Interest rate cap not coming off soon

The interest rate cap for businesses is not coming off anytime soon, said Bangladesh Bank Governor Abdur Rouf Talukder yesterday.

"This is not the right time to lift the cap. We are waiting for a good time, maybe it will be lifted anytime," he said on the first day of the three-day annual conference of the Bangladesh Institute of Development Studies (BIDS) held at the capital's Lakeshore Hotel.

At present, the interest rate for term loans and working capital is capped at 9 percent.

Previously, the interest rate for consumer loans was also capped at that. But that has been withdrawn; there is a band of 3 percentage points within which the rate can be moved, Talukder said.

The central bank would soon be introducing a market-based exchange rate.

"Actually, we would not be able to control hundi as they always offer at least Tk 5 more than us. So, we are thinking in other ways."

For instance, mobile financial service providers are now allowed to bring in remittances, so it would be easy for non-resident Bangladeshis to send money to their loved ones at home, he said.

"Though many people are complaining that the government is controlling imports, we are just controlling the import of some luxury goods."

To reduce over-invoicing and under-invoicing, the BB is examining all the letters of credit and found huge trade-based money laundering.

The central bank examined more than 100 LCs as a test case and found some had done over-invoicing of 20 to 200 per cent.

Similarly, some exporters showed under-invoicing that was much lower than the real price, he said.

"If anyone wants to import products showing the real prices, they would not face any difficulty," Talukder added.

A combination of flexible management of the exchange rate, credit growth tightening and judicious use of tax and expenditure measures are required to support the adjustment agenda, said Sadiq Ahmed, vice-chairman of Policy Research Institute, while presenting a paper on Post-Covid Challenges in an Uncertain and Divisive World.

Ahmed suggested adopting a uniform and market-based exchange rate, removing the interest rate cap, accelerating income transfer programs to the poor and vulnerable and raising tax revenues.

The prospective $4.5 billion loan programme from the International Monetary Fund will play a positive role in restoring macroeconomic stability, he said.

The discipline that the IMF would bring in helping the government implement difficult but required policy reforms is more important that the funds disbursed over a three-year period.

"Without the implementation of the required policy reforms, the IMF programme may not restore macroeconomic stability."

Ahmed also called for a tax commission to raise revenue earnings. At 7.6 percent, Bangladesh's tax-GDP ratio is one of the lowest in the world -- and even lower than Sri Lanka's at 8.6 percent.

Planning Minister Abdul Mannan said he heard the criticism of the low tax-to-GDP ratio.

"Is it really in such a bad position? If it is, then how did the economy grow by 6 percent on an average for years."

He went on to state that it is not possible to raise the ratio in the near future though the government will continue to try.

"Our government wants to see higher growth though there might be some corruption and flight of money," Mannan added.

A commission may not be effective in reforming the revenue sector given the past experience in other sectors, said Shamsul Alam, the state minister for planning.

A strong political will is necessary to mobilise the revenue earnings by increasing direct tax, he said, while calling for lifting the interest rate cap.

"The interest cap should change from 6-9 percent to 9-12 percent as the inflation rate is now quite close to the deposit rate. This deposit rate is not logical in the current level of inflation as depositors are being hampered," he added.

Inflation averaged 8.75 percent in the first four months of fiscal 2022-23 -- a long way off the target of 5.6 percent set in the budget for the year.

In another session, Wahiduddin Mahmud, chairman of the Economic Research Group, presented a paper on Rethinking Socialism for Democratic Developing Countries, while Rehman Sobhan, chairman of the Centre for Policy Dialogue, spoke as session chair.

Bangladesh is a fast-growing and increasingly unequal society, said Rehman Sobhan, also a former director general of BIDS.

"That is the objective reality. Policymakers should be complemented for the fast growth. However, the business class or economic powerhouses are dominating the democratic power here."

From union parishad to parliament, business people dominate the policy-making position, he said.

Subsequently, inequality is higher than the Gini coefficient suggests as the Bangladesh Bureau of Statistics cannot reach the affluent class who live in Gulshan, he said.

Binayak Sen, director general of BIDS, also spoke.