Too high interest rates frustrate investments
Friday, 31 August 2007
Enayet Rasul A number of high profile seminars were held recently. These were devoted to the functioning of the economy, its current travails and how best to address them. There is now little doubt that the economy is going through a period of stagnation. This state or even worse could be justified due to the political turmoil which was the outstanding feature of the country last year.
But stagnation now when conditions for relatively unhindered economic activities had existed without a pause for the last six or seven months, is indeed difficult to explain. A lot has been written on the economic slowdown and nervousness of businessmen in the different conditions that emerged from the tough government policies. The same have been cited by different quarters as the main reasons for the economy's sluggishness. According to newspaper reports, many business firms are facing bad times from a drop in sales or poor demand for their goods. Others are facing impediments to their normal functioning under the changed situation. Thus, many affected firms reportedly have not been paying their workers or staff regularly. Some have laid off or terminated their workers and staff in large number or are planning to do so.
The antidote to all these or the economic bad times is no other than increasing up investment operations. The established entrepreneurs in their different fields need to fully resume their activities. New investors should feel motivated enough to come forward to invest in trade, services and industries. The distinguished participants in the recent seminars pointed out that there is possibility for the economy to rise above the current gloom provided the government scores success in one area where the country's business bodies have been demanding result-oriented actions for a long time. The President of the Federation of Bangladesh Chamber of Commerce and Industry (FBCCI), Mir Nasiruddin, underlined in one seminar the significance of reducing the cost of funds for investors in trade and industries . This is not a new demand. It has been around for a long time. But under the unique economic slump that the country is experiencing, the demand has a greater relevance, it seems. From business houses recovering from their shocks and nervousness to other factors, many things require attention to reinvigorate the business environment. But the experts maintain that if there is one supreme factor to be considered to immediately and spontaneously lend a big stimulus to business activities, the same is government's persuasive actions to bring the country's commercial banks around to making significant reductions in their lending rate.
The FBCCI President and the President of the Bangladesh Garments Manufacturers and Exporters Association (BGMEA) tried to draw the attention of government representatives at these seminars to the very great need of bringing the lending rate at least at par with that of the neighbouring countries. The BGMEA President underscored specially that China and India are the biggest competitors of Bangladesh's readymade garments (RMG) industry. But there is no level playing field between Bangladeshi RMG producers and the Chinese and Indian ones. For example, the interest rate on loans for RMG exporters is only 3 per cent in China and the rate in India is 6-7 per cent. But in Bangladesh the lending rate is much higher at 14 per cent. How long our RMG exporters can survive in the fierce competition with their main rivals when they are so much disadvantaged in borrowing funds at such cut throat rates , he questioned.
Thus, one area where this government can play immediately a very useful role is meeting affordably the needs of finance of entrepreneurs. This will essentially involve lowering the costs of funds or borrowing for the entrepreneurs. But from this happening, the investment operations in the economy are likely to get a big boost with the consequent down the line positive developments from higher investment operations such as accelerated economic growth, more jobs and income for people and creation of more wealth.
It hardly needs elaboration that finance is the life blood of enterprises. Many things facilitate enterprising. But a surge in entrepreneurship in all conditions is linked to one major need which relates to finance. Among the key requirements of enterprises is finance or cost of funds. Entrepreneurs in industries and services no doubt make many calculations before making their business initiatives. They weigh all the pros and cons of their plans such as whether these would be sustainable in the long run and earn enough profits in the longer term to justify taking so much troubles to set them up. Some negatives in the investment climate may act like dampers. But these dampers are usually ignored or taken lightly in the last analysis if the entrepreneurs see that they can borrow funds cheap or that they have to pay interest rates on loans taken from banks and other sources at rates which appear affordable. In other words, low costs of funds can be a very powerful inducement to make faster an otherwise laggard pace of investment activities.
It is the view of most concerned persons that the high costs of servicing borrowed funds is posing as the single biggest obstacle to entrepreneurship in Bangladesh. Thus, all categories of entrepreneurs have been pleading for substantial reduction of interest on bank loans. The bank authorities maintain that they must keep interest rates high to offset the losses due to classified loans. But the banks can also reduce their losses by trimming their unnecessary expenditures and wastes. Besides, most of the commercial banks have more or less come out of their serious difficulties by being able to write off much of their classified loans.
Hopefully, the caretaker government will take steps to make a difference in this sphere. It should prevail on the banks to slash down interest rates on loans not nominally but substantially to create ample incentives among the present and potential investors. The economy has gone through a bad patch all through last year and the present one. A reduction in the cost of funds could very probably start the process of its rebound. The central bank must also reduce its own bank rate proportionately which in turn would help the commercial banks to reduce their lending rates.
