Fixing interest rates using the current SMART method will not be effective in restoring economic stability, Monzur Hossain, research director of the Bangladesh Institute of Development Studies (BIDS), said yesterday urging full liberalisation.

Interest rates must be based on the market, he said while presenting a paper titled "Exchange Rate Management in the Post-Covid Crisis Context: Implications for Macroeconomic Stability" at a session of an annual three-day BIDS conference on development at the Lakeshore Hotel in Dhaka.

The Bangladesh Bank had maintained a 9 percent ceiling on loans since April 2020, but the cap was withdrawn in June this year and a new interest rate formula was introduced to meet conditions attached to a $4.5 billion loan provided by the International Monetary Fund.

As per the central bank's new formula, banks can impose a 3.75 percent margin on the Six-Month Moving Average Rate of Treasury bills, abbreviated as SMART.

SMART has continued to rise in recent times as treasury bill interest rates have been going up. The SMART stood at 7.72 per cent in November and this rate will also be applicable in December. It was at 7.10 percent in June.

Responding to a question, Hossain said it would not be right to adopt a fully floating exchange rate in a developing country like Bangladesh.

He said the governance system in the financial sector was uncontrolled at present and that chaos would make it difficult to introduce a floating exchange rate.

A further 10 percent to 15 percent depreciation of the taka against the US dollar may lead to stability in the exchange rate while the country could also try settling trade in three currencies, he said in his paper.

In the post-Covid-19 period, Bangladesh faced a number of crises in exchange rate management such as multiple exchange rates, restrictions on imports, sharp depletion of reserves, rising inflation and a low interest rate ceiling, he said.

Meanwhile, trading partner countries took tight monetary measures, he added.

Mohammad Yunus, research director of BIDS, presented another paper titled "Export Processing Zones in Bangladesh: Enclave Industrialization Redux?".

Professor Emeritus Atiur Rahman of the University of Dhaka, also a former governor of Bangladesh Bank, chaired the session.