Monetary policy: Some clues from Turkey
Suppose you decide to conduct an experiment, and ask a random person you come across on a busy thoroughfare in Dhaka: “Can you tell me what Bangladesh and Turkey have in common?” I am sure that the first answer that you will hear is “Islam”. And I can bet that if you interview 30 individuals (a large sample, statistically speaking), or even 100, you will not get the reply I am looking for: “monetary policy”.
Yes, these two countries now appear to have similar monetary objectives, i.e. lower interest rates and exchange rate stability. Each country is determined to lower the interest rate to stimulate investment. However, the similarity ends there. In Bangladesh the rates of interest are at least five percentage points lower than those in Turkey where it is over 17 percent. The official inflation rate is 15.39 percent annually and while the value of Bangladeshi taka against the US dollar is sliding downward, its decline has not been as precipitous as that of the Turkish lira.
I will start with the situation in Turkey. The Turkish economy has been on the forefront of global media for the last three months. President Erdogan always declared his opposition to central bank policies to raise interest rates. He appointed his son-in-law, Berat Albayrak, to the position of Minister for Treasury and Finance Ministry. Recently, Turkey started a diplomatic row with the US by holding American pastor Andrew Brunson in jail for allegedly supporting a failed coup in 2016, reportedly orchestrated by Fethullah Gulen, a Turkish citizen living in the US.
But, why does President Erdogan resist the use of monetary policy to stabilise domestic demand and support the crumbling lira? As mentioned, Turkey suffers from the twin perils of high inflation and exchange rate instability, and to control both, the central bank can use one powerful tool: the interest rate. Unfortunately, every time the Central Bank of Turkey tried to raise interest rates, they received criticisms and threats from the president and his allies. In a famous quip, he said inflation is caused by interest rates, and “not tomatoes, not pepper”. At a large election rally in May, he predicted: “If my people continue on this path in the elections, I say I will emerge with victory in the fight against this curse of interest rates. Because my belief is: interest rates are the mother and father of all evils.”
Bangladesh too has recently faced some economic challenges, but they are somewhat different from Turkey's. It does not have a high rate of inflation nor has it witnessed any extreme volatility of the foreign exchange rate. However, the rate of interest is an area of concern for the government given that 2018 is the year of elections, both municipal and parliamentary. The finance minister had earlier promised that borrowers would enjoy “single digit” interest rate, an initiative resisted by owners of private banks. Currently, banks and other lending agencies charge between 12 to 16 percent annual interest rates for various loans. The private banks contend they are at a disadvantage in attracting deposits, since the government offers relatively high rates of interest on National Savings Certificates (NSCs), instruments that help pensioners, widows, and small savers, but also help the government finance its budget deficit.
Late last June, Bangladesh Association of Banks (BAB), a body representing the owners of private commercial banks in Bangladesh, announced that interest rates charged by these institutions would be brought down to the single digits from July 1. The 2018 budget announced that banks will be getting lower corporate tax rates to provide them with the cushion they need to offer loans on easier terms.
It thus appears that the Turkish president and Bangladesh finance minister both see the value of reducing interest rates or keeping them low. Nevertheless, there is one big difference and that explains why their wishes have not been fulfilled, yet. In Turkey, Erdogan is a conservative Muslim intent on turning his country away from the West. In Islam, charging interest on debts is considered as "riba," or usury, which is therefore “haraam”. Albayrak told Turkish TV, "We will see inflation and interest rates decline in the coming period." Erdogan gave himself the lone power to name the new governor of the central bank, and ensured that the bank did nothing with interest rates until this appointment.
In Bangladesh, the ruling party and the government are gearing up for the parliamentary elections and reduction of interest rate on lending in an ad-hoc manner is a much-used measure to boost investment and economic activity to enhance popularity of the government. While the incumbent finance minister is not running for reelection announcing a year ago that he plans to retire, his ministry is working with the Bangladesh Bank and BAB to lower interest rates but to no avail.
One obstacle that bankers and economists see in the way of lower interest rates is the NSC overseen by the Ministry of Finance. It has been argued that yield rates of savings certificates are high, and so these need to be brought down to the same level as deposit rates in banks or yield rates of treasury bills and bonds. The logic is that lower rates on NSC will help banks maintain lower rate of interest for deposits as well as for lending. Such demand from the owners of commercial banks is backed by many economists mostly aligned with international financial institutions.
The finance minister publicly voiced his support for the rate cuts in May but backed off following pushback from some sections of the “electorate”. Savings certificates are popular with various citizens' groups, particularly pensioners and small savers, even though the high rates brought forth strong criticism from Bangladesh Bank and private think tanks. Interest rates of savings certificates were last cut only in 2015 by an average of two percent to reduce excess demand.
On August 7, the finance minister announced that the government is not going to reduce interest rates on savings certificates before the national election, and instead a committee was formed to debate the issue. The recommendations of the committee will be implemented after the election. In the coming days we can expect further developments in both countries, apropos who wins the battle, the market or the government, and how the various stakeholders fare in the protracted and ever-changing scenario.
Dr Abdullah Shibli is an economist, and Senior Research Fellow, International Sustainable Development Institute (ISDI), a think-tank in Boston, USA. His new book Economic Crosscurrents will be published later this year.