INDUSTRY AND FINANCE SERIES VOLUME 14 IAF-14 Interest Rate Policies in Selected Developing Countries, 1970-82 James A. Hanson and Craig R. Neal FiLE COPY Interest Rate Policies in Selected Developiing Countries, 1970-82 - ii - Industry and Finance Series Volume 14 This series is produced by the Industry Department of the World Bank to disseminate ongoing work done by the department and to stimulate further discussions on the issues. The series will include reports on individual sectors in industry, as well as studies on global aspects of world industry, problems of industrial strategy and policy, and issues in industrial finance and financial development. Already published are the following: *Volume 1. Structural Changes in World Industry: A Quantitative Analysis of Recent Developments *Volume 2. Energy Efficiency and Fuel Substitution in the Cement Industry with Emphasis on Developing Countries *Volume 3. 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INDUSTRY AND FINANCE SERIES VOLUME 14 Interest Rate Policies in Selected Developing Countries,, 1970-82 James A. Hanson and Craig R. Neal The World Bank Washington, D.C., U.S.A. Copyright ©) 1986 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing June 1986 This is a document published informally by the World Bank. In order that the information contained in it can be presented with the least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The publication is supplied at a token charge to defray part of the cost of manufacture and distribution. The World Bank does not accept responsibility for the views expressed herein, which are those of the author(s) and should not be attributed to the World Bank or to its affiliated organizations. The findings, interpretations, and conclusions are the results of research supported by the Bank; they do not necessarily represent official policy of the Bank. The designations employed, the presentation of material, and any maps used in this document are solely for the convenience of the reader and do not imply the expression of any opinion whatsoever on the part of the World Bank or its affiliates concerning the legal status of any country, territory, city, area, or of its authorities, or concerning the delimitation of its boundaries or national affiliation. The most recent World Bank publications are described in the annual spring and fall lists; the continuing research program is described in the annual Abstracts of Current Studies. The latest edition of each is available free of charge from the Publications Sales Unit, Department T, The World Bank, 1818 H Street, N.W, Washington, D.C. 20433, U.S.A., or from the European Office of the Bank, 66 avenue d'1ena, 75116 Paris, France. James A. Hanson is senior financial economist and Craig R. Neal a researcher in the Industry Department of the World Bank. Library of Congress Cataloging-in-Publication Data Hanson, James A. Interest rate policies in selected developing countries, 1970-82. (Industry and finance series, ISSN 0256-2235 : v. 14) Bibliography: p. 1, Interest rates--Government policy--Developing countries. I. Neal, Craig R., 1954- . II. Title. HG1623.D44H36 1986 332.8'2'091724 86-13301 ISBN 0-8213-0782-7 - v - Abstract This paper examines the level and structure of interest rates for 1970-82 in ten developing countries: Bangladesh, Kenya, Republic of Korea, Morocco, Nigeria, Pakistan, Peru, Thailand, Turkey and Uruguay. In addition, the paper briefly examines the countries' broader financial and economic policies. In most cases nominal interest rates were controlled by the governments and varied substantially less than inflation during this period. As a result, real interest rates rose (or fell) with declines (or increases) in inflation; hence, highly negative real rates were a direct reflection of high inflation. A simple grouping of ninE! of the ten sample countries into two categories demonstrates this clearly: the first group (six countries) had low inflation and mildly negative real rates, which averaged within a few percentage points of the corresponding averages for the industrialized countries; and the second group (three countries) had high inflation and highly negative real rates, which averaged ten to twenty-five percentage points below rates in the industrialized countries. The tenth country, Uruguay, switched from the high-inflation, highly nega- tive real rate group to a high-inflation, highly positive and volatile real rate category about half way through the period, due to a major liberaliza- tion, and thus did not fall into either category. Aside from controlling interest rates, governments in the sample countries intervened extensively in financial markets to affect the alloca- tion of resources. Besides direct and indirect interest rate controls, other forms of intervention included large directed credit programs, public ownership of financial institutions, and sizable public sector borrowing. The paper's principal conclusion is that the narrow concern for raising real interest rates to positive levels, so oftea voiced in develop- ment policy dialogues, should give way to broader concerns for improvements in the financial system as a whole and for greater consistency between financial and macroeconomic policies. There are three basic reasons for this shift in emphasis: (1) unless real rates are considerably out of line, i.e., highly negative and well below those prevailing in inter- national capital markets, the scope for, and thus the impact of, raising real rates would be fairly limited; (2) even if real rates are considerably out of line, the focus of attention should be on the problem of high inflation and the economic imbalances driving it, since otherwise it will be difficult to achieve genuine progress on real interest rates; and (3) in and of themselves, positive real interest rates are no assurance that the financial system is efficiently allocating resources. Intervention in financial markets commonly fragments markets, distorts incentives with explicit and implicit subsidies, and burdens the system with counterproduc- tive taxes. Moroever, economic and financial rates of return often diverge due to macroeconomic and pricing policies. Accordingly, interest rate policies must be part of a consistent economic policy iramework, and the level of the real rates should not be considered in isolation. - vii - Table of Contents Summary and Conclusions** ............... .......... .... ix I. INTRODUCTION .................... ... ... ....... , 1 II. THE SAMPLE COUNTRIES, DATA SOURCES AND SOME METHODOLOGICAL CONSIDERATIONS ...*...................*..*...* ............ 2 III. THE AVERAGE LEVEL OF REAL INTEREST RATES: THE INTEREST RATE REGIME .........., 5 IV. THE DETERMINATION OF INTEREST RATES: NOMINAL ANT) REAL ...... 18 V. FINANCIAL SECTOR LIBERALIZATION: THE "NEW" VIEW ............ 32 VI. FINANCIAL SECTOR REFORMS: THE RECORD .......... .*..... . ... 36 ANNEX I SUMMARY AND COUNTRY TABLES AND FIGURES ............. 45 ANNEX 2 COUNTRY STUDY: BANGLADESH ........................ 83 ANNEX 3 COUNTRY STUDY: KENYA ............... . ..... too. 89 ANNEX 4 COUNTRY STUDY: NIGERIA .......................... 97 ANNEX 5 COUNTRY STUDY: PERU . .............................. 103 ANNEX 6 COUNTRY STUDY: THAILAND ......................... 113 ANNEX 7 COUNTRY STUDY: TURKEY ........................... 121 ANNEX 8 COUNTRY STUDY: URUGUAY ............................ 129 SOURCES AND REFERENCES ... 137 - viii - List of Text Tables and Figures Table 1 Average Real Interest Rates, 1970-82 .... ........... 7 Figure 1 Nominal Term Deposit Rates versus Inflation ........ 8 Table 2 Major Policy Changes in Nominal Deposit Rates....... 14 Table 3 Average Real Interest Rates, 1970-76 and 1977-82 16 Table 4 Average Real Interest Rates, 1970-80 and 1981-82 ........................... 17 Figure 2 Ex-Post Real Term Deposit Rates versus Inflation ... 22 Figure 3 Nominal Term Deposit Rates versus Devaluation Adjusted U.S. Treasury Bill Rate ................ 26 Figure 4 Nominal Rates on Domestic Foreign Currency, US$ Term Deposits: Uruguay, 1978-82 ............ 30 Table 5 Nominal Interest Rate Differentials, 1982 .......... 40 - ix - Summary and Conclusions A. Purpose and Organization i. This paper examines the financial sector policies in a representative sample of developing countries over the period 1970 to 1982, focusing on the evolution of interest rate policies. The objective of this study is to assess the policies pursued by these countries in relation to the standard policy advice to maintain positive real rates and the recommendations made by a growing number of proponents of greater market-orientation in the financial sector. ii. The financial sector policy advice most often given developing countries is to maintain positive real interest rates, i.e., nominal interest rates in excess of inflation. This recommendation is now beginning to give way to concerns for increased market-orientation in the full range of financial sector policies. As opposed to simply a mechanical insistence on positive real interest rates, the market oriented perspective stresses, among things, the need to reduce the size of subsidies passed through the financial sector and to increase the reliance on interest rates for the mobilization and allocation of resources, paying attention not only to the real levels of rates, but to the need for differentials which reflect differences in risk, maturity and cost. iii. Reflecting this shifting policy perspective, the paper is organized into two parts: first, an examination of the development of real interest rates in a sample of ten developing countries (Bangladesh, Kenya, Republic of Korea, Morocco, Nigeria, Pakistan, Peru, Thailand, Turkey and Uruguay); and second, an investigation of the patterns of financial market intervention and liberalization in seven of the ten ccuntries (Bangladesh, Kenya, Nigeria, Peru, Thailand, Turkey and Uruguay). The first half of the paper focusses on the questions: "Have interest rates been positive in real terms?" and, "Was there movement towards higher real interest rates over time?" The second half of the paper examines a broader set of financial sector policies, focussing on the questions: "What are the forms and extent of government intervention?" and "Is there evidence of a decline in the scope and degree of intervention, suggesting