Moving towards a command economy may not help
The Bangladesh Bank capped the interest rate on loans at 9 per cent and on deposits at 6 per cent for banks, and 11 per cent on loans and 7 per cent on deposits for non-bank financial institutions.
In September, foreign currency dealers and banks capped the dollar exchange rates following Bangladesh Bank's instructions, whereby the rate for inward remittances will be Tk 108 or below and Tk 99 for export proceeds.
This move also resulted in the rates of the US dollar exchanged through cards increasing by as much as Tk 13 to Tk 108. Previously, customers paid around Tk 95 per dollar bought through cards for overseas tuition, event fees, and the purchase of services and goods.
Force fixing special exchange rates for different instances is already creating confusion and chaos in the market and this is adding even more undesired volatility within the overall economy.
By capping or fixing interest rates and exchange rates, the market is no longer allowed to make its own necessary adjustments but is rather under strict and forceful control. Especially in a period of high inflation, capping interest rates is blocking free market forces from compensating and fixing themselves.
If that's not enough, in Bangladesh, the prices of various essential commodities are also fixed by the regulators at frequent intervals. Even the amount of savings tools an individual may be allowed to buy is also capped.
The inherent lack of competition in a command economy could hinder innovation, thereby impacting aspiring entrepreneurs and even existing businesses
But who is benefiting the most from the cap on interest rates? Such a ceiling is supposed to help SMEs and the rural economy, but the beneficiaries are the already wealthy big business owners and those who are taking undeserved and unfair advantage of low-cost funds from traditional banks.
Perhaps the interest rate cap was initially well-intentioned and was meant to provide a needed economic boost. "The rising tide" might have lifted some boats, but others seem to have run aground. Such a move should have been temporary at best and eventually, the market forces should have been allowed to determine interest rates like it is done in most other market-based or even emerging economies.
The inherent lack of competition in a command economy could hinder innovation, thereby impacting aspiring entrepreneurs and even existing businesses. Efficiency (in resource allocation) is also likely to be compromised if the authorities decide to act as a monolith, trying to control these pivotal aspects of a country's economy.
Leaving no room for naturally regulated allocation of resources poses risks for the creation of a more mammoth problem -- a possibility of a black-market/shadow economy explosion.
Now the question is whether such constant interferences and controlling of vital economic forces are yielding any true benefits? Yes, some vested and influential parties are most certainly benefiting from such moves but most likely it is not the average Bangladeshi citizen. At the same time, it is sending the wrong message to the international investment community and even the local young entrepreneurs.
The author is an economic analyst.
Comments