The International Monetary Fund (IMF) suggests Bangladesh to phase out caps on the lending and borrowing rates to strengthen monetary transmission as lifeblood in the economic-recovery process.
"Caps on the lending and borrowing rates limit the policy space and should be phased out to strengthen market-based pricing, improve credit allocation and monetary transmission," Rahul Anand, Division Chief in the IMF's Asia & Pacific Department, told a press briefing held at a Dhaka hotel Sunday to wrap up their economic reappraisal mission.
All the scheduled banks have been asked to implement single-digit 9.0 per cent interest rate for all kinds of loans, bar credit cards, in compliance with government directives since April 01, 2020. Bank- deposit rate pegged to 6.0 per cent.
Mr Anand, who led the IMF Article IV Consultation, made the remarks wrapping up a 15-day mission in Dhaka.
Talking to the FE, Syed Mahbubur Rahman, former chairman of the Association of Bankers, Bangladesh (ABB), said: "While we understand the government putting ceiling on the lending rate and fixing a floor rate for fixed deposit of individuals, but if it prolongs for indefinite period, market will not mature."
"We are middle-income country now and aspire to be a developed nation. We need to bring efficiency in market. Accordingly, market should be allowed to fix its own rates," Mr Rahman, also managing director and chief executive officer (CEO) of Mutual Trust Bank Limited, explains.
The Washington-based global monetary watchdog has also enhanced the economic growth projection for Bangladesh slightly, advising authorities concerned to keep a close eye on inflation.
The IMF re-fixed its projection for the economic growth of Bangladesh to be 6.6 per cent for the current fiscal year (FY), 2021-22, up from 6.5 per cent in October forecast.
Yet the projection is lower than government target of GDP (gross domestic product) growth at 7.2 per cent for FY'22.
Earlier on October 12 this year, the IMF had cut down the economic growth for Bangladesh to 6.5 per cent for the current fiscal year from its April projection of 7.5 per cent mainly due to worsening coronavirus pandemic dynamics.
"We think that the economic activities have picked up…." The IMF official said while explaining the upward revision of GDP growth.
He also says exports are really doing well as a lot of orders have been diversified from different countries, including Myanmar, Vietnam, China and even India. "Exports are major engine of driving growth in Bangladesh but it's time to diversify exports."
As the external environment improves as well as the domestic vaccination programme progresses, growth is projected to increase to 7.1 per cent in FY'23, according the IMF official.
A note of caution, however, rings from his economic reappraisal. The uncertainty around the outlook remains high and risks are tilted to the downside, he says.
Reflecting non-food price inflation and recent fuel-price increases, inflation is projected to be slightly higher than the authorities' target, he noted.
Considering 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 be very careful or watchful about inflation.
"….the BB's stance is appropriate and they are fully mindful about the risks of inflation on the economy," Mr Anand said in reply to a query.
The latest IMF observations come against the backdrop of rising trend in inflationary pressure on the economy in recent months that makes living hard for the multitudes.
The inflation as measured by consumer price index (CPI) rose to 5.70 per cent in October 2021 from 5.53 per cent a month before on a point-to-point basis, according to the latest data of the Bangladesh Bureau of Statistics. It was 5.36 per in July 2021.
"With the economy rebounding, the central bank should closely monitor inflationary pressures and stand ready to normalize," the IMF official noted.
He thinks greater exchange-rate flexibility, together with safeguarding foreign-exchange reserves, will help buffer external shocks.
"Higher exchange-rate flexibility is always welcoming because it is a shock absorber in the system," Mr Anand said while replying to another query.
The IMF also forecasts that the country's current-account deficit might widen in FY'22 for projected pickup in the imports of capital goods, industrial raw materials, and commodities.
Meanwhile, Bangladesh's current-account deficit deteriorated further during the July-October period of FY'22 following higher import-payment obligations along with lower inflow of remittances.
The current-account deficit rose to $4.77 billion during the period under review from $2.54 billion a month before. It was $3.64 billion surplus in same period of FY'21.
Besides, the fiscal deficit is projected to reach 6.1 per cent of GDP in FY'22 as the pandemic-related spending increases, according to the IMF.
The IMF also recommends the policymakers for addressing the flow of fresh non-performing loans (NPLs) along with stock ones through improving corporate governance in the banking sector.
"Addressing structural weaknesses in corporate governance, regulatory, supervisory, and the legal framework are important to stem NPLs growth," Mr Anand says.
An orderly exit from Covid-related financial policies remains important to reduce the buildup of financial-sector vulnerabilities.
Absent reforms, financial-sector risks could be a drag on medium-term growth prospects, according to the IMF official.
"Increasing revenue and enhancing fiscal-policy frameworks are necessary to scale up inclusive and productivity-enhancing investments, while safeguarding fiscal sustainability," he noted.
The Fund also prescribes modernizing revenue administration, streamlining tax expenditure, separating National Savings Certificates (NSC) from direct budget financing, and adopting a fuel-pricing mechanism in order to help accommodate additional social, developmental and climate-related spending.
"Recent NSC price changes are welcome, but efforts to reform the NSC scheme and to develop the bond market remain important for developing capital markets," the IMF official explains.
He also says: "More decisive reforms are needed to facilitate Bangladesh's transition out of the LDC status and to maintain competitiveness in a post-pandemic world."
To support private sector-led growth, underpinned by exports and investments, structural reforms should focus on improving governance, diversifying exports, increasing productivity, and building climate resilience to lift growth potential.
Jayendu De, IMF resident representative in Bangladesh, also spoke at the press meet.
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