To comply with International Monetary Fund (IMF) conditions, Bangladesh Bank (BB) is required to allow automatic access to all banks’ permanent lending and deposit facilities, a monetary policy instrument to stabilize liquidity. be.Experts talk about its benefits and feasibility of implementation
The International Monetary Fund (IMF) has set six new baseline conditions for Bangladesh to restore discipline in money markets and raise revenue. These are in addition to the conditions imposed by the $4.7 billion loan program’s performance standards and indicator goals.
All the directives set by the IMF seem to have one common goal: to free up the economy and let market forces decide how the economy will move forward.
at the bank front desk
As per the latest conditions, Bangladesh Bank (BB) has to grant automatic access to permanent lending and deposit facilities of all banks, subject to the availability of accepted collateral.
This is a monetary policy tool used around the world as a means of stabilizing liquidity.
“This is currently being done in many countries. It helps stabilize market liquidity. It is done when there is a demand for market liquidity from banks. Banks can access it whenever they need it. On the other hand, as there is excess liquidity, they can deposit easily,” said Mohammad A., a veteran banker and former deputy governor of Bangladesh Bank and chairman of the ICC Bangladesh Banking Committee. Rumi) Ali explained.
He said this was done to enforce monetary policy more effectively. The authorities can control monetary policy through the interest rates offered when withdrawing and depositing funds.
What will happen?
However, there is a standing loan facility and standing deposit facility provided by Bangladesh Bank. What does the directive from the IMF hope to achieve?
Experts and industry insiders argue that these funds are still in existence and should be automatically available to all banks if accepted collateral is available. There is. However, at present, Bangladesh Bank is exercising discretionary powers and the funds are not being utilized to their full potential. This is an issue that the IMF has asked Bangladesh Bank to address.
Currently, the maximum policy rate corridor cap for the Standing Loan Facility (SLF) rate is 9.75%. In contrast, the lower limit on the standing deposit facility (SDF) interest rate is 5.75%. Meanwhile, the policy rate, also known as the repo rate, is currently set at 7.75%.
“In the call money market, one bank lends to another bank overnight. If one bank tells another bank that it will only lend at an interest rate of 9.8%, the bank trying to borrow will avoid that bank. , you can go to the next bank.” Borrow from Bangladesh Bank at 9.75%.
On the other hand, some banks have surplus liquidity but are unable to earn interest rates on deposits above 5%. They can park their surplus money with Bangladesh Bank and avail an interest rate of 5.75%,” said Dr Zahid Hussain, former chief economist at the World Bank’s Dhaka office.
A lack of market liquidity causes interest rates in the interbank market to rise. To suppress this, an upper limit is set. A permanent facility from Bangladesh Bank to lend at competitive interest rates would inject liquidity into tight financial markets.
Similarly, if you have a surplus and no one wants to take the money at the stipulated interest rate, you go to Bangladesh Bank and deposit it at 5.75% interest rate and the liquidity moves from the market to Bangladesh Bank to be replenished. surplus. In this way, the call money interest rate will remain in the range of 9.75% to 5.75%.
“But if this is left to the discretion of Bangladesh Bank; [and] If one bank can get liquidity but another bank can’t, the system won’t work 100%. This is because the idea is to inject liquidity when money markets are tight and compensate for excess liquidity when it is available. . It only works if everyone has equal access to it,” Dr. Hussein explained.
The IMF also added the condition that open market operations be streamlined. Because, as experts say, these two are related. Bangladesh Bank has various funds to manage monetary policy. There is a liquidity support fund for primary dealers. Islamic banking facilities are available. There are also special liquidity adjustment features. All have different interest rates.
Experts say that streamlining the IMF and creating a permanent loan and permanent deposit facility will eliminate the need for other institutions. All primary dealers will receive the same treatment from regulators.
“Other equipment needs to be slowly phased out, otherwise banks will be encouraged to game the system,” Dr Hussain said.
Implementing changes
It shouldn’t be too difficult for Bangladesh Bank to make the necessary changes. According to Dr. Hussain, “There will be no need for any circulars. Banks will be able to easily go and take the funds, just like we buy over-the-counter medicines. If there is too much demand for funds, they will This means that monetary policy has not been tightened enough and interest rates will need to be adjusted.”
“On the contrary, if there is too much demand to deposit excess liquidity at a prescribed rate, it means there is excess liquidity in the system and it needs to be reduced,” he added.
But the country’s banking watchdog also needs to be wary of the impact of these changes on money markets, and needs to have solid plans for how to achieve the goals set by the IMF. .
“Every time you adopt something new, it affects the market. Things were going in a certain direction and now there is a change. So is there a risk of destabilizing the market? We need to do an impact analysis to see whether “in some way implementing the IMF recommendations” said Mohammad A. (Rumi) Ali.
“And based on that impact analysis, we can come up with an action plan to implement it step by step over time, so there is no problem,” the former BB deputy governor added.