Will a single-digit lending rate spur investment?

The Awami League-led government has initiated yet another drive to a single-digit lending rate in 2015 after six years of its similar endeavour. The then minister for industry, Dilip Barua, talked a lot about interest sensibility on investment in 2010 but all endeavours of the government ended with an opposite result in two years. However, private investors kept up their unsatisfied demand for low interest rate. Accordingly, the government has again reduced interest rate on national savings certificates, similar to its earlier step. Moreover, the Prime Minister on September 03, 2015 assured a business delegation of her government's  intervention for single-digit lending rate. Will such endeavours be effective to increase the pace of industrialisation and business in Bangladesh?
The government, in its earlier term, put an additional effort for further cut in weighted average lending rate, which was already downed from 12.78 per cent in FY 2007 to 11.31 per cent in FY 2010. The lending rate ceiling was fixed at 13 per cent for industrial term loan and a few loans of working capital in April 2009. Moreover, interest rate on national saving certificates was cut to help banks in cutting their rates on deposits. In the wake of the central bank's initiatives of reducing interest on deposits and spread, a few foreign commercial banks brought their weighted average rate below 3 per cent in September 2010. Many savers were de-motivated for formal savings, which led them to move to stock market and emerging MLM (multi-level marketing) firms. Subsequent crash in stock market and unusual exit of MLM firms put them into dark. Meanwhile, a high mobility of money to semi-formal financial institutions pushed the banks' lending rate up at 13.75 per cent in FY 2012. Accordingly, the central bank moved back to a market-based interest rate policy.
Meanwhile, weighted average rate of lending gradually came down to 11.51 per cent and that of deposits to 6.74 per cent in August 2015. The interest spread came down below 5.0 per cent in March 2015 and call money rate did not cross 8.0 per cent thereafter, which indicated a low demand for credit and liquid money. Will any additional cut of lending rate raise credit demand? Was our investment demand ever sensitive to lending rate? Two researchers of Bangladesh Bank found it inelastic during the 1973-2004 period when one per cent fall in real lending rate raised investment by 0.36 per cent. Moreover, the private investment, accounting for over three-quarters of the total, was hovering over 19 per cent of the GDP (gross domestic product) during 2009-2012 period. Under a market-oriented interest policy, private investment reached at 22.07 per cent of the GDP in FY 2015, which was below its target of 25 per cent at the end of the Sixth Five Year Plan in 2015. However, total investment approaches to cross national savings, limiting it to 30 per cent of the GDP in FY 2016.
Let's have a comparative look at the money market on the eve of drives for single-digit lending rate in FY 2010 and FY 2015. The credit growth for private sector was 24.24 per cent in FY 2010, which came down to 12.27 per cent in FY 2015. The interest rate on a few savings certificates and wage-earner bonds was cut by 1.5 per cent in June 2010, which was later raised for all savings certificates in March and June 2012. However, the government again cut interest on a few savings certificates by 2.0 per cent in May 2015. There was a huge surplus of savings over investment up to 5.6 per cent of GDP in FY 2010 that came down to 0.04 per cent in FY 2015. Yet, the private banks were found to offer the highest weighted average rate of 6.89 per cent on deposits in September 2015. It would drop as the six large state-owned banks had deposit growth of 14.55 per cent against a credit growth of 4.48 per cent on year-on-year in August 2015. In addition, non-bank financial institutions are reluctant to collect deposits reflecting from their cut in interest on deposits from 14.21 per cent to 10.61 per cent during 2013-2015. Is it due to over-investment with a few leeways in petty shops, auto-rickshaws, etc? If the market forces lead to any slight cut in interest rate on deposits, lending rate and interest spread, a single-digit lending rate will come to sight soon.
The government estimated an investment amounting to 34.4 per cent of GDP at the end of the 7th Five Year Plan in FY 2020. Wherefrom will the economy source this investment fund? The national savings is estimated to be 32.1 per cent of GDP in 2020. However, the national savings turned decreasing from 30.53 per cent of the GDP in FY 2013 to 29.01 per cent in FY 2015. If the interest rate on deposits continues to fall, the declining ratio of national savings would likely limit domestic fund. Meanwhile, the door for borrowing from foreign sources is open with an interest rate of 3.0 per cent to 4.0 per cent plus the London interbank offer. Even, registration for new investment decreased from Tk. 331 billion during April-June 2015 to Tk. 146 billion during July-September 2015. Notwithstanding the FDI inflow limited to $1.6 billion in FY 2015, the 7th Five Year Plan estimated it to increase at $9.6 billion in FY 2020. There might have been a huge demand for FDI as our affluent consumers are growing at 10.5 per cent per year as reported by the Boston Consulting Group. Will their high demand for conspicuous consumption items be continued to meet through import, franchising and licensing? How can we expect so high inflow of FDI when investment registration of overseas firms fell by 37 per cent over last two quarters? Apparently, investment-- domestic or overseas--depends not only on comparative advantage but also on investment climate.
A few well-recognised global indices represent investment climate of different countries. Bangladesh's was factor-driven economy with its 109th position among 148 countries in the global competitiveness index 2014-15. This index was organised into 12 pillars and divided into three sub-indices. The sub-index for basic requirement was 3.8, which was 3.6 for efficiency enhancers and 3.0 for innovation factors in a progressive-better score of 0-10. According to a respondent survey of this index, the most problematic factors of doing business are inadequate supply of infrastructure (21 per cent), corruption (20.6 per cent), inefficient bureaucracy (15.3 per cent) and government instability (9.3 per cent). On the other hand, the country dropped two positions to be placed at 174th out of 189 countries in the World Bank's ease of doing business index 2016. We could not progress in any ranks of 10 indicators and was even placed 189th in getting electricity, 188th in enforcing contract and 185th in registering property. Moreover, recent killings of foreigners will influence entry decision of overseas firms. Could a single-digit lending rate attract investment without taking care of deficient infrastructure, corruption, conflict, bureaucratic inefficiency, insecurity and other development traps?

The writer is Associate Professor, Department of Economics, Comilla University.
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