Borrowing rates

IMF calls on Bangladesh to uncap lending and borrowing rates to fuel credit flow

The International Monetary Fund (IMF) suggests that Bangladesh gradually remove ceilings on lending and borrowing rates to strengthen monetary transmission as a driver of the economic recovery process.

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

All scheduled banks have been asked to charge a single-digit interest rate of 9.0% for all types of loans, except credit cards, in line with government guidelines since April 1, 2020. The rate bank deposits is set at 6.0%.

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

Speaking to the FE, Syed Mahbubur Rahman, Former President of the Bangladesh Bankers Association (BBA), said: “While we understand that the government is capping the lending rate and setting a floor rate for fixed deposit individuals, but if it continues for an indefinite period, the market will not mature.”

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

The Washington-based global monetary watchdog also slightly improved the economic growth projection for Bangladesh, advising relevant authorities to keep a close eye on inflation.

The IMF has revised its economic growth projection for Bangladesh to 6.6% for the current financial year (FY), 2021-22, from 6.5% in the October forecast.

Still, the projection falls short of the government’s GDP (gross domestic product) growth target of 7.2% for FY22.

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

“We believe that economic activities have resumed….” The IMF official said while explaining the upward revision to 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 FY23, according to the IMF official.

A note of caution, however, resonates from its economic reassessment. Uncertainty around the outlook remains high and risks are tilted to the downside, he said.

Reflecting non-food price inflation and recent fuel price hikes, 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 watchful of inflation.

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

The IMF’s latest observations come amid a trend of rising inflationary pressures on the economy in recent months, which is making life difficult for the multitude.

Inflation 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 data from the Bureau of Statistics. from Bangladesh. It was 5.36 percent in July 2021.

“As the economy rebounds, the central bank should closely monitor inflationary pressures and stand ready to normalize,” the IMF official noted.

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

“More exchange rate flexibility is always welcome because it’s a shock absorber in the system,” Anand said in response to another question.

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

Meanwhile, Bangladesh’s current account deficit deteriorated further in the July-October period of FY22, following higher import payment obligations and lower remittances. funds.

The current account deficit widened to $4.77 billion during the review period from $2.54 billion the previous month. This was a surplus of $3.64 billion over the same period of FY21.

In addition, the budget deficit is expected to reach 6.1% of GDP in FY22 as pandemic-related spending increases, according to the IMF.

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

“Addressing structural weaknesses in corporate governance, regulation, oversight and legal framework is important to stem the growth of NPLs,” Mr. Anand said.

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

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

“Increasing incomes and improving fiscal policy frameworks are needed to scale up inclusive and productivity-enhancing investments, while safeguarding fiscal sustainability,” he noted.

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

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

He also says, “More decisive reforms are needed to facilitate Bangladesh’s graduation from LDC status and to maintain its competitiveness in a post-pandemic world.”

To support private sector-led growth, supported by exports and investments, structural reforms should focus on improving governance, diversifying exports, 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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