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RAISING INTEREST RATES

Businesses concerned at BB advice to banks

STAFF CORRESPONDENT
The Bangladesh Bank (BB) yesterday advised all commercial banks to increase interest rates in line with the International Monetary Fund's (IMF's) latest prescription while the country's top 10 business chambers and associations expressed deep concern over it, saying the interest rates should rather go further down.
The BB at a meeting with top executives of the commercial banks suggested that the banks may gradually increase the rates on deposits, consumer lending and credit for commercial imports.
Talking to newsmen later, BB Deputy Governor Nazrul Huda said high credit growth in the recent months has supported high import growth, creating high pressure on exchange rate of taka. "Increase in inflation eroding real interest rates has impeded deposit growth and accelerated lending growth, creating an imbalance," he pointed out.
"This is why the banks have been
suggested to be cautious in their lending activities," Nazrul added.
BB Governor Fakhruddin Ahmed
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told the meeting with the top bankers that there is a global trend of high inflation coupled with high interest rates, which once used to be the reverse. Bangladesh has to be cautious in such a situation so that it can control the situation without feeling the jolt, he added.
The central bank also urged the banks to discourage import of items for which there are substantial outstanding LCs in the pipeline.
In the last eight months, deposit marked a growth of 7.3 percent while credit grew at eight percent. Some banks are facing an imbalance of liquidity and credit deposit ratio. To avoid this, all banks need to be careful about a balanced growth of assets and liabilities as per relevant guidelines, the BB said.
Nazrul defended the central bank's position on interest rates saying, "We are not doing it as per the IMF suggestion. We have been taking measures to control credit before the IMF made its suggestion."
The central bank last year asked all the banks to lower their interest rates in accordance with another suggestion of the IMF saying the rates are already too high.
Meanwhile, 10 top business leaders in a joint statement yesterday expressed deep concern over the IMF proposal to increase the interest rates.
"The business community is not aware of the details of the proposal as the IMF mission did not care to have any discussion with it. As reported in the press, the mission wanted increase of the bank interest rate so as to control inflation. The business community strongly feels that if the press reports are true, the IMF's proposal is ill-judged and not based on any proper assessment," said the statement.
"The country's economy has already started getting the benefits of the lower interest rate regime. Production costs have declined thereby improving the international competitiveness," added the statement.
Signatories to the statement included Abdul Awal Mintoo, president of the Federation of Bangladesh Chambers of Commerce and Industry, Mahbubur Rahman of International Chamber of Commerce Bangladesh, Kutubuddin Ahmed of Metropolitan Chamber of Commerce and Industry, Sayeeful Islam of Dhaka Chamber of Commerce and Industry, M Anis Ud Dowla of Bangladesh Employers' Federation, Mahbub Jamil of the Foreign Investors Chambers of Commerce and Industry, Annisul Huq of Bangladesh Garment Manufacturers and Exporters
Association, MA Awal of
Bangladesh Textile Mills Association, M Ali Behrouze
Ispahani of Bangladesh Jute Mills Association and Fazlul Hoque of Bangladesh Knitwear Manufacturers and Exporters Association.
The statement said industrial output has increased by two percentage points during July-October, 2004 indicating creation of new job opportunities, and there are other indicators to show reduction of poverty. "High cost of credit will negate the on-going growth process," it added.
"At present, interest rates are higher compared to those in the neighbouring countries. In Bangladesh, interest rates are in the 12-15 percent range as against 6-7 percent in India, 5 percent in Pakistan, and as low as 2.7 percent in Sri Lanka. On export credit, too, the interest rate is much higher in Bangladesh, around 7-10 percent, which is more than twice the rate prevailing in India and Pakistan," the business leaders pointed out.
The statement went on, "Historically speaking, inflation in this country has never been a monetary phenomenon alone. For instance, in the second half of the 1990s, monetary policy was made more restrictive but inflation rate continued to remain high at around 8 percent. On
the other hand, monetary policy was eased starting from 1989, when the inflation rate declined to below 2 percent despite significant expansion of credit in the economy. Major factors which contributed to price increases are budget deficits, supply shocks, production losses, decline in productivity, frequent increases in the administrated prices of fuel oil, power and gas, devaluation of the currency, and problems of law and order.
"Poor law and order conditions constitute a significant factor behind price increases. Businessmen have frequently complained that extortion by different groups of hoodlums at all stages of production, transportation, wholesale marketing and retailing raises the prices of essentials."
For controlling inflation, therefore, much depends on decisions which have more to do with law and order problems, fiscal and trade policy, exchange rate management, infrastructural bottlenecks, administered prices, and monetary policy. Raising interest rates without addressing these other problems will aggravate rather than control any inflationary pressure, the business leaders felt.
"In the present situation of the economy, there is thus a strong case for further lowering rather than raising interest rates. We, therefore, suggest that the central bank should further reduce the bank rate and refix it at 5 percent, the rate that prevailed in the mid-1990s, and induce commercial banks to lower their lending rates further. At the same time, the government needs to take appropriate fiscal and other policies that will encourage higher capacity utilisation, more investment, etc., which will bring about a downward movement of prices," the statement said.