growing acceptance of the newer, market-oriented policy perspective?" B. Principal Conclusions iv. In terms of interest rate policies, the principal conclusions of this study are: x (1) The observed nominal interest rates were predominantly set by governments, although there was some latitude for financial institutions to adjust effective interest rates through such practices as compensating balances on loans and more frequent compounding on deposits. (2) Administered interest rates were very "sticky," There was very little change in nominal rates over time, particularly in comparison to fluctuations in inflation rates. (3) The "stickiness" of the nominal rates meant that year-to-year variations in the real rates were primarily determined by variations in the inflation rates. (4) Real deposit rates were predominantly negative throughout the 1970-82 period. However, it should be noted that slightly negative real deposit rates also prevailed in most of the industrialized market economies, including the U.S., during this period. (5) Real lending rates on general credits were between 2 to 7 percentage points higher than deposit rates in the sample countries. These rates were also generally negative during the 1970-82 period, although in six of the ten sample countries average real rates ranged between -1.3% and +2.9%. (6) The sample countries' interest rate policies fell into three distinct groups: six countries had low average inflation rates and real rates that were not very negative on average, three countries had relatively high inflation rates and quite low average real rates, and one country (Uruguay) had high inflation but, in the middle of the sample period, moved to market determined interest rates, which swung from low to high real levels. (7) Countries with relatively high average inflation rates also generally had relatively low average real rates, indicating that the governments were unwilling or unable to set nominal rates in line with high rates of inflation. The exception is Uruguay after its reforms. (8) Uruguay was not the only country to undertake reforms. In most of the sample countries, nominal rates in the second half of the period tended to be somewhat higher and there was generally some increase in the average level of real interest rates. This suggests that the authorities took some measures to raise real rates--in accordance with "traditional" Bank recommendations. (9) However, most of the improvement in the average real rates in the 1976-82 period was attributable to a decline in inflation rates in the sample countries, especially during 1981-82, and, only to a lesser extent, the upward shift in the nominal rates. - xi - (10) Real rates in all the countries (including the U.S.) generally rose together in 1981 or 1982 and declined together during 1973 or 1974 and again in 1979 or 1980. These contemporaneous movements suggest similar factors were at work in the sample countries. In fact, the common element is the contemporaneous movements in inflation. (11) The hypothesis that interest rates are determined in the short run by flows of international capital, and thus are tied to industrialized country interest rates adjusted for devaluation, is not supported by the record of the ten dieveloping countries studied. v. The principal conclusions from the investigation of financial sector intervention and liberalization, in the seven countries are: (12) All the countries maintained substantial directed credit programs. Three types of instruments typically were used: (a) regulations on the portfolio composition of intermediaries; e.g., requirements to devote a certain portion of lending to specific activities; (b) Central Bank rediscounting- of credits to priority sectors, usually at subsidized rates; and (c) control of financial intermediaries through direct ownership. (13) Public sector borrowing to finance the fiscal deficit and public enterprises was an important factor in the sample countries. Regulations often existed which forced the financial system to hold low-interest government debt, thereby imposing substantial cost on the rest of the system. (14) The directed credit programs and the public sector borrowings combined to reduce the supply of credit available to non-preferred borrowers--the well known "crowding out" phenomenon. Increased competition for the remaining credit drove up interest rates when these were free, in some cases producing very high rates on non-preferential credits. When interest rates were constrained, crowding out greatly complicated the overall allocation of credit. (15) All of the sampled countries also maintained some form of administered interest rate regime, with this exception of Uruguay after 1978. The principal differences between the countries were in the relative size of the directed credit programs and in the interest rate differentials between preferiential and non-preferential credits. (16) All countries exercised control over the allocation of credit. Among the three low real interest countries the fraction of credit affected by directed allocation in 1982 rarnged from almost 100% in Nigeria to nearly 55% in Peru. In Uruguay, which - xii - underwent sweeping reforms during the 1974-1979 period, 37% of credit was still extended by the two government banks in 1982. Even among the higher real rate-low inflation countries there was substantial government control of credit allocation, from as much as 70% to figures in the neighborhood of 33%. (17) In general terms, at the end of 1982 the differentials between rates on deposits, general lending and preferential lending rates were fairly small in the low inflation-high real rate countries, with the exception of one or two programs. In the three high inflation-low real rate countries, the differentials were quite large. This difference can probably be explained by the simple fact that low inflation and low nominal interest rates effectively place a ceiling on the absolute size of the subsidies. High inflation provides more room for subsidies through large differentials, and because subsidizes can be larger there is a greater incentive to demand them. Also preferential rates were often lower than deposits rates in the high inflation-low real rate countries, an interest rate structure which encourages diversion of directed credit. (18) In all but one of the seven sample countries there were definite moves towards greater market-oriented financial sector policies, from major reform movements to more limited realignments in the structure of nominal interest rates and directed credit programs. This movement could well be interpreted as a growing acceptance of value of financial sector liberalization, in accordance with the new market-oriented perspective. However, the scope of market determination still remains quite constrained by many factors, including a wide array of government regulations. C. Sample Country Experience vi. A closer look at the evidence on the development of the real interest rates in the ten sample countries shows: Over the period 1970-82, the countries' policies toward real interest rates fell into three distinct groups. In the first six countries--Pakistan, Morocco, Thailand, Korea, Bangladesh and Kenya (in descending order of their average real deposit rates)-the average real interest rates on deposits (defined as the ex-post real rate) were somewhat negative during the period 1970-82, ranging from roughly zero to negative 7 percent. Average non-preferential loan rates were just negative or slightly positive in real terms. Preferential rates typically were above or just below deposit rates. While not exactly conforming to the standard policy advice, these deposit and loan rates were similar to the comparable average U.S. real rates during the same period, which were negative one percent and positive two percent, respectively. vii. A second set of three countries--Nigeria, Turkey and Peru--maintained real deposit rates which were, on average, quite negative over the period, ranging from -16.5% to -18.6%. Their non-preferential - xiii - lending rates also tended to be highly negative, althcough various financial devices such as discounting and compensating balances kept these rates above deposit rates. Preferential loan rates were often substantially below deposit rates. The last country, Uruguay, undertook a significant financial reform starting in 1974, switching from highly negative real deposit and lending rates to a regime in which interest rates were determined in an open capital market by 1978. viii. Uruguay was not the only country in the sample to reform its interest rate policy. Turkey, after 1980, increased the permissible nominal level for many interest rates and permitted market determination of some others. In combination with a sharp decline in Lnflation, this resulted in unprecedented high real rates, rates that reached +34% on short term credits at the end of 1982. Bangladesh, Pakistan, and even Nigeria achieved higher real rates during the second half of the period, but primarily though a reduction in the average rate of inflation. Peru increased the permissible ceilings on nominal interest rates beginning in 1978, however this increase was insufficient to compensate for the sharp escalation in inflation, producing lower average real rates in the second half of the period than the first. ix. The Uruguayan reforms included an opening up of the domestic financial markets to the international capital markets. However, the spread between nominal rates on domestic currency and foreign currency deposits remained relatively constant, despite the (preannounced) decline in the rate of devaluation. These results are at variance with the standard theories that suggest convergence between world and domestic interest rates (adjusted for devaluation) once the capital market is opened. Either the public's expectations were for a constant rate of devaluation, rather than the actual rate (which was preannounced during most of the period), or a growing risk premium was required on peso deposits to cover the growing threat of a maxi-devaluation, a devaluation which finally occurred in November 1982. Thailand also provided a test for the interest parity model, since it has a long history of an open financial market and a fully convertible currency. In the Thai case the model works reasonably well as the nominal