The Financial Express

Pros and cons of single digit lending rate  

| Updated: December 20, 2019 22:25:57

Pros and cons of single digit lending rate   

The economic performance as revealed by Bangladesh Bureau of Statistics (BBS) indicates the economy maintained its real growth inertia with 8.15 per cent over the fiscal year 2018-2019, which is merely 0.02 per cent higher than the preceding fiscal year (FE December 01). The growth expansion increased per capita GDP (gross domestic product) to $1827, which surpassed last FY's number by $152. The BBS reports also claimed that the estimated private sector investment -- GDP ratio stood at 23.54 per cent -- a slight gain over the FY 2018 ratio of 23.54 per cent. The industrial sector alone showed a stunning growth of 12.67 per cent. Public sector investment and service sector also showed a slight gain over the previous FY. However, agricultural growth fell to 3.92-per cent from 4.19 per cent in FY 2018.

While presenting these and other vital statistics to the Executive Committee of the National Economic Council (ECNEC), planning minister MA Mannan has claimed that the higher economic growth was propelled by the exponential growth of the country's industrial and service sectors in tandem.  Minister Mannan's statement and the growth data should soften the infuriation of many quarters who are bent upon on curving banks' lending to a single digit. This does not necessarily mean that Commerce Minister Tipu Munshi's concerns about exorbitantly high lending rate should be overlooked.

Speaking at the "Ceramic Expo Bangladesh, 2019" on December 06, Tipu Munshi said," Bangladesh is the exception in the globe where the spread between deposit and lending rate is the highest." To make his point even stronger I would add that it is also the only country that I know of where in the name of poverty reduction, micro loan interest rate is over 20 per cent (example: Grameen Bank). It is also the only country in the community of nations where - for whatever reasons - non-performing loans, loans defaults, and bank looting by bank owners are rampant and the perpetrators - in most instances -- go scot-free.  Additionally, consider the 100s of billions of bank funds that are being crowded out (borrowing by the government for deficit spending) of the private sector to finance government projects. Had the country succeeded in broadening the tax base and tax collections, the "crowded-out" funds could have supported banks liquidity with higher reserve money, putting downward pressure on lending rates.  Hopefully, Minister Tipu Munshi would see why the lending rate (between 12 to 13) is so high in the country.  

I believe, with the performance of the economy over the FY 2019, the commerce minister and other stakeholders would not be as frustrated with the prevailing high lending rate. I am certainly in the company of all those who are clamouring for a single digit interest rate (SDIR) at 9.0 per cent or even lower. Low interest environment is certainly a sign of healthy economy if the inflation is tamed to remain low and expected inflation is anchored as in the US economy for several years now. Interest rate acts as a lubricant to incentivise businesses to invest in new capital goods thus expand businesses with job creation.

There is no debating that the growth statistics for the FY 2019 are laudable given the economies of Bangladesh's trading partners tiptoeing into hibernation with anemic growth. The question is: how long can the economy steer this growth momentum or at least maintain at or close to the prevailing rate of growth? This concern could be a pressing reason why politicians and Bangladesh Bank (BB) are under pressure from private investors and FBCCI (Federation of Bangladesh Chambers of Commerce and Industries) to actively explore options to bring down industrial lending interest rate to SDIR of 9.0 per cent.

According to a December 13 FE report the seven-member committee formed by BB recommends that the interest rates on large industrial loans along with cottage, micro, small and medium industrial loans will be slashed to a single-digit of 9.0 per cent from the prevailing 12 to 13 per cent range. This lending rate shall also be extended to readymade garment (RMG), textile, ship-building and ship-breaking, agro-based industry and similar other sectors. Finance Minister Mustafa Kamal told the press that the single digit interest rate will come into effect from January 01, 2020. However, loan defaulters will be barred from this privileged low interest rate loan.

Having real GDP growth close between 7.0 to 8.0 per cent for several successive fiscal years could be an indication that the economy is operating at or near its full potential - implying that any further stimulative policy actions - fiscal and/or monetary - could result in overheating the economy with the risk of accelerated inflation. Reports are already pouring in about price increases of daily consumables, including rice. In such an environment, how prudent would it be to slash lending rate from 13 per cent to 9.0 per cent instead of a gradual decrease following the US and other developed countries? 

If the economy is operating at its full potential (on or near the production possibilities frontier) at this time, the economy would benefit the most from low lending rate only if the borrowed funds are expended by businesses in (a) buying new capital goods (business expansion) and none spent for repair and maintenance of depreciated ones; (b) training existing low-skilled workers to raise productivity and hire new skilled workers. Both targeted spending would shift the Aggregate Supply rightward enabling higher growth and lower price level - a double yummy achievement. This is pure and simple a supply side-effect which will trickle down and benefit the rest of the economy down the line.

If the funds are squandered largely on reconditioning existing machineries or buying foreign currencies to import materials to produce consumer goods, it will shift the aggregate demand curve rightward resulting in an increase of the general price level. That would force the monetary authority to raise interest rate to dampen the inflation inertia. Therefore, it will be prudent to introduce some monitoring regime as the low interest rate-funded loans are disbursed.

Finally, from my angle, whatever measures are taken to slash lending rate to 9.0 per cent may be deemed as preemptive policy activism should the global economy, particularly Bangladesh's trading partners, slide into a recession. Fortunately, the economy is enjoying a robust growth albeit with high interest rate. This is great. Why so? Because in the event of knocking recessionary pressures, policy makers would still have enough leeway to cut interest rate well below 9.0 per cent in succession.


Dr Abdullah A Dewan, formerly a physicist and a nuclear engineer at BAEC, is Professor of Economics at Eastern Michigan University, USA. [email protected]

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