For the last couple of years, inflation has been deterring the growth of our economy. Hence Bangladesh Bank(BB) has taken initiatives to counter this nuisance. In order to tame inflation, BB has decided to raise the policy interest and restrict the flow of money in the market.
This year, the policy interest rate has been increased five times. As a result, we have witnessed how the cost of loans spiked up for consumers. Furthermore, it also decreased credit flow in the private sector.
Last year, the maximum interest rate on bank loans was 9%. Right now, it is around 16%. The average loan interest rate across all banks is also steadily increasing. According to the Bangladesh Bank, the average bank loan interest rate was 7.83% in September last year. This year in August it rose to 11.57%.
One of the key policy interest rates in the country is the Repurchase Agreement, or Repo Rate, which is the rate at which Bangladesh Bank offers short-term loans to commercial banks.
On Tuesday, the repo rate was increased by 50 basis points, bringing it to 10%. Just a month earlier, on 24 September, it was raised to 9.50%. On 25 August, it was increased by 50 basis points to 9%.
Earlier, on 8 May this year, the repo rate was hiked by 50 basis points, and on 17 January, it was raised by 25 basis points. The rise in policy interest rates is directly reflected in higher loan interest rates at the consumer level.
Business owners are becoming increasingly worried about the ongoing rise in interest rates, stating that it has added to their operational costs, which had already surged under the recently ousted fascist regime. The Awami regime had repeatedly raised the prices of gas and electricity. Entrepreneurs also had to increase wages and benefits for their workers to cope with soaring commodity prices.
However, global prices of export products, including ready-made garments, have not increased proportionately. In such circumstances, further increases in interest rates will make it difficult for businesses to repay loans, leading many to become defaulters.
“If interest rates continue to rise like this, investments will come to a halt. Those who previously took loans at 8% to 9% interest will struggle under the burden of debt and become defaulters. Simply put, an increase in interest rates means strangling businesses to death,” said Mohammad Hatem, president of Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA).
Shams Mahmud, president of the Bangladesh-Thai Chamber of Commerce and Industry, said, “We always want to take some policies to tame inflation. Business costs will drop if inflation is under control. However, interest rates continue to rise, almost halting business expansion and putting the ongoing operations under pressure. If this situation persists, it will negatively affect the overall stability of the macroeconomy.”
A lot of SME entrepreneurs feel that they do not stand a chance of surviving with loans at 15% or 16% interest. Besides, access to fair credit is becoming difficult. Industries are also struggling with gas and electricity shortages.
For over 2 years, Inflation in Bangladesh hovered around 10%, and economists don’t expect it to decrease soon. According to the Bangladesh Bureau of Statistics(BBS), inflation reached 11.66% in July, which slightly decreased to 10.49% in August, and 9.92% in September.
To address inflation, the central bank has reduced the private sector credit growth target for the July-December period of FY25 to 9.8%, down from the previous target of 10% for January-June. According to the latest data from Bangladesh Bank, credit growth fell to 9.86% in August, down from 10.13% in July.
Husne Ara Shikha, spokesperson and executive director of the Bangladesh Bank, said, “There is no alternative to increasing policy interest rates to control inflation. The rising interest rates may increase business costs, but the rates will be reduced once inflation declines.”
She also said, “When global interest rates were rising, we couldn’t adjust ours for various reasons. Now, even though those countries are cutting their rates, we are unable to do so.”
Analysts said Bangladesh’s situation is somewhat different in this regard. Despite global interest rate hikes, Bangladesh capped lending rates at 9%. Similarly, the dollar exchange rate was kept artificially fixed. These policies, which are flawed for many reasons, have caused significant damage to the economy.
Dr Khondaker Golam Moazzem, research director at the Centre for Policy Dialogue (CPD), said, “We cannot compare our economy with others’. The decision to increase interest rates is appropriate for now, given the current liquidity crisis and the lack of significant investment demand.”
“Additionally, many loans are not being repaid on time. Injecting more liquidity into the system without sufficient demand will only increase inflation, as one of the primary drivers of inflation is excessive money supply. Therefore, keeping money supply restricted will gradually bring down inflation,” he further said.
Average loan interest
According to Bangladesh Bank, the average bank loan interest rate was 7.83% in September 2023. In October, November, and December of that year, the rates increased to 7.89%, 7.99%, and 9.36%, respectively. In January of this year, the rate remained in the single digits at 9.75%.
In February it crossed double digit and stood 10.05%. After that, in March, April, May, June, July the rate was 10.36%, 10.53%, 10.36%, 11.28% and 11.52% respectively. In August bank loan interest rate increased to 11.57%.
Bankers reveal that the maximum lending rate was capped at 9% from April 2020 to June 2022 even though there were criticisms made by the expert. During this period, some businesses secured loans at 7% to 8% interest, while deposit rates ranged between 2% to 6%.
However, inflation began to rise in early 2022 due to the post-COVID global economy and the Russia-Ukraine war. In response, most countries raised their interest rates in phases.
Typically, investments in dollars yield 2%-3% interest in developed countries, but due to the global situation, US interest rates surged past 9%. In comparison, Bangladesh’s average lending rate in September last year was 7.83%, making the dollar more attractive than the taka. Consequently, many investors shifted their funds to dollars.
During this time, oversight and regulatory measures in Bangladesh were weak. Some borrowers took advantage of the low-interest loans to illegally transfer money abroad.
Capital outflow to foreign currencies and a shortage of both taka and dollars— both of these problems caused double trouble for our economy.
Policy rates in other countries
Bangladesh is increasing interest rates while countries such as the US, Canada, the UK, and China are lowering theirs. On September 18, the US Federal Reserve reduced its policy interest rate by 50 basis points, bringing it to a range of 4.75% to 5%. Similarly, the European Central Bank lowered its rate by 25 basis points.
Canada’s central bank has already reduced rates three times this year, and the Bank of England recently lowered its interest rate from 5.25% percent to 5%.
(Source-The daily Sun)
bd-pratidin/Rafid