term deposit rate remains fairly close to the devaluation adjusted U.S. Treasury Bill Rate, and some of the small difference in the two rates probably could be attributed to the differences in the two instruments. In all the other countries, however, neither expected devaluation nor expected inflation seemed to have much to do with the setting of interest rates. Thus real rates were largely determined by inflation. x. A country-by-country look at the wider question of financial sector policy reforms, in the seven country sub-samp:Le shows: (a) Bangladesh raised most ceilings on interesi: rates in late 1980. The government also loosened its institution-specific ceiling on credit expansion, relaxing some of the restrictions which had prevented the transfer of funds to banks constrained by their credit ceiling with a surplus of investment opportunities, from banks below their credit ceiling but without good investment opportunities. - xiv - (b) In Kenya, the minimum deposit rates and the maximum lending rates were increased between 1980 and 1982. Beyond these readjustments, Kenya did not undertake any sweeping reforms. In large part, this lack of reforms was attributable to the country's history of relative price stability and relatively market-oriented economic policies, which kept pressures from building to a level that would require major reforms. (c) Due to Thailand's long history as an open and relatively price stable economy, its policy makers were not forced to undertake massive reforms. However, the government's overriding policy commitment to a freely convertible currency did require the authorities to make some macroeconomic policy changes to manage developments which threatened convertibility. In particular, after roughly five years of increasing protectionism and in the face of sharply rising world interest rates, the authorities instituted a set of reforms in 1980, which included an upward adjustment in the interest rate structure. (d) Since 1978, Nigeria has been raising its interest rate structure slowly, though rates have remained far below historical inflation. Credit allocation remained highly controlled by the government, through a complex and sometimes inconsistent set of regulations. Up until 1981, when the countries oil revenues collapsed, the Nigerian authorities apparently felt little need to promote the domestic financial sector, as most of the country's investments were undertaken directly by the government with the oil earnings. The softening of the long term outlook for oil is likely to increase pressures for greater domestic resource mobilization, and improved financial intermediation in general. (e) In Turkey the financial sector was highly controlled by the authorities. Among the important government policy instruments were large directed credit programs and a highly complex set of interest rate controls. In 1980 some these interest rates were liberalized, including term deposit rates and the ceiling rates on general credits. In addition, the size of the directed credit programs were scaled back somewhat. By 1982, the newly liberalized interest rates reached extraordinarily high levels--up to +22.1% on term deposits and +34.3% on general credits--causing some serious difficulties for the heavily indebted firms in the corporate sector. These high real rates are due, in part, to the rapid decline in inflation and probably reflect subsidies required to cover the cost of large share of total credit which is still extended at unliberalized rates. In addition, fears of a devaluation may have pushed up rates in local currency. However, the authorities have made it a matter of announced policy to continue reducing the scope and complexity of preferential credit schemes. This should help rationalize the credit allocation process, reduce the amount of the cross-subsidization, and lower intermediation costs. - xv - (f) Peru initiated a shift in interest rate policy in 1978, which continued through 1982. Despite the massive upscaling of the interest rate structure, the adjustments in the ceiling rates lagged well behind the increases in inflation, so real interest rates on deposits remained quite negative, with the exception of 1981. The adjustments in the interest rates were also part a set of major reforms expressly aimed at giving ma.rket forces a larger role in the economy, which included opening cf both the goods and capital markets, the legalization of dollar t;ransactions such as deposits and loans, a reduction in the vast rLumber of controlled interest rates through a simplification of the preferential lending categories. Reserve requirements on deposits in local currency were also reduced and interest was paid on the remaining part. This led to a reduction in the inflation tax base, thereby increasing the inflation resulting from a given increase in central bank credit. In view this potentially explosive situation and the lack of progress towards hi'gher real interest rates, the Peruvian reforms must be judged to have been of rather limited success. (g) Uruguay, much like Peru and Turkey, had a history of extremely high inflation rates, though its experience began much earlier. The combination of a stagnating economy, balance of payments problems and high inflation prompted the authorities to begin a liberalization process in 1974 that was almost without precedent in its dimensions. By the end of 1978 virtually all interest rate controls had been dismantled, the fiscaL deficit was closed, sectoral credit guidelines and reserve requirements on domestic currency deposits were eliminated, and foreign currency transactions were legalized, including bank deposits and dollar loans. With the important exceptions of the operations of the publicly owned Banco de la Republica and the Banco F[ipotecario del Uruguay and the authorities' control over the exchange rate, control over the financial sector resided primarily in the hands of the private sector in 1982. xi. It is very important to note that, based on the evidence, financial sector liberalization is neither a simple matter, nor a painless one. Specifically, the success of the financial sector liberalization process is highly dependent on the mix of domestic fiscal, monetary, exchange, commercial and trade policies, particularly when the domestic financial market is open to international capital flows. For example, inconsistencies between fiscal and monetary policies, on the one hand, and exchange rate policies, on the other, can cause major disruptiLons of financial markets through inflows and outflows of capital. In countries where significant protection exists, financial liberalization may have the undesirable effect of providing additional credit to economically inefficient firms or, as in Uruguay, a boom-bust cycle based on credit. xii. On this point, the record shows that both Peru and lJruguay made major changes in their financial sector policies in the latter part of the seventies which, among things, opened the financial sector to international - xvi - markets. However, when the exchange rate policy became inconsistent with domestic monetary, fiscal, and wage policies, a common pattern emerged of either high real interest rates in the local currencies, and/or "dollarization" and capital flight. This experience can be contrasted to that of Thailand, which also began to experience large capital out flows through its very open financial system at the end of the seventies. However, Thailand was able to escape the full impact of the crisis which struck Peru, Uruguay and much of the rest of Latin America, because its initial macro-policy framework was much more consistent, and because it adjusted its monetary, fiscal and trade policies more rapidly to the changing conditions. While a full exploration of these two experiences lies beyond the scope of this paper, there is general agreement that one of the crucial lessons of the financial liberalization process in Latin American was the necessity of a consistent macroeconomic policy package when the capital account is "open." Thus, both policy makers contemplating financial sector liberalizations and proponents of such reforms must take serious note of this lesson. D. The Call for Greater Market-Oriented Financial Sector Policies xiii. The growing consensus among development policy analysts for greater market-orientation of financial sector policies has received its impetus from a number of sources including: (1) an increasing appreciation of the social costs imposed by large scale government intervention in financial markets, (2) a greater sense of the importance of the well-functioning financial markets for development, and (3) a growing doubt as to the effectiveness of many forms of intervention in achieving the professed policy goals. In particular, government policies such as interest rate controls and large directed credit programs severely distort the pattern of incentives in the economy and thus affect the allocation of resources, often with questionable efficiency and distributional implications. The very administration of such programs also absorbs a great deal of scarce resources, particularly skilled labor. Furthermore, the fungibility of financial resources and the politicized nature of the "non-price" rationing mechanisms result in substantial leakages of resources away from the targetted sectors or groups, making it difficult for credit programs to achieve their stated objectives. xiv. Briefly, the market-oriented perspective suggests that there should be three broad objectives of financial sector policies: (1) the mobilization of adequate amounts of resources, both domestically and internationally; (2) the allocation of credit to its socially most productive uses; and (3) the promotion of stability in the financial system, which will encourage development. In terms of interest rates, these objectives can best be achieved by allowing rates to vary according to the state of the business cycle, pressures on the foreign exchange market, and the risk, maturity and administrative cost of the individual transaction. Also subsidies and complex systems of directed credit should be avoided. This "new perspective" does, however, recognize the need for better financial market supervision to control fraud and mismanagement and for regulations which promote greater competitiveness in the financial - xvii - system. The new perspective also emphasizes the importsLnce of narrowing the differences between economic and financial rates of return, by reducing price distortions through a more consistent fiscal, monetary, exchange, commercial and trade policy mix. E. Implications for Development Financial Policy xv. Financial sector policy should shift its emphasis from a mechanical insistence on positive real rates to promotion of broad based improvements in the functioning of the financial system and greater consistency in the macroeconomic policy framework. While real interest rates are important, they are only an imperfect indicator of the general health of the financial system. The concept of the "real" interest rate simply does not permit any but the broadest judgment about the functioning of the financial system. Slightly negative real interent rates in a given year, or even over a period of time, can be explained by the composition of the country's price index, by taxation, by differences between nominal and effective interest rates, or by expectations regarding the future. Moreover, even tying local interest rates to world rates; does not guarantee positive real rates. The evidence presented in this paper suggests that, even in developing countries with open capital markets, real interest rates may vary sharply from year-to-year, and may even be negative in real terms for a number of years. xvi. Despite the foregoing qualifications, it is possible to identify situations when interest rates are excessively negative in real terms. However, the evidence of the paper indicates that negatLve real rates are generally not a problem, in and of themselves, but a symnptom of much larger problems: that the whole macroeconomic framework--monetary, fiscal, exchange rate and tariff policies, as well as the interest rate-are out of line. Moreover, abnormally high real rates, as well as abnormally low real rates, may be indicators of these problems. For example, as shown in the paper, very low real rates typically reflect high inflation, which in turn reflects the government's use of inflationary finance to cover large public sector deficits. The paper suggests that liberalizing financial markets, without closing the deficit, could actually produce higher inflation and higher nominal interest rates if the government continues to resort to inflationary finance. Alternatively, if the public sector tries to finance its deficit with debts at market rates, or if the government tries to shield some sectors from the effects of higher interest rates by providing low-interest, directed credit, then interest rates in the rest of the market may become abnormally high, as in the Turkish case. Judging from the experience of Uruguay, and perhaps Turkey, abnormally high real interest rates may also develop in open capital markets due to expectations of a maxi-devaluation, which in turn reflect a perceived inconsistency between the exchange rate policy and the other macroeconomic policies. The above cases suggest that liberalization of real rates, without paying sufficient attention to the underlying imbalances in the economy, could well destabilize the corporate and banking sectors, by creating significant cash flow and liquidity problems. - xviii - xvii. The scope and scale of low interest, directed credit programs should be reduced, in order to improve the functioning of the financial system. The sources surveyed for this paper indicate a number of problems associated with large amounts directed credit. In particular, the fungi- bility of financial resources and the politicized nature of the credit allocation process often lead to substantial leakages of resources from the target groups or sectors. Attempts to prevent such leakages are also problematic, since they necessitate imposing a degree of fragmentation on financial markets that thwarts the markets' role as efficient, decentra- lized allocators of resources. The evidence also suggests that the distortions produced by the directed credit programs often have question- able efficiency and distributional consequences, particularly when account is taken for the ultimate bearers of the implicit and explicit taxes inherent in such programs. Finally, the administration of these programs and the efforts taken to circumvent their regulations tend to absorb large amounts of scarce human resources without generating any social benefit. xviii. Two final points are worth noting: First, the urgency of such policy reforms is directly related to both the size of the programs and the size of the interest differentials. Small interest differentials and small programs simply cannot create large distortions. Second, even if financial distortions are small, the financial system may be efficiently allocating resources to economically inefficient projects if the price and profita- bility signals that it receives do not reflect economic efficiency. This problem once again highlights the need for a link between macroeconomic policy, trade and pricing policy, and financial sector policy in order to achieve development goals. I. INTRODUCTION 1.01 Broadly speaking, the recommendations for finarncial sector policies in developing countries have evolved along the following lines: The orthodoxy of the fifties and sixties was that interest rates should be kept low to stimulate investment. Rising world inflatiorL in the late sixties and the seventies focussed attention on the detrimental effects of negative real interest rates on the allocation of resources, the distribu- tion of income, and the mobilization of savings. As a result, policy recommendations often emphasized that lending and deposit: rates should be positive in real terms and intermediation spreads should provide an ade- quate return to financial institutions. In recent years, a growing consen- sus has developed regarding the need for greater reliance on market forces in the determination of interest rates and in the financial sector in general. 1.02 Several factors have contributed to the growing recognition of the need for more market-oriented financial sector policles. First, it has become exceedingly difficult either to prescribe a fixed structure of interest rates, or to expect that governments could adjust interest rates with sufficient speed to maintain stability in the financial markets and avoid massive flows of international capital, given the sharp increases in the level and variability of local inflation and of world interest rates. Second, there has been an increasing perception that welL-functioning financial markets are an important factor in development., As evidence has accumulated on the functioning of financial markets in developing coun- tries, it has become increasingly clear that the distortLons introduced by many government financial sector policies, particularly Interest rate controls, were substantial. Moreover, the effectiveness of many of these policies in attaining the intended policy objectives was also cast into doubt. 1.03 Another growing perception in the development 'Literature is that financial markets and interest rates cannot be considered in isolation; they are greatly influenced by what goes on in the rest of the economy. In particular, the importance of factors such as openness and distortions in the real side of the economy have been rather rudely brought to light in the last couple of years. For example, in some developing countries unprecedented high real interest rates have appeared, producing a crisis in the corporate sector by sharply increasing debt service burdens. To some extent these high real rates simply reflect the higher real rates in the world financial markets and capital market openness. However, the high real interest rate problem has been most acute in historically high infla- tion countries which have undertaken interest rate and exchange rate reforms. In some cases these high real rates appear to be related to inconsistencies between fiscal and monetary policy, exchange rate and trade policy, and expectations; in other cases they seem to be related to distress borrowing and/or the poor performance of a substantial portion of - 2 - outstanding credits, which in turn are largely a reflection of poor performance in the real economy. No clear consensus has formed on either the explanations for these high rates, or the optimum policy response. Nonetheless, the whole problem underscores the fact that formulating an "appropriate" interest rate policy is an exceedingly difficult task and involves far more than the real rate of interest. 1.04 This paper examines interest rate policies in developing countries by asking the following two questions: "Have interest rates been positive in real terms?" and, in light of the growing consensus over the need for more market-oriented policies, "Have market forces been important factors in the financial sectors of the developing countries?" 1.05 To answer these questions the paper proceeds as follows: Section 2 discusses the selection of the countries used in the investigation, the time frame, the interest rate series collected and the data sources. Section 2 also discusses two important methodological issues: (1) whether to focus on lending or deposit rates, and (2) the calculation of the "real" interest rate, i.e., either "ex-ante" using lagged inflation or "ex-post" using the actual inflation rate. Section 3 addresses the first question, using evidence on the real and nominal interest rates in the sample countries. Section 4 examines whether interest rates were set according to two well-known models: the Fisherian Model and the Uncovered Interest Rate Parity Model. Section 5 begins the discussion of the paper's second question--the degree of market orientation of financial sector policies-- with a brief statement of the arguments for greater reliance on market forces. Section 6 summarizes the evidence relating to the changing role of the market in the financial sectors of developing countries. II. THE SAMPLE COUNTRIES, DATA SOURCES AND SOME METHODOLOGICAL CONSIDERATIONS 2.01 This paper examines the financial sector policies pursued by a sample of ten developing countries over the period 1970 to 1982. These countries are: Bangladesh, Kenya, Republic of Korea, Morocco, Nigeria, Pakistan, Peru, Thailand, Turkey and Uruguay. To investigate the question of positive real interest rates, evidence is presented on nominal and real interest rates on term deposits, general short term credits, and a preferential lending category in each of the ten countries. The second issue investigated in this paper--the extent of financial market liberalization--is treated through a broad, qualitative examination of financial sector policies in a subset of seven of the ten countries. These analyses appear as Annexes 2 through 8 and are summarized in Section 7, which focuses on government intervention in financial markets, financial sector reforms, the structure of lending and deposit rates, and the relation between interest rate and exchange rate policies. 