ACCORDING to news report the Chief Economist of Bangladesh Bank on Sunday said that the government should give more powers to the central bank in playing its role in the money market and rein in inflation. In his opinion the government’s offer of high interest rate on saving certificates is disturbing the proper functioning of the money market. He said, it is the central bank’s duty to regulate interest rates keeping eyes on the fiscal and monetary front but the government’s interference is disturbing the equilibrium weakening central bank’s control on interest and inflation. The government policy is distorting the money market impacting private sector investment and this in turn is retarding new job creation and income generating activities. The government’s short-term monetary objectives are undermining long-term economic growth.
What the central bank’s Chief Economist said is that if the interest rates on government bonds and saving certificates are high, depositors in banks would take away money from banks and invest in treasury bonds for higher interest. This is what is happening now reducing level of deposits in banks to force them to demand higher interest on lending to business for new investment. Bangladesh Bank data shows the sales of saving certificates has shot up by 77.42 percent to Tk 26,533.48 crore in July-February period profiled by high interest rate of up to 13 percent while banks now offer below 10 percent against deposits. We know that the government is collecting money selling saving certificates at higher interest and repaying bank loans in the short run; but in doing so the burden of domestic debt servicing is surging making tax payers now and future to repay the debt. It is not a prudent policy unless the economic returns from such borrowing is higher than the loan burden for future. Moreover, the direct victim of higher interest rates on saving instruments is the stock market, because investors are taking away the money from the market lured by higher gains and this in turn is drying funds in the bourse.
The faulty monetary policy is moreover forcing many big corporate houses to switch to foreign borrowing sources, which offer loans at lower interest than domestic bank interest. Meanwhile, foreign direct investment (FDI) in the country remains insignificant to achieve its middle-income status by 2021. Here, Bangladesh Bank is failing to play a significant role through this volatile political situation.
In fact, political uncertainty and overwhelming government interference in the money market sidetracking the central bank’s authority are causing more mismatch in fiscal front and it may lead to more chaos in the economy sooner. We have seen earlier that the government excessive involvement in the management of state owned banks has led to their swindling by vested interest groups and the concerns voiced by the central bank’s Chief Economist appears to be a timely warning to reduce the government intervention in the country’s momentary management before it is too late. We hope the authorities concerned will pay heed to the advice.
