Bangladesh set out for financial sector reforms in the 1980s.

The interest rates were partially deregulated in 1989 to bring flexibility in determining the deposit and lending rates. In 1992, the interest rate bands for lending were removed for all sectors, except agriculture, small industries, and exports.

It took a step further in 2003 when the government adopted a free-floating exchange rate regime to determine the value of the local currency on the basis of demand and supply, which forms the theoretical basis of modern economics.

Still, regulatory intervention in the markets has not become a thing of the past, posing a threat to the progress that the country has attained so far in financial liberalisation.

Sometimes, regulatory measures are taken on an ad hoc basis. And every now and then, they are put in place, due to, economists say, a lack of knowledge and good governance, in absence of empirical analysis, and often to provide undue advantage to a few big players.

In the money market, the interest rates of banks are determined, not by the market forces, but by the Bangladesh Bank’s order. The central bank also controls the foreign exchange market strictly.

In the stock market, the Bangladesh Securities and Exchange Commission (BSEC) even goes further. It tries to control the market movement by imposing a floor price or reducing the limit of the circuit breaker although it is not its core task.

“Nothing is market-determined in the financial market of Bangladesh,” said Zahid Hussain, a former lead economist of the World Bank’s Dhaka office.

“The interest rate is determined by the central bank. The minimum wage of employees is also set by the regulator. Fees and charges limit of financial services are also dictated. Even sector-wise, credit targets are also given.”

“So, there is no free market anymore in the financial sector. The companies are doing business based on the volume only.”

Selim Raihan, executive director of the South Asian Network on Economic Modeling, blames market imperfection for the intervention.

“There are many reasons for the imperfection. A lack of good governance is one of them.”

It is expected that when market players don’t play by the book, regulators will step in.

Sometimes, people have a lack of awareness and major players or vested quarters use the market to their advantage and it is mostly seen in the capital market.

This prompted the BSEC to impose a floor price on all stocks in March 2020 to stop the index from falling after the coronavirus pandemic hit the country. It even kept the exchanges shut for two months, a usual move and also almost unprecedented.

The BSEC removed the floor price amid huge criticism from big investors and analysts.

For many years, the commission has maintained a circuit breaker to prevent shares from advancing or declining by 10 per cent on a single day.

It lowered the circuit breaker limit to 2 per cent on March 8 this year to stop the freefall of the key index. This means a stock can’t slip more than 2 per cent on a day.

A month later, it was raised to 5 per cent. But the circuit breaker was brought down to 2 per cent last week to skirt a massive fall as uncertainties owing to the raging Russian-Ukraine war, the dragging coronavirus pandemic, supply chain disruptions and higher price pressures have kept weighing on investors’ minds.

In April 2020, the BB fixed the maximum deposit rate at 6 per cent and the lending rate at 9 per cent.

In August last year, it asked lenders not to set the deposit rates on fixed-term deposits at below the inflation rate, as higher consumer prices have turned the actual return on such savings negative.

According to Raihan, a professor of economics at the University of Dhaka, banks are charging higher interest rates on new borrowers to compensate for the higher non-performing loans (NPLs) in the banking sector.

Bankers are realising higher fees for many other services, so ultimately the real cost of funds has remained double-digit for entrepreneurs.

“So, dictating the interest rate is not the solution. The government should solve the real problem. Otherwise, the government will keep intervening but people will not benefit from the moves. If NPL is reduced, the interest rate may lower automatically,” said Raihan.

There are only a few countries where a free-market economy exists in a pure sense.

“But most countries rarely intervene in the markets, whereas our regulators step in frequently and without any empirical analysis,” said Raihan.

Sometimes, regulators take steps under pressure.

“In Bangladesh, the government intervenes in a reactive manner. But it should be proactive and there should have proper reasons and objectives,” said Prof Raihan.

Zahid Hussain says when the interest rate rises, the government moves to cut it without addressing the main problem which is the higher NPLs.

The intervention takes place in the markets in many countries, including Bangladesh, but it should not continue for long, said Monzur Hossain, research director of the Bangladesh Institute of Development Studies.

“The government steps in because a market imperfection prevails and there is also a lack of competitiveness,” he said, adding that a lack of governance and strong institutions also leads to market imperfection.

Due to the imperfection, the market does not function smoothly, so the government should focus on liberalisation, Monzur added.

BUT CONTROL DOES NOT WORK ALL THE TIME

The government is desperately trying to control the exchange rate of the taka against the US dollar through the fixation of an interbank exchange rate amid fast-depleting foreign currency reserves, driven by higher imports against moderate exports and lower remittance flows.

But the demand has dwarfed the supply, sending the exchange rate to a record level. As a result, the BB is struggling to ensure discipline in the money market.

The local currency trades at Tk 97 to a dollar in the case of importers. It is more than Tk 100 for travellers, whereas the interbank exchange rate is Tk 87.90 a dollar.  

The situation has compelled the central bank to raise its key interest rate for the first time in a decade on Sunday.

THEN WHY KEEP REGULATING

There is a question of why such intervention takes place and whether it is for the ignorance of regulators or aims at serving the interest of vested groups.

“I believe a lack of knowledge can’t be the reason,” said Zahid Hussain.

“Fuel and power prices are also set by the government. The government takes the decision on an ad hoc basis and is not following any formula.”