2.02 The ten countries were selected on the basis of: (1) diversity, both geographical and developmental; (2) the availability of interest rate series covering the 1970-82 period; and (3) the availability of data on the holdings of financial assets, specifically demand, savings and term accounts, plus other forms of widely held near-monies. The sample contains -3- countries from East Asia, South Asia, Sub-Saharan Africa, North Africa, Latin America and an OECD member. It is fairly representative of develop- ing countries in general, as it contains countries at very low income, low income and middle income levels. There are countries with inward looking economic policies and countries pursuing export-oriented growth strategies, and there is a major oil-exporter. 2.03 For inclusion in the seven-country sub-sample, an additional criteria was used: the availability of a reasonably up-to-date World Bank study of the financial sector, permitting a characterization of the broader policy setting. These seven countries are: Bangladesh, Kenya, Nigeria, Peru, Thailand, Turkey and Uruguay. 2.04 In addition to the World Bank financial sector studies, the sources for the data used in this study include the bulletins of the central banks for the interest rate and asset data, and the IMF's International Financial Statistics for the consumer prices, exchange rates and national income data. The interest rates quoted in the central bank publications typically are the rates established by governments, e.g., minimum or maximum deposit rates and maximum lending rates. The published figures usually do not reflect various common financial practices such as compounding, compensating balances required of borrowers, or free services rendered to depositors; nor do they reflect the impact of taxes on interest rates. Whenever the information was available, effective interest rates were used or computed: for example, rates were adjusted for compounding or discounting. Unfortunately, for most countries only unadjusted rates were available. Thus the figures presented here should be used primarily to identify the range of actual interest rates and should not be taken as overly precise. 2.05 Bearing this in mind, the first important methodological question is whether to cast the discussion in terms of lending rates or deposit rates. Some technical considerations suggest focusing on deposit rates. First, it is relatively easy to identify a "standard" deposit rate that is comparable across countries, but there is no similar "sitandard" lending rate; in a free market lending rates vary substantially by risk and matur- ity. Moreover, in the controlled markets of developing countries varying degrees of credit rationing occur, making direct comparLsons of lending rates difficult. Second, the available data predominantly refer to official rates and in practice, compensating balances, commissions, grace periods and taxes allow effective lending rates to diverge further from the official lending rates than compounding and taxes allow effective deposit rates to differ from official deposit rates. Again thia makes it prefer- able to compare deposit rates. Third and finally, the standard deposit rate provides a reasonable amount of information about the loan rates. This is because the standard deposit rate and a comparable loan rate should differ by a fairly constant margin within a country, reflecting country -4- specific intermediation costs and reserve requirements.l/ Across countries the differences in these margins are also likely to be small, relative to differences in the levels of interest rates. For these reasons most of the discussion of real rates will be focus on deposit rates, although lending rates also will be mentioned. 2.06 The second *ethodological issue is the appropriate calculation of the "real" rate. While a wide range of policy discussions express concern that interest rates be positive in real terms, i.e., in excess of the rate of change in prices, little is said about what price index should be used in comparison. In the conventional model of the demands for financial assets or credit, agents are assumed to make their decisions based on a comparison of interest rates with their expectations about future prices (including possibly the price of foreign exchange). However, such expecta- tions are not observable, nor is there general agreement regarding the "relevant" array of prices or interest rates. The typical proxy for the "real" rate involves a single interest rate adjusted either by some average of past changes in the consumer price index (and, for the exchange rate, past changes in the official exchange rate) or by some projection of declining inflation. However, in periods of rising inflation (or major devaluations) such as the 1970-80, such procedures systematically under- state investors' expected returns on credit and systematically overstate depositors' expected returns on financial assets, assuming the public understands that inflation is rising. In effect, using lagged inflation to calculate a real rate implicitly assumes that economic agents are system- atically fooled by rising inflation. 2.07 Such an assumption is highly unsatisfactory, particularly since many of the important conclusions to be drawn from a study of interest rates relate to the allocation of financial resources and the mobilization of financial savings, both of which depend heavily on the public's expecta- tions. In an attempt to provide a better proxy for the expected real interest rates, this paper concentrates its analysis on the "ex-post" realized rate, i.e., the nominal interest rate deflated by the actual price change over the relevant period. For example, the real interest rate for 1982 was calculated by deflating the nominal interest rate in effect in December 1982 by the annualized rate of change in consumer prices (or the exchange rate, when applicable) from December 1982 to June 1983. While not imputing perfect foresight, the authors feel that this method provides a better proxy for the expectations of depositors and borrowers than the usual method of averaging past inflation, particularly in periods of rising 1/ For a profit maximizing bank, the interest rate on a standard loan, R, should cover the marginal interest cost of deposits used to make the loan, D, multiplied by an adjustment for the reserve requirement, RR, plus intermediation costs expressed as a percentage of the loan, C, i.e., R - C + [ D/(1 - RR) ]. - 5 - inflation.2/ A six month time horizon was utilized in these calculations to reflect the short maturities of portfolios which characterize the finan- cial markets of the developing countries. However, in view of all the questions regarding both the interest rates and the appropriate choice of proxy for expectations it is worth repeating the warnirLg that the figures in this study should not be interpreted as a precise estimate of the real rate but only as a general indicator of the range of real interest rates.3/ III. THE AVERAGE LEVEL OF REAL INTEREST RATES: THE INTEREST RATE REGIME 3.01 The real interest rates policy regimes of the ten countries fall into three distinct groups, as measured by the average ex-post real interest rates for the period 1970-82. This division shows up in Table 1, which presents averages 4/ of year-end real interest rates in local currency on term deposits, general short term credits and preferential 2/ The ex-post real rate has become a standard approach for studying the extent to which inflationary expectations are incorporated into the interest rate. See for example E. Fama, "Short Term Interest Rates as Predictors of Inflation," American Economic Review, June 1975, pp. 269-82 and R. Saracoglu, "Expectations of Inflation and Interest Rate Determination," IMF Staff Papers, March 1984, pp. 141-78 and the works cited there. 3/ It should also be noted that the analysis is affected very little by the choice of lagged or future inflation as the deflator for the calculation of the real rates. While the choice cdoes affect the real rates on a year to year basis, it has little impact on the broad picture over a longer period of time. First, nominal interest rates were fairly constant over time in the sample, thuE real rates were primarily determined by the inflation rates. Second, inflation tended to move contemporaneously across the countries, thus the choice of lagged or future inflation primarily shifted the point in time at which real interest rates rose or fell, but made little impact on the relative levels of average real rates across count:ries. On this point, the interested reader is encouraged to compare Figure 1 in Section 3, which plot the nominal deposit rates against the Lnflation rates six months forward from December of the current year, to Figure IA in Annex 1, which plot the nominal deposit rates agaLnst the rates of inflation over the twelve months preceding Decembar of the current year. In addition, see Footnote 16 which also relates to this issue. 