BB chief economist slams high interest on savings tools

The chief economist of the central bank yesterday came down heavily on the government for distorting the interest rate market by offering too high returns for savings instruments.

If the trend continues, money will flow out of bank deposits and end up in savings schemes, meaning the government's interest liability will go up.

At present, commercial banks offer 5.5-6 percent for deposits whereas the rates for savings instruments are close to 12 percent.

“Let the interest rates for savings instruments be the bond rate plus 100 basis points. That's the market related rate,” said Biru Paksha Paul, chief economist of Bangladesh Bank.

Paul's comments came at a discussion on the proposed budget for fiscal 2016-17 and ways to boost private investment, organised by The Daily Star at its office in the capital.

At present, the average return on five-year bond is 6.5 percent, so the yield on savings certificates should not exceed 7.5 percent.

India has set the rate based on the bond rates. “Let the market play and determine this. You should not set it artificially.”

He said the rates on government savings schemes are distorting the market in many ways.

For example, the government sets a target to borrow Tk 15,000 crore from savings scheme, but it gets double the sum.  Consequently, the government's interest liability will shoot up.

On the other hand, the target to borrow from commercial banks will remain hugely unachieved, so the banks would get demoralised as their excess liquidity would be soaring.

“Now, the BB is not buying the banks' money. The repo and reverse repo are totally inactive because the government is playing with another rate (savings schemes). Has it happened in any other country?”

To boost investment, Bangladesh needs to cut the interest rate for lending.

“Many small entrepreneurs are not concerned about gas or electricity -- they just want cheap money to start a business of their own.”

Paul said when a society encourages too much savings, investment is discouraged, which is happening in Bangladesh right now.

“You cannot use a cat to play the role of a bullock. Let the bullock play its role,” he said, adding that if the government wants to give benefits to retirees, it can do so by creating pension funds, which exist in many countries.

He questioned the purpose of the savings instruments in Bangladesh as these are availed by a relatively rich class of people instead of the middle-class and lower middle-class.

“Of the buyers of savings schemes, 65 percent are millionaires -- which is not the purpose the schemes. It is doing something else that is disturbing the monetary policy stance.”

The BB chief economist also touched upon the issue of administered fuel oil prices. “It should be handed over to the market for the benefit of consumers.”

He went on to cite the cases in India, Sri Lanka and Pakistan, where market-based adjustment of fuel oil prices helped them manage inflation downwards.

“But, Bangladesh still administers the prices.”