Bangladesh’s current account deficit deteriorated further in the July-October period of fiscal year 22 as a result of higher import payment obligations and lower shipments of funds.

The current account deficit reached $ 4.77 billion during the period under review, down from $ 2.54 billion a month earlier. This was a surplus of $ 3.64 billion over the same period of FY’21.

In addition, the budget deficit is expected to reach 6.1 percent of GDP in fiscal year 22 as pandemic-related spending increases, according to the IMF.

The IMF also recommends that policymakers manage the flow of new non-performing loans (NPLs) as well as loans in stock by improving corporate governance in the banking sector.

“Addressing structural weaknesses in corporate governance, regulation, supervision and the legal framework is important to stem the growth of non-performing loans,” Mr. Anand said.

An orderly exit from Covid-related financial policies remains important to reduce the build-up of vulnerabilities in the financial sector.

In the absence of reforms, financial sector risks could weigh on medium-term growth prospects, according to the IMF official.

“Raising incomes and improving fiscal policy frameworks are necessary to scale up inclusive investments and improve productivity, while maintaining fiscal sustainability,” he noted.

The Fund also mandates the modernization of revenue administration, the rationalization of tax expenditures, the separation of National Savings Certificates (NSCs) from direct budget funding, and the adoption of a fuel pricing mechanism to help to cope with additional social, development and climate-related spending.

“The recent price changes of the NSC are welcome, but efforts to reform the NSC regime and develop the bond market remain important for the development of capital markets,” said the IMF official.

He also said: “More decisive reforms are needed to ease Bangladesh’s transition out of LDC status and to maintain its competitiveness in a post-pandemic world.”

To support private sector-led growth supported by exports and investment, structural reforms should focus on improving governance, export diversification, increasing productivity and building climate resilience. to increase growth potential.

Jayendu De, IMF resident representative in Bangladesh, also spoke at the press conference.

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