4/ The average is defined as the average compound real interest rate over the period. Thus it is the average growth of the real purchasing power of a one unit deposit over the period, or the average real cost of one unit of credit over the period. For the exact formula see Table 1, Note 1. - 6 - credits for each country for the period 1970 to 1982.5/ The groupings also shows up in Figure 1, which charts the end-year nominal term deposit rates and inflation rates over the same period.6/ The ex-post real term deposit rates can be read off the charts as roughly the difference between the two lines. The real rate is negative when the inflation rate lies above the deposit rate and positive when the opposite is true. 3.02 The first group of countries--Pakistan, Morocco, Korea, Thailand, Bangladesh and Kenya, in descending order of their average real deposit rates--maintained real rates which were only slightly negative when averaged over the whole period. These rates ranged from roughly zero in Pakistan to -6.8%, in Kenya. Real lending rates for short term credits were 2 to 7 percentage points above these rates, depending on the country, and ranged from about +3% to -1%. Preferential lending rates generally fell between the average deposit and the average lending rate. 3.03 Even though real deposit rates were, on average, not positive in these six countries, they did approximate the average real deposit rates prevailing in developed countries. In particular, the average real deposit rates for these countries ranged from rough equivalence to six percentage points below the comparable U.S. real deposit rate of -0.7%, which is displayed in the last line of Table 1.7/ Moreover, one would not expect the real rates to be exactly the same, even if financial markets were integrated or if both individual preferences and investment opportunities were the same across countries, because of cross-country differences in the 5/ As shown in the Annexes, Uruguay and Peru recently allowed deposits and credits denominated in foreign currency. These deposits and credits represented a substantial portion of total financial assets and liabilities, and rates on them approximated international levels. 6/ Annex 1 presents the raw data for Tables 1 through 4 and Figures 1 and 2. As shown in Figure 1 in Annex 1, the countries fall into the same three groups if past inflation is used to calculate real interest rates. 7/ Using a more complicated methodology, Saracoglu estimated that real interest rates in the Federal Republic of Germany, France, Japan and the U.K. were also negative during most of the 1970's. See Saracoglu op. cit. - 7 - Table 1 Average Real Interest Rates a/ (percent per annum) Deposit Lending Representative Country Rate Rate Preferential Rate e/ Pakistan 1970-82 0.1 2.2 1.5 Morocco 1974-82 -1.7 2.7 -1.8 Korea 1970-82 -4.1 -1.1 -8.3 Thailand 1970-82 -4.1 2.9 -4.6 Bangladesh 1971-82 -5.4 -1.3 -3.4 Kenya 1970-82 -6.8 -1.0 b/ 4.4 Uruguay 1970-82 -11.1 14.7 c/ #N/A Turkey 1974-82 -16.2 -13.6 -20.5 Nigeria 1970-82 -16.5 -11.8 -7.8 d/ Peru 1970-82 -18.6 -9.1 -24.8 U.S. 1970-82 -0.7 1.9 #N/A Sources: Annex 1 tables. U.S. figures are based on F'ederal Reserve Bulletin nominal rates and IMF CPI data. a! Average refers to the average compound real interest rate over the the period, i.e., Antilog([Ft( ln(l+rt) - ln(l+pt)) 1/n ) - 1 where rt - nominal rate of interest at end of year t, Pt - annualized inflation rate from end of year t to the following June, n - number of years. b/ 1977-82; the corresponding average real deposit rate was -4.7X and the average preferential lending rate was -3.8%. c/ 1976-82; the corresponding average real deposit rate was 0.9% and the prime lending rate was 4.6%. d/ 1978-82; the corresponding average real deposit rate was -10.8% and the average real general lending rate was -6.0% e/ Specifically, the preferential rates were as follows: loans against jute, jute goods and tea, Bangladesh; loans from the Agricultural Finance Corp., Kenya; preferred sector maximum, NLgeria; rediscounts from the Banco Agrario, Peru; export credits, ThaLland; and agricultural credits, Turkey. - 8 - Figure 1 Nominal Term Deposit Rate versus Inflation - NOMINAL INTEREST RATE ON TERM DEPOSITS (6 MONTH) --. INFLATION RATE (DECEMBER TO JUNE, ANNUALIZED) 80- 4' : X 20- 10- "',." " ', , -10- BANGLADESH 48- 308 50- KENYA 408 30- X 20- 0- KOREA -18- , I I I I I I I I I I , 1797 1972 1874 1978 1978 1880 1982 -9- Figure 1 (continued) NOMINAL INTEREST RATE ON TERM DEPOSITS (6 MONTH) ------ INFLATION RATE (DECEMBER TO JUNE, ANNUALIZED) 20- X15- ,, t h\ ~~~~~............ "' 5- MOROCCO 410- l 20 IS ~~~~~~~~' '' '' X * . I a 0 -20 30- 20- 3 0-_XE=v,,, Is- -5- PAKISTAN 1970 1972 1974 1976 1978 1989 1982 - 10 - Figure 1 (continued) NOMINAL INTEREST RATE ON TERM DEPOSITS (6 MONTH) ----- INFLATION RATE (DECEMBER TO JUNE, ANNUALIZED) 1208 3 - ........ .. . ... go PERU 30- 208 9r l 0-. 30, 0- TURKEY -970 - 187 1Q74 1 1Q7 1 1 150-~~97 .97 ,:6196ies1 - 11 - Figure 1 (continued) NOMINAL INTEREST RATE ON TERM DEIPOSITS (6 MONTH) --.-- INFLATION RATE (DECEMBER TO JUNE, ANNUALIZED) 408- a q URUGUAY -20- 25- 20- 0 - _5_ UNITED STATES -10 I. I I I I I I-74 7 I I I I 82 1075 1972 1974 1970 1S176 ices 192 - 12 - composition of the price index.8/ Also, differences in the tax treatment of deposit interest affect any comparison between U.S. and developing country interest rates. For example, a pre-tax real rate of -1% is equivalent to about -3.4% after taxes, given a nominal interest rate of 8% and a tax rate of 30%.9/ Since effective tax rates were probably much higher in the U.S.--because interest is often legally free of taxation in developing countries and, in any case, is often unreported to the tax officials--a comparison of pre-tax real returns exaggerates the relative attractiveness of U.S. deposits. 3.04 The last line of Table 1 also displays the average real U.S. Prime Rate, which can be used to roughly estimate an intermediation spread for the U.S. A comparison of the differences between lending and deposit rates in the first six developing countries and the corresponding spread for the U.S. indicates that spreads in these six developing country were reasonable--roughly one to three percentage points greater than the U.S. margin. Also, the preferential lending rates in the six countries were, by-and-large, above the deposit rates. In sum, the evidence suggests that in these six countries interest rate policy was similar to policies in developed countries. 3.05 The second group of countries--Turkey, Peru, and Nigeria--clearly pursued policies of low interest rates. The average real deposit rates over the period were -16.2%, -18.6% and -16.5% respectively, substantially negative in real terms. While the lending rates shown in Table 1 are somewhat above the deposit rates, the true spreads probably were much larger, since the full effects of commissions, compensating balances and discounting could not be accurately factored into the ceiling rates. Finally, in two of the three cases the reported preferential lending rates actually fell below the deposit rates. Thus, over much the 1970-82 period these three countries followed an interest rate policy directly opposed to standard policy advice to maintain positive real rates. However, it must be pointed out that under the pressures of serious economic crisis both Turkey and Peru recently attempted interest rate liberalizations.10/ 8/ For example, the rapid escalation in petroleum and transport prices would produce higher measured inflation rates in countries where these goods and services have larger weights in the consumer price index and where these prices changes were more fully reflected in higher prices to consumers. 9/ The real interest rate after taxes is (1 + (1-tx)*r/(l+p), where tx is the tax rate, r is the nominal rate, and p is the rate of inflation. This is approximately (1-tx)*r-p or using the text numbers (1.0 - 0.3)*0.08 - 0.09 - -3.4%. For a further discussion of the impact of taxes see M. Darby, "The Financial and Tax Effects of Monetary Policy on Interest Rates," Economic Inquiry, June 1975, pp. 266-276 and V. Tanzi, "Inflationary Expectations, Economic Activity, Taxes and Interest Rates," American Economic Review, March 1980, pp. 12-28. 10/ See Section 6 and Annexes 5 and 7 for more complete descriptions. - 13 - 3.06 The remaining country--UrugIuay--is set apart from the other two groups, first because it had an average real deposit rate over the period that fell between the two groups, and second, but most importantly, because it undertook a major interest rate policy shift in 1975, about the middle of the sample period. This shift is obscured in the average figures but appears clearly in Figure 1. Between 1971 and 1973, Uruguayan real interest rates were among the lowest recorded of the ter. countrLes. How- ever, beginning in 1974 the Uruguayan capital market was opened and interest rate controls were lifted gradually, so that by 1978 most interest rates were determined by market forces and closely linked to international rates. One rather interesting observation should be maele here: The policy of market determination of interest rates did not imply positive real deposit rates in Uruguay in every year. Real deposit rates shifted back and forth between positive and negative levels after the! reforms, as shown in Figure 1. Some of the factors behind this outcome will be discussed in Sections 4 and 6. 3.07 Aside from Uruguay, a number of the other sample countries also changed their interest rate policies, as shown in Figure 1. Table 2 summarizes the major changes in the nominal deposit rates.11/ Bangladesh raised nominal rates between 1974 and 1976, and again in 1980. Kenya and Thailand raised nominal rates in 1981 and 1980, respectively. Pakistan and Morocco raised rates gradually. In contrast to the other five countries, Korea adjusted its interest rates frequently throughout the period, with nominal term deposit rates ranging from 8% to 17%. In the high inflation- low real rate group, all three countries made some changes in the level of nominal rates: Turkey embarked on a policy of greater :reliance on market forces for determining rates on deposits and some credit:s in 1980; Peru shifted to a policy of higher nominal rates between 1978 and 1982; and Nigeria raised rates a few percentage points between 1978 and 1982. As in Uruguay, these changes generally followed periods of substantially negative real rates: e.g. Bangladesh (1972-73 and, to a much lesser extent, 1976-79); Kenya (1972-80); Thailand (1978-79); Pakistan (1971-75); Turkey (1973-78); Peru (1972-77); and Nigeria (1970-77). 