DHAKA, April 11: The central bank of Bangladesh and leading trade bodies of the country take diametrically opposite positions on a recent IMF prescription that the country should raise lending rate and tighten money supply to contain inflation. The International Monetary Fund put forward the prescription of ‘contractionary’ monetary policy by increasing the lending rate and tightening credit growth on Saturday.
Subsequently, the central bank, Bangladesh Bank, echoed the IMF’s position on Monday. In a meeting with the chief executives of state-owned, private and foreign commercial banks, top BB officials suggested that they should increase the lending as well as deposit rates.
“We have advised the commercial banks to raise interest rates on lending and deposit to restore the balance between deposit growth and credit growth,” Bangladesh Bank deputy-governor Nazrul Huda told newsmen after the meeting. “Nominal interest rates on bank deposits and loans need to be raised to contain inflationary pressure.”
“The deposit rate should rise significantly to ensure a reasonable return for savers, while the lending rate should rise sufficiently to discourage borrowing for unproductive, wasteful purposes.”
In this connection, the central bank suggested that commercial banks should raise interest rates on consumer credit and commercial imports.
Meanwhile, leading trade bodies on Monday expressed concern over the IMF prescription to adopt ‘contractionary’ monetary policy by increasing interest rate to contain inflation.
“The IMF proposal is ill-judged and not based on any proper assessment,” said a joint-statement of 10 chamber and business associations on Monday.
The trade bodies rather suggested lowering interest rate further, adding that the central bank should reduce the bank rate again and re-fix it at five per cent, the rate that prevailed in the mid-1990s and induce commercial banks to lower their lending rates further.
The trade bodies were of the view that the country’s economy had already started getting benefits of the lower interest rate regime. “Production costs have declined, thereby improving the international competitiveness,” the joint statement said. “High cost of credit will negate the ongoing growth process.”
Justifying cutting the lending rate further, the trade bodies said that interest rates were higher as compared to the neighbouring countries. The statement said that in Bangladesh, interest rates ranged between 12 and 15 per cent, against six and seven per cent in India, five per cent in Pakistan, and as low as 2.7 per cent in Sri Lanka.
“On export credit, too, the interest rate is much higher in Bangladesh — around seven to 10 per cent — which is more than twice the rate prevailing in India and Pakistan.”
The trade bodies signing the joint statement include: the Federation of Bangladesh Chambers of Commerce and Industry; the International Chamber of Commerce, Bangladesh; the Metropolitan Chamber; the Dhaka Chamber Bangladesh Employers’ Federation; the Foreign Investors Chambers of Commerce and Industry; the Bangladesh Garment Manufacturers and Exporters Association; the Bangladesh Textile Mills Association; the Bangladesh Jute Mills Association; and the Bangladesh Knitwear Manufacturers and Exporters Association.
