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Slash interest on savings instruments further

News Published: Wednesday, Jun 17, 2015

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12:00 AM, June 17, 2015 / LAST MODIFIED: 12:00 AM, June 17, 2015

Slash interest on savings instruments further

An economist suggests as MCCI and PRI hold discussion on budget


AB Mirza Azizul Islam, former caretaker government adviser; Zaidi Sattar, chairman of Policy Research Institute; Nojibur Rahman, chairman of National Board of Revenue; MA Mannan, state minister for finance and planning; Anis A Khan, vice-president of Metropolitan Chamber of Commerce and Industry; and Ahsan H Mansur, executive director of PRI, attend a discussion on the proposed budget for the next fiscal year, jointly organised by MCCI and PRI in Dhaka yesterday. Photo: Star

Star Business Report

A top economist yesterday suggested the government cut the interest rate on savings certificates further to increase the flow of liquidity into the banking sector as bank deposits have bottomed out.

“People are more interested in buying savings certificates, rather than depositing money into banks,” said Ahsan H Mansur, executive director of the Policy Research Institute (PRI) of Bangladesh.

Deposits in the banking system collapsed in the outgoing fiscal year, he said. “This must be reversed to give a boost to the private sector credit demand to support private sector-led investment, export and growth.”

If the deposits in banks do not increase, the government and entrepreneurs will not get adequate money to borrow and finance their projects or make fresh investments, Mansur added.

Last month, the government slashed the deposit rate on its savings instruments by up to two percentage points to reduce its borrowing as well as prop up banks' deposit collection.

Depending on the types of savings instruments, the rate went down to 11-12 percent from 12-14 percent earlier.

On the other hand, the weighted average interest rate on deposits at banks was 7.04 percent in April this year, down from 8.11 percent in the same month a year ago, according to Bangladesh Bank.

“The recent rationalisation of the interest rate structure for the national savings schemes will help. But if inflation and interest rates come down further, the deposit rates on savings instruments must come down as well,” said Mansur. 

The government should borrow funds from international sources, rather than from domestic sources, he said. “Private investors might not get adequate loans from the banks if the government goes for higher bank borrowing.”

“The government should certainly make an effort to mobilise external financing by accelerating the utilisation of foreign aid or issuing sovereign bonds in the international market.”

The former economist of International Monetary Fund made the comments at a discussion on the proposed budget for next fiscal year, co-organised by the Metropolitan Chamber of Commerce and Industry (MCCI) and PRI in Dhaka.

The proposed government borrowing target for the next fiscal year would create tensions in the money market, said Mansur.

“Our estimates indicate that the private sector credit expansion of 14 percent would not be sufficient for 2015-16 and the government must find additional external financing in order to create space for the private sector and avoid crowding out of private credit.”

He urged the government not to bring educational institutions and hospital services under the tax system, as they squarely serve the people.

Mansur also took a swipe at the reduction of allocation for the education sector in the first budget of the Seventh Five-Year Plan.

The prevailing political calm as well as the planned establishment of special economic zones might help increase private and foreign investment commitments, he said.

At the discussion, AB Mirza Azizul Islam, a former adviser to caretaker government, said attaining the 7 percent economic growth target would be difficult as the inflow of investment is still slow.

To achieve the planned growth rate, the investment-GDP ratio should be raised to 32.7 percent, but it is now hovering around 28 percent, he said.

The government needs to increase the investment-GDP ratio by 4 percentage points to attain the growth target, he said. “But it is difficult in Bangladesh to increase the investment-GDP ratio,” Islam said.

Islam is however positive about the proposed budget. “We should encourage the private sector for more investment. We should give them a business friendly environment.”

MA Mannan, state minister for finance and planning, said the objective of the budget is to reduce poverty on a large scale. “We want fairness in the allocation of money.”

This year, critics are not worried about the size of the budget, rather they are questioning the government's capacity to implement it, he said.

Anis A Khan, vice-president of the MCCI, moderated the discussion.