Industries to feel the heat of new monetary policy

The government's new monetary policy, announced on Sunday lifting the 9% cap on bank lending and raising policy rates, will increase the cost of borrowing for industries and businesses, hampering industrialisation and pushing up inflation, entrepreneurs said.

In addition, they fear that defaulted loans may rise as the new policy will make it more difficult for businessmen to repay their loans.

Mohammad Ali Khokon, a textile entrepreneur and president of the Bangladesh Textile Mills Association (BTMA), told The Business Standard, "The global export market is not in a good shape. The cost of production has increased due to the increase in the cost of raw materials and fuel but the price of export products is relatively low. Changes made in the new monetary policy were not time-befitting. It will not be helpful for the export and local industry."

"Had the Russia-Ukraine war stopped, our business would have survived, the energy problem would have been solved. Only then, such policy changes would have been appropriate," he said, adding: "We are not against any policy, but it should not have been announced at this moment."

However, other countries around the globe have also used monetary policy to rein in inflation since the war began. Most countries have increased policy rates.

Stating the problem of policy rate hikes in Bangladesh, the BTMA president said, "Bangladesh is not like other countries. Here (Bangladesh) fuel prices have been increased at an excessive rate, the cost of imports has increased due to massive currency devaluation, and there are inefficiencies in ports, and customs, for which traders are already incurring additional costs."

Tipu Sultan, president of Bangladesh Finished Leather, Leather Goods and Footwear Manufacturers and Exporters Association, also views the policy rate as a problem due to a lack of good governance and business environment in the country.

He said, "Other than the bank loan interest, only those who run industries here know how much we have to pay to customs, ports and banks. Entrepreneurs in other countries do not have to bear this kind of additional expenses."

According to the new monetary policy, banks will be able to add a 3% interest and financial institutions 5% interest to the average rate of 182-day treasury bills even if the lending cap is lifted. Accordingly, the interest rate on bank loans will be a maximum of 10.12%, and the interest rate on loans from non-bank financial institutions will be a maximum of 12.12%.

On the other hand, as a policy rate, the repo rate will increase by 50 basis points to 6.5% and the reverse repo rate will increase by 25 basis points to 4.5%.

Anis A Khan, former managing director of Mutual Trust Bank, told The Business Standard, "This is the first contractionary monetary policy statement (MPS) in recent times with a challenging task of reducing private-sector credit. The growth target of 11.0% should not be difficult to achieve given that the actual growth fell to 11.28% in April 2023."

"What remains to be seen is how much this will affect private sector investment growth, industrialisation and services. As it is, borrowings in foreign exchange by large businesses have now become prohibitive due to the global increase in interest rates and the depreciation of the Taka against the US dollar by over 13.0%," the banker added.

Default loans to mount high

Md Jashim Uddin, president of the Federation of Bangladesh Chambers of Commerce and Industries (FBCCI), told TBS, "Gas price [for industries] hiked by double, raw material import price increased. How would entrepreneurs repay loans in this tough situation? Non-performing loans are increasing and may further increase now."

"The central bank adopted such a policy to tame inflation, but it will not bear fruit in reality. The International Monetary Fund (IMF), World Bank and our so-called economists also believe that this initiative will not be able to control inflation," he said.

"It is getting worse than the Covid-19 period. This decision (policy rate hike and lending rate hike) is not appropriate for this crucial time," Jashim Uddin said.

"Already, raw materials and capital machinery imports are declining, and the new policy might reduce imports further, eventually hitting hard on employment and the overall economy," the FBCCI president added.

SMEs will be under pressure

According to the Bangladesh Bank, about 20% of the banks' total loans are lent to the country's small and medium enterprise (SME) sector. 

Industries in this sector, which have suffered the biggest losses in the pandemic, are still going through tough times. Rising interest rates on loans will put pressure on such industries.

Dhaka Chamber of Commerce and Industry (DCCI) said if the interest rate increases, the cost of running the business for cottage, small and medium entrepreneurs will rise.

Sameer Sattar, president of DCCI, told TBS, "Due to Covid and Ukraine-Russia war, the country's SME sector has been in a quandary for the last two years. Many companies were unable to survive due to the increase in business expenses. If the loan interest rate increases, their expenses will go up, making it harder for them to pay instalments."

The target of credit flow to the private sector has been reduced. The impact of the reduction will be more on SMEs because banks want to lend to big customers, said the DCCI president.

Tipu Sultan, president of Bangladesh Finished Leather, Leather Goods and Footwear Manufacturers and Exporters Association, said, "SMEs will surely be affected by it because on the one hand, their cost of funds will increase, and on the other hand, their sales will decrease."

Interest rate pressure on real estate after tax hike

Realtors said maximum people take bank loans for building houses or buying flats. If the interest rate increases, the construction cost will increase. Common people will reduce the purchase of flats, leaving entrepreneurs in the lurch.

Alamgir Shamsul Alamin (Kajal), president of the Real Estate and Housing Association of Bangladesh (REHAB), told TBS that due to the global crisis, prices of all types of construction materials, including rod-cement, have almost doubled in the last two years. Land prices and taxes have increased a lot. A rise in interest rates of bank loans at this point will create a crisis for the housing sector.

"More than 400 backward linkage industries are involved with the housing sector. A crisis in the housing sector means a crisis in these sub-sectors. Around 40 lakh people are employed in the housing sector. We fear that the crisis in this sector will create a crisis in the economy."

It is worthwhile to mention that the proposed budget for FY24 has doubled the tax on the sale of land and flats.