Chief economist says govt's control over interest rates on savings certificates disturbs market

The government should give more powers to Bangladesh Bank to allow it to properly play its role in the money market and rein in inflation, the central bank's Chief Economist Biru Paksha Paul said yesterday.

The government's control on the interest rate on savings certificates disturbs the market and affects the central bank's efforts to bring down lending rates and control inflation, which are needed to boost investment, he said.

“The central bank is supposed to control the interest rates. If there is someone else playing this role, our game is disturbed.”
“We have a referee -- the government. If the referee takes sides, the game is disturbed,” Paul said.

Speaking at a discussion on the state of the economy organised by the Board of Investment at Dhaka Reporters Unity, Paul said: "If the interest rate on saving certificates is high and you are forcing the banks to reduce the deposit rate, funds will be channelled into savings certificates. And there is a moral hazard as well.”

The sales of saving certificates rose 77.42 percent to Tk 26,533.48 crore in July-February from the same period a year ago, according to BB. 

The spike is due to the high interest rate of 13 percent offered by the government on the instruments, while the rate is below 10 percent for banks; there are some instruments that are tax-free too, said officials.

"I will request the government to either reduce the interest rate on savings certificates or give control over the rate to the central bank," he said. 

A reduction in the interest rate on savings certificates might facilitate a cut in bank rates and stimulate investment, he added.

"If it is done, investment will pick up," said Paul, urging the government to control taxes and fiscal issues.

The average lending rate declined to 12.32 percent in January from 12.46 percent in December, according to BB. 

Inflation went down to 7 percent from 12 percent in the last three years, but the average lending rate did not go down to that extent due to institutional rigidity towards a downward revision, he said.

Many companies are switching to foreign borrowing because of the high lending rates in Bangladesh, Paul added.

However, foreign direct investment or FDI remains insignificant as a percentage of the gross domestic product, he said.

"We have to increase the efficiency of our bureaucracy. Our economy is strong but the institutions are not," he said, citing foreigners' complaints about weak institutions. 

BoI Executive Chairman SA Samad said FDI is less than 2 percent of GDP.

He said foreign investment is led by supply, and Bangladesh should be an attractive destination to foreign investors because of various incentives offered by the government.

"It does not depend on me. It depends on those who invest. Investors have choices, but as an economist, I asked why we are not getting it.”

“I do not think there is any flaw in whatever we have designed to attract FDI," Samad said. FDI has been increasing since 2009, he added. 

It cannot be explained why the member states of the Organisation of Islamic Countries get only 2 percent of global GDP and why China gets 10 percent, said the BoI chief. 

“I believe Bangladesh is an attractive investment-wise, as it has a high rate of return and investment is secure here.”

Most investors who went to Vietnam and Myanmar have already left those countries. “People do not keep record of that but, in Bangladesh, the investment that has come has stayed and most profit is reinvested.”

Prime Minister's Energy Adviser Towfiq-e-Elahi Chowdhury said Bangladesh has made strides on economic and social fronts ranging from steady economic growth to poverty reduction. The standards of living have also improved, he added.

Some 70 percent of the population now has access to electricity, which was 45 percent a couple of years ago, he said.