3.08 The upward adjustments in the nominal rates were in apparent response to the problems created by the low real rates and in line with standard policy advice. However, the results of the adjustments were mixed, either in terms of achieving positive real rates, or even higher real rates. Generally speaking, the nominal rates were not raised enough to even exceed past inflation. Thus, it would be hard to argue that the interest rates were reset to produce positive real rates ex-ante. Instead the reforms relied heavily, and not always successfully, on falling infla- tion for achieving subsequent positive real rates, ex-post. In Bangladesh 11/ More detailed discussions of these reforms are contained in Section 6 and in the Country Annexes. In each case, these changes were accompanied by similar changes in the nominal rates for general credits. - 14 - (1974-75, and 1981), Morocco (1979 and 1982), Pakistan (1975-78) and Thailand (1981-82) real rates became positive after the changes in the nominal rates largely due to declines in inflation, as shown in Figure 1. In Korea the role of declining inflation is even clearer; nominal rates were lowered slightly in 1981 and sharply in 1982, but inflation dropped so swiftly that real rates shifted from slightly negative to fairly positive levels. Among the low inflation-high real rate group, only in Kenya (1982) was the rise in the nominal rates the principal factor in achieving positive real rates. Table 2 Major Policy Changes in Nominal Deposit Rates a/ (percent per annum) Reform Pre-reform Post-reform Country Period Interest Rate b/ Interest Rate c/ Bangladesh 1974-76 4.8 7.5 Bangladesh 1980 7.5 13.0 Kenya 1980-82 5.4 13.2 Pakistan 1973-75 5.6 8.9 Morocco 1978-82 4.5 8.5 Thailand 1980 7.0 10.0 Uruguay 1974-79 18.0 50.6 Turkey 1980-82 12.0 50.0 Nigeria 1978 3.0 5.0 Nigeria 1982 6.0 8.5 Peru 1978-82 14.0 71.2 Sources: Annex 1, Summary Table 4. a/ Each of these increases in nominal deposit rates was accompanied by a similar increase in the rates for general credits. See Annex 1, Summary Table 5. b/ The "pre-reform' rates refer to the rates prevailing at the end of the year preceding the reform period. c/ The "post-reform" rates refer to the rates prevailing at the end of the last year of the reform period. 3.09 Among the high inflation-low real rate group, the experience with interest rate reforms was even more mixed. In Nigeria, as in the first group, the decline in the rate of inflation was more important than the - 15 - increase in the nominal rates in raising the level of real rates. In Turkey the increase in the nominal rates was much larger than in Nigeria, and correspondingly was a mDre important factor in the appearance of higher real rates, ex-post. Together with the rapid decline in inflation during 1980-82, the Turkish interest rate reforms resulted in markedly higher real rates in 1980-82, rates that reached as high as +22.1% for term deposits and +34.3% for general credits at the end of 1982. These high rate were in striking contrast to the extraordinarily negative real rates--about -60.0 percent--that prevailed at the end of 1978. However, it must be pointed out that these liberalized rates applied only to a rela- tively small fraction of all financial transactions, particularly on the lending side. Thus, to some degree, the high real rates on general credits reflected the large amount of low interest, directed credit which the banks were required to extend. In addition, fears of devaluation may have pushed up rates in local currency. Finally, Peru also switched to a policy of substantially higher nominal rates during the 1978-82 period, but surging inflation generally kept real rates negative, rendering the reforms fairly ineffective in raising real rates. 3.10 In sum, over most or all of the 1970-82 period, six of the ten countries studied followed reasonable interest rate policies and two others--Uruguay and Turkey--switched to policies of the type of policies which are typically recommended. Thus, overall, there was a fair degree of concordance with the standard interest rate policy advice in the ten sampled countries. 3.11 It is also worth inquiring whether acceptance of this policy perspective has increased over the period, i.e., whether real rates were on average higher during the second half of the period (1977-82) than the first half (1970-76). As shown in Table 2, the major changes in nominal rates generally occurred after 1977. Judging from the increases in average real deposit and lending rates in the 1977-82 period over the 1970-76 period, which are displayed in Table 3, the interest rate performance improved on average between the two periods. This improvement occurred through the combined effects of the steady rise in nomirnal rates and, most importantly, lower average inflation. 3.12 The improvements in interest rate performance were strongest in Uruguay, due to the sweeping reforms of 1974-79, and in Bangladesh and Nigeria, due to marked declines in inflation. However, Nigerian real rates remained very low despite this improvement. Table 3 also shows that the two other low real rate countries--Peru and Turkey--suffered sharp declines in the average levels of real interest rates for the second half of the 1970-82 period. However, these figures mask two very different patterns in the development of real interest rates. In Turkey, the lower average is largely due to the extraordinary negative levels reached in 1977-79, before the 1980 reforms. In Peru, the decline in the average reflects the failure of the interest rate reforms to keep pace with rising irLflation. This is clearly evident in Table 4, which displays the average rates for the 1970-80 and 1981-82 periods. The real rates show an shaLrp increase in Turkey and a slight decline in Peru. - 16 - Table 3 Average Real Interest Rates in 1970-76 and 1977-82 aT (percent per annum) 1970-76 1977-82 Term Gen. Pref. Term Gen. Pref. Country Deposit Credit Credit Deposit Credit Credit Pakistan -2.3 0.3 -0.7 3.0 4.4 4.1 Morocco b/ -3.2 1.7 -2.2 -0.9 3.2 -1.6 Korea -4.4 -0.4 -9.6 -3.8 -1.9 -6.8 Thailand -4.6 2.5 -4.1 -3.5 3.3 -5.1 Bangladesh c/ -9.9 -5.0 -6.8 -0.8 2.6 0.1 Kenya -8.7 - -6.0 -4.5 -1.0 -2.6 Uruguay -10.9 - - 5.3 18.0 - Turkey d/ -10.9 -8.0 -9.0 -19.5 -17.2 -27.3 Nigeria -20.4 -15.4 - -11.7 -7.4 -7.8 Peru -11.5 -3.8 -14.1 -26.2 -14.9 -35.7 Sources: Annex 1, Tables 1-3. a/ See Table 1, Note 1 for definition of average real rate and Note 5 for the specific categories of preferential credits. A dash indicates less than two observations. b/ All Moroccan series begin in 1974. c/ All Bangladesh series begin in 1971. d/ All Turkish series begin in 1974. 3.13 An examination of Figure 1 reveals another interesting pattern. Each of the ten countries, and the U.S., experienced a noticeable decline in its annual real interest rates around 1973-74 and again around 1979-80, and a noticeable rise around 1981-82. Table 4 highlights the 1981-82 upswing by comparing the average real interest rates over the years 1970-80 to those of 1981-82 for each of the ten countries and the U.S. As shown there, real interest rates rose sharply in all the countries except Peru. These contemporaneous swings in the annual real interest rates suggest that common factors were at work in all of the countries, despite their seemingly different economies and degrees of financial openness. The following section offers some explanations for these contemporaneous move- ments and provides a discussion of the determination of interest rates on a year-to-year basis. - 17 - Table 4 Average Real Interest Rates, 1970-80 and 1981-82 a_ (percent per annum) 1970-80 1980-82 Term Gen. Pref. Term Gen. Pref. Country Deposit Credit Credit Deposit, Credit Credit Pakistan -0.8 1.4 0.7 5.4 6.2 6.3 Morocco b/ -2.9 1.7 -2.7 2.6 6.2 1.5 Korea -5.8 -2.6 -10.8 5.8 7.8 6.8 Thailand -5.9 1.2 -5.8 6.1 12.8 2.3 Bangladesh c/ -7.7 -3.3 5.2 6.8 9.6 5.6 Kenya -7.9 -2.4 d/ -5.6 -0.5 2.0 -0.6 Uruguay -15.3 11.2 e/ - 15.6 23.9 - Turkey f/ -23.0 -22.0 -23.6 17.9 29.6 -6.5 Nigeria -17.6 -12.9 -8.4 g/ -10.2 -5.6 -7.0 Peru -18.1 -9.4 -21.8 -21.7 -7.2 -39.6 U.S. -1.6 0.8 - 4.6 7.9 - Sources: Annex 1, Tables 1-3, and the U.S. Federal Reserve Bulletin, for the U.S. data. a! See Table 1, Note 1 for definition of average real rate and Note 5 for the specific categories of preferential credits. Also a dash indicates less than two observations. b/ All Moroccan series begin in 1974. c/ All Bangladesh series begin in 1971. d/ 1977-80; the corresponding rates for term deposits anLd preferential credits were -6.4% and -3.4%, respectively. e/ 1976-80; the corresponding rate for term deposits waim -4.5%. f/ All Turkish series begin in 1974. &/ 1978-80; the corresponding rates for term deposits and general credits were -11.3% and -6.4%, respectively. - 18 - IV. THE DETERMINATION OF INTEREST RATES: NOMINAL AND REAL 4.01 As stated in Section 2, the interest rates quoted in this study are not market rates, with the exception of the post-78 Uruguayan figures. Instead the rates were either set by the government or reflect such statu- tory rate ceilings or floors.12/ Thus, the movement of interest rates discussed in this study is principally the mDvement of government adminis- tered interest rates. An investigation into the determinants of these interest rates is therefore really an examination of government behavior in setting interest rates. 4.02 Before proceeding with this investigation, it is necessary to point out that government intervention in financial markets is pervasive, even in the industrialized countries. First, reserve requirements and taxes affect the levels of interest rates in all countries. Second, controls are often placed on interest rates. For example, even the U.S. financial system, which is among the most market-oriented, was subject to Regulation Q until 1983. This regulation established ceilings on the interest rates paid on many important classes of deposits. Since interven- tion exists everywhere, the relevant issue is its impact not its existence. 4.03 A useful basis for investigating the impact of government rate setting is a comparison between the observed rates and those that might have occurred had a free market prevailed. This standard is useful because it provides a convenient benchmark for comparison, and because recent financial sector work has increasingly called for greater reliance on market forces in the determination of interest rates. Thus the question is: "Did governments set rates so as to simulate market rates." 