Cut lending rates to boost investment: MCCI

The Metropolitan Chamber of Commerce and Industry yesterday hailed the central bank for aiming to keep inflation in check and move to a higher growth path amid the prevailing political unrest.

The rate of inflation, according to the new Monetary Policy Statement of Bangladesh Bank, will be brought down to 6.5 percent by June 2015. At the same time, the economy is expected to grow at 6.5-6.8 percent this fiscal year.

To prop up investment, the MPS has kept the private sector credit growth target at 15.5 percent at the end of fiscal 2014-15, which is substantially higher than 12.7 percent in November 2014, the MCCI said in a statement.

“Political unrest, structural deficiencies and a cautious approach on the part of banks have, in fact, slowed down private sector credit growth,” it said. The MCCI urged the central bank to take immediate steps to bring down the lending rates to boost private investment.

“The existing average lending rate of 12-13 percent is bound to dampen investment,” it said, adding that the central bank should encourage the commercial banks to devise ways to reduce their lending rates, which did not come down commensurately with the decline in inflation in the past three years.

The lending rates should be kept just above the inflation rate in order to keep the real interest rate (lending rate minus inflation) positive.

In early 2012, the average lending rate in Bangladesh was 13 percent and the inflation rate was 10 percent, making the real interest rate 3 percent. Now, in 2015, the inflation rate is below 7 percent. Hence the lending rate should be no more than 10 percent, it said.

The nation’s oldest trade body also reiterates its earlier proposition that the central bank and the government should immediately set up a functional secondary money market as an alternate source for borrowing money.

“If this is done, banks and the government will be able to reduce their dependency on the banking system, and on the national savings schemes as a source of borrowing,” it said.

The MCCI appreciates that the central bank has revised the lending rate ceiling for agriculture downward from 13 percent to 11 percent but much more needs to be done, particularly at this time when the farmers cannot sell their produce due to the ongoing blockade.

The benchmark repo and reverse repo rates, which have remained unchanged for 18 months, should be slashed. The MCCI suggested that the deposit interest rates may be kept just above the inflation rate so that depositors do not end up with a negative rate of return.

Such continued reforms will help shore up investor confidence, particularly during this time of general investor pessimism in the capital market.

“It is good to see that BB has pledged to shore up banking governance to clamp down on loan delinquencies and financial fraudulence,” according to the statement.

The MCCI also appreciates that the central bank is keen on further consolidating the country’s external sector liquidity, and to continue maintaining a comfortable amount of foreign currency reserves to cover up to 5 to 10 months’ imports.

There are also encouraging projections in the MPS, that overall export growth in fiscal 2014-15 will be 8 percent, import growth 15 percent and remittance growth 12 percent, to yield a reasonable balance of payments surplus of $642 million, the MCCI said.

The leading chamber also stressed an optimal level of foreign exchange reserve to protect the external value of the taka and to ensure a healthy growth of imports.

At the same time, the central bank must help ensure that Bangladesh does not lose its competitiveness in exports due to its exchange rate, the chamber said.