But stagnation now when conditions for relatively unhindered economic activities had existed without a pause for the last six or seven months, is indeed difficult to explain. A lot has been written on the economic slowdown and nervousness of businessmen in the different conditions that emerged from the tough government policies. The same have been cited by different quarters as the main reasons for the economy's sluggishness. According to newspaper reports, many business firms are facing bad times from a drop in sales or poor demand for their goods. Others are facing impediments to their normal functioning under the changed situation. Thus, many affected firms reportedly have not been paying their workers or staff regularly. Some have laid off or terminated their workers and staff in large number or are planning to do so.
The antidote to all these or the economic bad times is no other than increasing up investment operations. The established entrepreneurs in their different fields need to fully resume their activities. New investors should feel motivated enough to come forward to invest in trade, services and industries. The distinguished participants in the recent seminars pointed out that there is possibility for the economy to rise above the current gloom provided the government scores success in one area where the country's business bodies have been demanding result-oriented actions for a long time. The President of the Federation of Bangladesh Chamber of Commerce and Industry (FBCCI), Mir Nasiruddin, underlined in one seminar the significance of reducing the cost of funds for investors in trade and industries . This is not a new demand. It has been around for a long time. But under the unique economic slump that the country is experiencing, the demand has a greater relevance, it seems. From business houses recovering from their shocks and nervousness to other factors, many things require attention to reinvigorate the business environment. But the experts maintain that if there is one supreme factor to be considered to immediately and spontaneously lend a big stimulus to business activities, the same is government's persuasive actions to bring the country's commercial banks around to making significant reductions in their lending rate.
The FBCCI President and the President of the Bangladesh Garments Manufacturers and Exporters Association (BGMEA) tried to draw the attention of government representatives at these seminars to the very great need of bringing the lending rate at least at par with that of the neighbouring countries. The BGMEA President underscored specially that China and India are the biggest competitors of Bangladesh's readymade garments (RMG) industry. But there is no level playing field between Bangladeshi RMG producers and the Chinese and Indian ones. For example, the interest rate on loans for RMG exporters is only 3 per cent in China and the rate in India is 6-7 per cent. But in Bangladesh the lending rate is much higher at 14 per cent. How long our RMG exporters can survive in the fierce competition with their main rivals when they are so much disadvantaged in borrowing funds at such cut throat rates , he questioned.
Thus, one area where this government can play immediately a very useful role is meeting affordably the needs of finance of entrepreneurs. This will essentially involve lowering the costs of funds or borrowing for the entrepreneurs. But from this happening, the investment operations in the economy are likely to get a big boost with the consequent down the line positive developments from higher investment operations such as accelerated economic growth, more jobs and income for people and creation of more wealth.
It hardly needs elaboration that finance is the life blood of enterprises. Many things facilitate enterprising. But a surge in entrepreneurship in all conditions is linked to one major need which relates to finance. Among the key requirements of enterprises is finance or cost of funds. Entrepreneurs in industries and services no doubt make many calculations before making their business initiatives. They weigh all the pros and cons of their plans such as whether these would be sustainable in the long run and earn enough profits in the longer term to justify taking so much troubles to set them up. Some negatives in the investment climate may act like dampers. But these dampers are usually ignored or taken lightly in the last analysis if the entrepreneurs see that they can borrow funds cheap or that they have to pay interest rates on loans taken from banks and other sources at rates which appear affordable. In other words, low costs of funds can be a very powerful inducement to make faster an otherwise laggard pace of investment activities.
It is the view of most concerned persons that the high costs of servicing borrowed funds is posing as the single biggest obstacle to entrepreneurship in Bangladesh. Thus, all categories of entrepreneurs have been pleading for substantial reduction of interest on bank loans. The bank authorities maintain that they must keep interest rates high to offset the losses due to classified loans. But the banks can also reduce their losses by trimming their unnecessary expenditures and wastes. Besides, most of the commercial banks have more or less come out of their serious difficulties by being able to write off much of their classified loans.
Hopefully, the caretaker government will take steps to make a difference in this sphere. It should prevail on the banks to slash down interest rates on loans not nominally but substantially to create ample incentives among the present and potential investors. The economy has gone through a bad patch all through last year and the present one. A reduction in the cost of funds could very probably start the process of its rebound. The central bank must also reduce its own bank rate proportionately which in turn would help the commercial banks to reduce their lending rates.