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Bank & Finance - April 2, 2023

Interest rates to be skyrocket from July

Implementation of IMF conditions

Mahfuz Emran: Bangladesh Bank has decided to waive the loan interest rate limit as per the conditions of the International Monetary Fund (IMF). As an alternative, the market-based interest rate will be introduced.
This is why the central bank is creating a structure similar to the London Interbank Offer Rate (Libor). Under this, the average interest rate of various treasury bonds of the government will be taken as the base.
By adding 3 or 5 percent to this, banks will calculate the interest rate of the loan. The interest rate of deposit will be determined in coordination with this. In this process, if the interest rate of the loan is determined, it will increase by 3 to 5 percent. Some banks will increase more. Interest rates will skyrocket. Note that currently the maximum interest rate is 9 percent.
At the same time, the central bank will create a corridor for various types of policy interest rate determination. Based on this, the policy rate of interest will be changed from time to time. Besides, in coordination with this, the banks will change the interest rates of loans and deposits. The rate of interest on loans to non-banking financial institutions cannot exceed 2 to 3 percent.
Recently, these decisions were taken in a meeting chaired by the Governor of Bangladesh Bank.
The central bank will announce this structure regarding the loan interest rate during the monetary policy announcement for the new financial year in July. Banks will be given some time to implement this policy. Also, the structure of net foreign exchange reserves, market-based exchange rate of dollar will be announced.
If these decisions come into effect, this will be the first international policy on interest rates. But in this policy, the interest rate may increase by 3 to 5 percent in one jump.
In this context, the top organization of businessmen, Federation of Bangladesh Chamber of Commerce and Industry (FBCCI) President Md. Jasim Uddin said, if the loan interest rate increases, investment will be hindered. The development of the private sector will be threatened. Already, due to increase in gas and electricity prices, the production cost of the industry has increased a lot. If the interest rate increases, the cost will increase further. Therefore, it is not right to increase the interest rate of the loan.
According to sources, the interest rate of all types except credit cards is currently fixed at 9 percent in the country. The IMF has stipulated that the limit be lifted by next June. By lifting this limit, the central bank wants to allow the interest rate to rise unbridled.
Earlier, the interest rate had risen to a maximum of 18 percent as it was left to the market. From that experience, the central bank wants to leave this rate to the market under a policy framework.
A framework has been started for this purpose. There are 5 government bonds in the market. Government takes loans through these. These are 2, 5, 10 and 20 year Bangladesh Government Treasury Bonds.
Among them, 8.13 percent of 2-year term, 8.29 percent of 5-year term, 12.12 percent of 10-year term, 12.42 percent of 15-year term and 15.95 percent of 20-year term bond interest rate.
The average interest rate of these bonds is 8.90 percent. A few months ago, the average interest rate on these bonds was below 8.5 percent. As the demand for government debt increases, bond interest rates also rise. 3 to 5 percent should be added to the average interest rate depending on the bank.
As such, the loan interest rate stands at 12 to 14 percent, which is 3 to 5 percent higher than the currently fixed maximum interest rate. Some banks are currently giving loans at 7 and a half to 8 percent interest. In this case, the interest rate is increasing by 4 and a half to 6 percent.
Meanwhile, the interest rate on deposits will also increase. Currently, the average deposit interest rate is 4 to 6 percent. Some banks charge fixed deposits at 12 percent interest. The interest rate of loans in those banks is also high.
At present, various countries or organizations lend in foreign currency by adding 2 to 5 percent based on the average interest rate of 6-month dollar bonds at the London Interbank.
Banks in Bangladesh are also guaranteeing customers to take buyers’ credit or suppliers’ credit under this policy. At the same time, banks are disbursing foreign currency deposits as loans to their offshore banking units (OBUs).
The central bank feels that commercial banks have experience in making such loans. As a result, there will be no problem if international standard interest rate determination system is applied. This will reduce the interest rate risk in the government borrowing, commercial bank deposit collection and loan disbursement system to some extent.
But economists have disagreed with this. The former governor of the central bank. Salehuddin Ahmed said that the banks do not have the ability to apply such international policies. This policy will change the interest rate frequently. As a result, customers will also be confused. Before implementing such policy, the capacity of banks should be increased. Otherwise, it will not be beneficial.
According to sources, currently the average interest rate of deposits in the banking sector is 4.29 percent. The average inflation rate is 8.14 percent. The rate of inflation is 3.85 percent higher than the average interest on deposits. At that rate, the deposit is eroding. Besides, various fees and government taxes are deducted. As a result, the loss of money increases.
Currently, the average interest rate on loans is 7.24 percent. Average interest on deposits in financial institutions is 7.74 percent, loan interest is 8.88 percent. Interest rates will increase further due to imposition of new system.
According to the terms of the IMF, the net account of foreign exchange reserves was to be published by next June. This will be done by the central bank from next July. But will create a framework for it.
Shows the information on usable reserves along with gross reserves. At present usable reserves are 2 thousand 6 billion dollars. Gross reserve is 3 thousand 106 million dollars. Reserves may fall further in July.
According to the IMF, net reserves may fall to $2,000 billion. Then it will be possible to meet the import expenses of three months with that reserve. But the IMF said reserves equal to at least four months of import costs should be kept. For this, the net reserve will be 2 thousand 8 billion dollars.
The exchange rate of rupees against the dollar has been market-based since May 2003. But it was never effective. Its price was determined by the intervention of the central bank.
This time, under the terms of the IMF, the price of the dollar is being left entirely to the market. However, its price will be controlled through the Bangladesh Foreign Exchange Dealers Association (BAFEDA), an organization of banks.
Then the price of the dollar will increase. At present, the official rate for buying dollars for import is 107 rupees. But most of the banks are not getting dollars at this price. Tk 105 to Tk 122 they are keeping the dollar price.
According to sources, the central bank is making fundamental changes in the monetary policy of the next financial year to implement the conditions of the IMF. The monetary policy here only sets the target of money supply to various sectors. Along with these, the next monetary policy will have some basic principles. In the light of which the interest rate and dollar rate will be determined.

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