Some much-needed policy changes

Even if late, the three major decisions taken by the Bangladesh Bank could prove vital in steering the economy out of its current state. First, the central bank devalued the local currency against the dollar by Tk 7 to Tk 117—the highest slide in a day. Second, it loosened its grip on the taka and will now allow it to follow the crawling peg system—which, by definition, means the exchange rate will be more flexible. And third, it made the lending rates fully market-based, abandoning a treasury bill-linked formula for banks, which marks a major shift from the command-and-control system imposed on banks for four years.

Economists have been calling for all three of these measures for some time now. So, we welcome the central bank's decision to implement them at last. But the time lag effect could delay their effects on the economy. Additionally, given that the exchange rate of the taka against the dollar in the spot market has been actually much higher than the previously set official exchange rate, how much the economy will benefit from taka devaluation remains to be seen. However, it is likely that exporters will benefit from it, as their products will become more competitive on the international market. On the flipside, this will make imports more expensive, likely resulting in a decrease in the import of capital machineries and economic growth. Given that GDP growth in the second quarter of this year has already been the lowest in at least three quarters, its impact on the economy could be devastating. Therefore, the government should try to cushion that in other ways.

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Scrapping the SMART interest rate, and opting for a market-driven one instead, could result in interest rates to rise. As borrowing becomes costlier, demand for loans could dip and, consequently, inflation could come down. This, however, will negatively affect borrowers. And for the sake of good borrowers and the overall banking sector, the government has to go a step forward and initiate some much-needed banking reforms to clean up issues that have plagued the sector for years. On the other hand, an increase in the interest rate could finally provide depositors with some good news, as interest on deposits should go up.

The steps taken by Bangladesh Bank were necessary, but they could lead to some short-term pains. But those, too, could be minimised by ensuring greater efficiency and improvements in certain areas—which should be the government's focus now. Moreover, this should not be the end of economic reforms, but the beginning of it. The IMF, for example, has mentioned the need for certain banking sector reforms which the government should also heed. Aside from that, it should concentrate on increasing its revenue collection by ensuring that tax avoidance, particularly by the rich and powerful, is finally addressed.