Lending rate cap to be lifted soon: BB tells IMF

The Bangladesh Bank has assured the International Monetary Fund (IMF) that it will soon lift the existing lending rate cap and leave the country's foreign exchange market to a free-floating exchange rate system, several high officials of the central bank have told The Business Standard.

The IMF team, which arrived in Dhaka on Wednesday on a 15-day visit to discuss the terms and conditions of a prospective $4.5 billion loan for Bangladesh, held several meetings with the Bangladesh Bank high-ups including Governor Abdur Rouf Talukder on Thursday and emphasised withdrawing the lending rate cap, and ensuring the market-determined exchange rate.

An official of the central bank told TBS, "The IMF asked us about the floating exchange rate. We said the interbank exchange rate of the banks is now market-determined, and also assured them that the central bank is moving toward a free-floating exchange rate."

Currently, there are four different exchange rates in the forex market – the central bank's dollar selling rate to meet government liabilities, banks' remittance rate, LC (letter of credit) rate, and export proceeds encashment rate.

According to sources, the visiting IMF team held two rounds of meetings with Bangladesh Bank officials from 9:30am to 12:30pm on Thursday where they discussed a wide range of issues, including the recent monetary development and outlook, interest rate development, government bonds, monetary exchange rate, research development, banking issues, the balance of payments, external loan disbursement, recent trade performance, recent exchange performance, risk-based supervision, and technical meeting on anti-money laundering.

The other representatives from the central bank who met with the IMF delegation included deputy governors Ahmed Jamal and Kazi Saidur Rahman, and officials of the Forex Reserve and Treasury Management and Accounts and Budgeting departments of the Bangladesh Bank.

Bangladesh Bank spokesperson Abul Kalam Azad said the IMF told the Bangladesh Bank that it would make a decision on granting a loan to Bangladesh within the next two weeks.

He also said the IMF delegation during their discussions with the central bank did not give Bangladesh any condition regarding getting loans from the IMF. They, however, stressed financial sector reforms and restoring discipline in the banking sector and raised questions about the lending rate cap, and different exchange rates of the US dollar.

On 1 April 2020, the central bank set a maximum interest rate of 9% on all bank loans and a maximum of 6% on deposits.

But, on 8 August 2021 in the wake of rising commodity prices, the central bank ordered banks to keep deposit rates higher than the rate of inflation.

The inflation rate in the country jumped to 9.5% in July, although it dropped slightly to 9.1% in the following month.

Banks have had to increase the deposit rate as the rate of inflation kept rising, but the lending rate remains the same.

Apart from this, due to the increase in the country's imports following the reopening of the economy post-Covid and an increase in import costs in the wake of the Ukraine-Russia war, the central bank has sold a huge amount of dollars in light of the demand of the banks.

The central bank has sold around $4 billion to various banks so far in the current financial year. As a result, about Tk40,000 crore went to the central bank's vault from the market. Last year, about Tk70,000 crore entered the central bank from the market against the sale of $7.62 billion.

In this situation, banks in the country are now facing a liquidity crisis along with dollar shortages.

Besides, the growth of deposits in the banking system is low in recent months as many banks are not keen to raise interest rates on deposits. On the other hand, borrowers are taking loans easily due to the lending rate cap.
 
Bangladesh's forex reserves as per IMF's calculation

The IMF says the Bangladesh Bank has overstated its foreign exchange reserves by $8.4 billion, although the Bangladesh Bank claims that it has been calculating the volume of the reserve following the same method as before.

As per the central bank's calculation, Bangladesh's current reserves of foreign exchanges stand at $35.80 billion. However, the IMF says the figure will decrease to $27.4 billion if its accounting method is followed.
 
What's for discussion in later sessions?

As part of the next series of sessions on 30 October, the IMF mission will hold discussions with the Bangladesh Financial Intelligence Unit (BFIU) on matters of risk-based supervision, major challenges, and actions.

The team will also meet with the statistics department director to discuss matters relating to the balance of payment.

On 31 October, the IMF mission will meet with central bank Deputy Governor Abu Farah Md Nasser, and hold discussions regarding the present status of state-run commercial banks, their performance under the regulator's MoU, and recent changes in the board of these banks.

The purpose of the visit is to start that process formally. Discussions will include borrowing from the IMF's Enhanced Credit Facility (ECF), Enhanced Funding Facility (EFF) programme, and the New Initiatives, Resilience and Sustainability Fund (RST) programme.