By
Fear of negative impact on the economy
After keeping the interest rate cap at nine percent for a long time, the 'Smart Rate' system was introduced from the last financial year. But the International Monetary Fund (The IMF) is going to introduce completely market-based interest rate out of smart rate due to various pressures including conditions central bank. As a result, the banks themselves will decide how much the interest rate will be. By doing this, the interest rate will increase a lot, the sector concerned think. Besides, rising interest on loans will have a negative impact on investment and reduce employment. Businessmen and entrepreneurs fear that the matter will have an adverse effect on the country's trade and economy as a whole.
Bangladesh Bank has introduced new rules for determining interest rates from July 1 last year. In this rule, the interest rate is fixed on the average interest rate of 182 days treasury bills. Which is called 'Six Month Moving Average Rate of Treasury Bill' (Six Month Moving Average of Treasury Bill) 'SMART' or 'SMART' or Smart Reference Rate. Bangladesh Bank is withdrawing from 'Smart Rate' within nine months due to the failure of this method. Recently, the Governor of Bangladesh Bank Abdur Rauf Talukdar has announced the new market-based interest rates.
Last Sunday (May 5) at an international conference in a hotel in the capital, Governor Abdur Rauf Talukdar said that the bank loan interest rate will be market-based by moving away from the current smart reference rate.
On January 30, 2023, the IMF approved a loan program of USD 4.7 billion for Bangladesh. One of the conditions was to get out of the fixed interest rate. Bangladesh Bank introduced a new interest rate system from July last year to meet the loan conditions. Since the introduction of this system, the maximum interest rate is determined by adding the margin determined with the smart rate.
He said that the current interest rate is almost market based. So even if the smart is handed over, the interest rate will not increase much.
According to central bank officials, the monetary policy committee of the central bank is expected to make an official announcement on Wednesday (May 8).
Directors themselves do not know which organization they represent. No loan to government from central bank: Governor
From April 2020 to June last year, the maximum interest rate was nine percent. On January 30, 2023, the IMF approved a loan program of USD 4.7 billion for Bangladesh. One of the conditions was to get out of the fixed interest rate. Bangladesh Bank introduced a new method of interest from July last year to meet the loan conditions. Since the introduction of this system, the maximum interest rate is determined by adding the specified margin with the smart rate. Bangladesh Bank announced smart rate on the last working day of every month from last July. However, the smart rate of last April has not been officially released yet.
According to the relevant department of the central bank, the six-month moving average rate of treasury bills or smart rate stood at 11.13 percent in April. Adding three percent margin to this, the interest rate at customer level stands at 14.13 percent. The previous month March smart rate was 10.55 percent.
In the first month of the current financial year, the six-month average interest rate (smart rate) on Treasury bills with a maturity of 182 days was 7.10 percent in July, 7.14 percent in August and increased to 7.20 percent in September, 7.43 percent in October, 7.72 percent in November, Smart rate increased to 8.14 percent in December, 8.68 percent in January and 9.61 percent in February. As the smart rate continues to increase, the central bank is forced to withdraw from this rule as per the conditions of the IMF.
Now the interest rate is already high, if there is a market based interest rate, it will increase further. If interest rates rise, business will stagnate. Because everyone starts business with a calculation of money. Now if more interest has to be paid out of account, then his expenses will increase. High interest rates coupled with prevailing economic conditions will make it difficult to do business.
Businessmen and sector stakeholders say the government opted for smart interest rates to curb inflation. But it did not benefit. Interest rates have risen steadily to over 15 percent. Now if it is based on the market, this rate will be close to 20 percent. The rise in interest rates on bank loans has increased the cost of doing business, which in turn has fueled inflation. Now if the interest rate increases further, the business will be in crisis.
Meanwhile, bankers claim that if the interest rate is fully market-based, it will have a negative impact in the short term but will be good in the long term. In the beginning, the interest rate may increase slightly. However, it will stabilize at the earliest.
Ahsan H. Mansoor, former chairman of the private BRAC Bank and executive director of the Policy Research Institute (PRI), told the Dhaka Post that it will be understood if Bangladesh Bank implements the interest rate policy. Because the previous initiatives did not bring good results. However, it is better if you can do market based interest. Even if the interest rate increases a little initially, the long-term benefits will come.
Claiming that traders will be in trouble if the interest rate increases, Mohammad Hatim, the executive president of BKMEA, an association of knitwear industry owners, told Dhaka Post that the interest rate is already high, and it will increase even more if the interest rate is based on the market. If interest rates rise, business will stagnate. Because everyone starts business with a calculation of money. Now if more interest has to be paid out of account, then his expenses will increase. High interest rates coupled with prevailing economic conditions will make it difficult to do business.
Market-based interest rates are going to prevail as suggested by the IMF. The interest rate may rise to double digits. It will increase the cost of CMSME sector. Which will have a negative impact on local and foreign competition in the product market
Former President of DCCI Rizwan Rahman
In such a situation, he demanded to keep a way out of the business in the next budget. According to him, there will be no way but to get out of there if the business fails.
Demanding market-based interest rate and market-based dollar rate, Mohammad Hatim said that he will pay 100 and 9 taka per export dollar. And if you want to buy for import, you have to count 120 to 122 taka, what kind of policy is this? We have to get out of this policy. Here also market based dollar rate should be introduced. Why would there be two policies in one market?
Businessman-entrepreneur and former president of Dhaka Chamber of Commerce and Industry (DCCI) Rizwan Rahman said that the smart rate has now reached 13 percent to 14 percent, which has already failed. Because it could not bring down the interest rate on loans desired in the market. This did not work for the welfare of the bank's customers and traders. Smart rate growth has not kept pace with increased business spending in the CMSME sector. Revision of smart rates is necessary to contain hyperinflationary pressures and private sector credit flows. However, if market-based interest rate is introduced instead of smart rate at the moment, the loan interest rate will increase in the banking sector of the country. Market-based interest rates are going to prevail as suggested by the IMF. The interest rate may rise to double digits. It will increase the cost of CMSME sector. Which will have a negative impact on local and foreign competition in the product market.
Rizwan Rahman said that the earlier 'interest rate cap' and smart rate rate were not fully implemented. The proposed new rate will attract bank depositors. In view of which the interest rate of the banks will increase. The result could be high inflation. In fact, there will be no benefit in terms of growth in private sector credit unless macroeconomic balance and inflation are controlled.
