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IMF suggests cut in lending rates to sustain growth

REJAUL KARIM BYRON
The International Monetary Fund (IMF) has recommended further lowering the lending rates in Bangladesh, saying that the economy would suffer if the cost of capital could not be reduced.
"If it cannot be lowered further in the next few years, the rate of economic growth may suffer," said a study report prepared by an IMF consultant. The report was submitted to the Ministry of Finance and Bangladesh Bank last month.
The report however observed that the cost of capital in Bangladesh must be seen in the context of its demand and non-inflationary supply.
The IMF consultant also suggested Bangladesh Bank to reduce statutory liquidity requirement (SLR) and modify cash reserve requirement (CRR) by the end of this year to better the central bank's liquidity management.
"The central bank should reduce SLR and then phase it out over the next few years," said the report. It recommended modification of CRR to allow reserve averaging and remuneration for better implementation of monetary policy.
Dwelling on matters relating to high lending rates and their possible solutions, the IMF report said the lending rates are high because of the banks' high operating costs and other inefficiencies like rigid labour
practices.
Banks have to pay high interest on national saving certificates to compete with the government, which is also a reason for high interest rates. Private commercial banks also have to pay high rates against deposits to attract more clients, the paper said.
The study found high incidence of individually negotiated deposit rates for larger deposits in the banks in Bangladesh.
The IMF suggested the Ministry of Finance and BB to clearly define and separate their respective responsibilities regarding debt management and monetary policy.
The ministry should establish a debt management unit by the end of
this year and publish the government borrowing strategy for 2004 and beyond, the report said.
"This unit should take full responsibility, in consultation with BB, for implementing the government's weekly borrowing plan published a quarter in advance."
The IMF report said government deposits with banks should be made on the basis of one-year contracts competitively awarded to banks in full compliance with all prudential regulations.
"The government should explicitly remunerate banks for services provided and also contract with banks for such services on a competitive basis," the report suggested.