IMF questions SMART rate's effectiveness in reining in inflation

Highlights: 

• IMF for transition towards a market-based lending rate model, moving away from SMART rate formula
• The IMF also advocates for increasing the lending rate further
• BB tells IMF that is it still exploring the benefits of "Crawling Peg" exchange rate mechanism
• IMF pleased with BB's NPL reduction plan implementation

In a meeting with central bank officials on Wednesday, the International Monetary Fund (IMF) inquired about the efficacy of the Six-month Moving Average Rate of Treasury (SMART) bill formula in controlling inflation. 

Furthermore, they requested clarification regarding the central bank's intention to transition towards a market-based lending rate model, moving away from the SMART rate formula, several senior officials of the central bank who participated in the meeting told TBS.

During the meeting, the IMF said following the implementation of the SMART rate, inflation did not decrease as expected. Moreover, the calculation of this rate involves determining the weighted average interest rate of six-month (182 days) treasury bills. The IMF has raised concerns regarding this methodology, questioning why the treasury bill rate is tied to the lending rate.

Bangladesh Bank officials said the inflation rate fluctuates monthly. However, in setting the lending rate, the interest rate of six-month treasury bills is currently factored in. The IMF has proposed reducing the six-month timeframe.

According to data from the central bank, the interest rate on 182-day treasury bills has remained between 11.20% and 11.40% over the past few months. The SMART rate, which averages over six months, currently stands at 10.55%. The lending rate is then determined by adding 3% to this, resulting in a rate of 13.55%. 

The IMF advises that using an average period of less than six months to determine the lending rate would lead to an increase in the lending rate, said officials.

On 23 April, a 10-member IMF delegation arrived in Dhaka to assess the fulfilment of various conditions necessary for the disbursement of the third tranche of the $4.7 billion loan to Bangladesh.

Throughout today, from 11:30 am to 5:30 pm, members of the IMF delegation held separate meetings with officials from various levels of the Bangladesh Bank.

No financial account deficit by FY25: BB to IMF

Regarding the Balance of Payments (BOP), the Bangladesh Bank assured the IMF that there would be no deficit in the Financial Account by FY25. 

During the meeting, central bank officials conveyed plans to reduce this deficit by FY24. Elaborating on their strategy, they highlighted the likelihood of receiving multiple foreign loan instalments in the coming months. Moreover, they emphasised the absence of significant payment pressures in the coming months, anticipating a decrease in the financial account deficit.

Additionally, officials informed the IMF of the substantial reduction in the trade deficit compared to the previous fiscal year, attributed to decreased imports and increased exports. 

They also highlighted the positive performance in the current account balance, supported by a notable growth of over 7% in remittances, averaging over $2 billion received monthly.

BB still exploring Crawling Peg benefits

Central bank officials also engaged in discussions with the IMF regarding the exchange rate mechanism known as "Crawling Peg."

A senior official said, "Based on our comprehensive research, we have found that none of the countries that implemented the Crawling Peg mechanism achieved success. Therefore, we cannot guarantee success in adopting this approach. We conveyed to the IMF team that we are still in the experimental phase of this matter."

"Furthermore, if we were to adopt a market-based exchange rate at present, the dollar rate could increase significantly. The IMF concurred with our assessment, given that we are not currently employing a market-based exchange rate. Therefore, we are left with no choice but to consider implementing the Crawling Peg mechanism to transition away from the fixed exchange rate," he added.

Central Bank Deputy Governor Habibur Rahman told TBS, "We are still at the research stage with the Crawling Peg. Our team is working on it but we will move to this method as per convenience."

IMF pleased with BB's bad debt reduction plan implementation

The visiting IMF delegation expressed satisfaction with the implementation of the central bank's plan aimed at reducing bad loans.

An official said, "We have undertaken several measures to control inflation. Additionally, we informed the IMF about halting lending to the government and banks through devolvement."

The central bank informed the IMF that it has devised a total of 17 action plans to reduce default loans and enhance good governance. These action plans aim to decrease defaulted loans to below 8% by June 2026.

The IMF commended the central bank's efforts in reducing non-performing loans and applauded their circular to align the overdue period of IMF term loans with international agreements.

According to Bangladesh Bank's data, the country's gross reserves stood at $25.32 billion on 23 April. However, according to the IMF's BPM-6 calculation, it is $19.97 billion.