4.04 To answer this question, it is necessary to have a broad under- standing of what determines market rates. Here there are basically two theories. The most well known theory, and the one that forms the basis of the standard recommendations on real interest rates, argues that competi- tive financial markets would establish nominal interest rates on deposits that are positive in real terms, because savers must be induced to hold financial rather than real assets, and, on average, real assets grow in nominal terms at the rate of inflation. Thus, the nominal deposit interest rate must equal the expected inflation rate plus a small underlying real rate. This real rate provides the incentive to hold financial rather than real assets. Lending rates, in turn, will also be positive in real terms, since they are based on the cost of deposits--the rate paid to depositors--plus a margin covering the cost of intermediation: reserve 12/ In the case of Pakistan a weighted average of rates subject to government controls was reported and in the cases of Turkey and Peru an attempt was made to capture the effect of discounting and compounding on the ceiling rates. - 19 - requirements, taxes, risk, administrative costs, overhead and the return to equity. This theory is know as Fisher's Theorem.13/ 4.05 An alternative, more recent theory suggests that the foregoing Fisher theorem--Nominal Rate = Real Rate + Expected Inflation--is not the appropriate model for market determined interest rates in an open economy. The more recent theory stresses the potential substitutions between assets denominated in domestic currency and assets denominated in foreign currency, rather than the substitution between goods and assets that forms the basis of the Fisher Equation. This theory predicts that the nominal interest rate on domestic assets will equal the "world" interest rate, adjusted for the expected rate of devaluation (and for risk). According to the theory, this condition--Uncovered Interest Parity--is assured by fluid international capital flows, which rapidly respond to any divergence in the domestic and world rates. For example, suppose expectations of a larger devaluation were to develop, because of an expansionary monetary and fiscal policy or a decline in export prices. An incipient capital outflow would raise local interest rates until the marginal asset holders were just indifferent between foreign and local currency assets, i.e., until the interest differential or spread between local currency and foreign currency assets just covered their expectation of devaluation.L 4, 4.06 Notice that the interest parity theory and the Fisher theory may yield significantly different results if the expected rate of devaluation is not equal to the expected difference between local anid world inflation.15/ In particular, if the expected rate of devaluation substan- tially exceeds the expected inflation differential, because the currency had become obviously overvalued, then local interest rates might reach extremely high real levels. Such high real rates simply would reflect the public's increased desire to borrow in local currency and to lend or deposit in dollars. Thus, the effects of expected devaLuation provides one explanation of the abnormally high real rates recently observed in some middle income countries. 13/ It is worth noting that (1) Fisher actually did not claim that positive real rates would prevail in each and every year, nor even on average, see I. Fisher, The Theory of Interest (MacMillian, 1930), and (2) that the effect of inflation would differ, depending on whether it was foreseen or unforeseen. Fama's work Mp. cit. suggests that expected inflation was fully incorporated into U.S. Treasury Bill rates. However, recent evidence has raised some questions about the general empirical validity of the theory, see L. Summers, "The Non-adjustment of Nominal Interest Rates: A Study of the Fisher Effect," in J. Tobin Macroeconomics: Prices and Quantities, Brookings, Washington, DC, 1983 and R. Saracoglu op. cit. and works cited there. 14/ A similar argument can be made for lending rates, althoughl that spread is not investigated in detail here. 15/ The two theories also could yield different results if the risk premium on one of the currencies is significant. - 20 - 4.07 In addition to the case where expectations of devaluation exceed the differential in inflationary expections, an alternative case exists, namely: If the expected rate of devaluation became significantly less than the expected differential in inflation rates, then market-clearing interest rates in local currency rates would become depressed, possibly even negative in real terms according to the Fisher equation. This would reflect the public's increased desire to borrow in foreign currency and lend or deposit in local currency. The point here is that recommendations for market determined interest rates and recommendations for positive real interest rates can be inconsistent if market interest rates are determined in accordance with the Uncovered Interest Rate Parity Model. 4.08 "Do governments set interest rates in accordance with either the Fisherian Model or the Uncovered Interest Parity Model?" Judging by the data collected this study, the answer is no. In general, the administered rates were at best only partially adjusted to maintain real returns and real costs of credit in the face of actual inflation or devaluation. 4.09 Figure 2 illustrates the relationship between the real rate of interest and inflation. If nominal rates had been set according to the Fisher Model, then the real rates would have remained stable and would show up in the graphs as horizontal lines or, given errors in expectations, would vary randomly around a constant level. A quick glance at Figure 2 reveals that real interest rates do not follow this pattern (the U.S. included). Instead they are basically a mirror image of the inflation rate. This means that governments typically adjusted the nominal interest rate by much less than actual inflation, leaving variations in the real rate to be largely determined by variations in inflation.16/ 4.10 The observation that the inflation rate predominantly determined the real rates also explains the contemporaneous variation in the annual real interest rates across countries (again see Figure 2). Specifically, real rates moved together because domestic inflation rates moved together, and because domestic nominal rates were not fully adjusted for future inflation. In particular, real rates declined sharply around 1973-74 and again around 1979-80 in both the sample countries and the U.S., 16/ This pattern also shows up in some regression analyses of nominal interest rates undertaken as background for this paper. Regressions of the nominal interest rates on future and lagged inflation yielded statistically insignificant coefficients for both variables, rather than coefficients summing to one, as would be implied by the Fisherian Theory. In other words, the nominal interest rate was fairly independent of the inflation rate, whether future or lagged. This, in turn, implies the real rate is largely a function of the inflation rate. These regression results also support the view that it matters little whether lagged or future inflation is used as a proxy for expectations; since nominal rates were fairly constant over the period, the difference between using lagged and future inflation rates only affects the timing of the variation in real rates, not the average real rate. (See also Footnote 3). - 21 - due to the oil-price shocks and the rise in worldwide Lnflation.17/ In 1981, and in most cases 1982, real rates were sharply higher. This was primarily due to a general decline in world inflation, although increases in local nominal rates also played a role (See Sections 3 and 6). 4.11 Finally, differences in average real interest rates over the period largely reflect differences in average inflation rates: Countries with higher average real rates tended to be countries with lower average inflation. Lower rates of inflation permitted these countries to maintain low nominal interest rates without having real rates which were excessively negative. Countries with highly negative real rates on average tended to be countries with higher average inflation. This indicates that in these countries governments were typically unwilling or unable to set nominal interest rates in line with average inflation. The exception is in Uruguay after 1978, when rates were set in the free market. Given this historical pattern of government policies toward nominal interest rates it seems that maintaining a low rate of inflation is critical to maintaining a stable real interest rate policy. 4.12 If anything, the Uncovered Interest Parity Ilodel fares even worse than the Fisher equation as a theory of government rai:e setting. Figure 3 graphs the local nominal deposit rate in each country and the U.S. Treasury bill rate adjusted for the ex-post rate of devaluation. If uncovered interest parity had held, then the two lines would have moved roughly in parallel. However, Figure 3 shows that the gap betweean the two rates fluctuated wildly. This fluctuation indicates governments did not adjust the deposit rate to reflect future devaluation as would have occurred with more open capital markets. 4.13 As mentioned above, Uruguay, from 1978 onward, was the only case in the sample where interest rates were allowed to be freely determined in an open capital market. After the reforms, Uruguayans could deposit and borrow locally in either dollars or pesos and there mere no restrictions in capital flows. In addition, reserve requirements were eliminated in 1979 and there were no taxes on interest rates. Thus, an examination of Uruguay in this period provides an idea of the behavior of a free market interest rate in a financially open, developing economy. The following discussion suggests that the uncovered interest parity model works tolerably well, provided it is assumed that expectations of devaluation were fairly constant. 17/ It could be argued that governments kept nominaL interest rates low in an effort to manipulate inflationary expectatioas, i.e., not to be seen as admitting that inflation will be higher in the future. Clearly, such a policy is extremely limited in its potential effectiveness, since its credibility is rapidly eroded by negative and real rates, ex-post. - 22 - FigEur 2 Ex-post Real Term Deposit Rate versus Inflation - EX-POST REAL INTEREST RATE ON TERM DEPOSITS <8 MONTH) . INfLATION RATE CDECEHBER TO JUNE, ANNUALIZED) 130 le0 70 X 40,-^ -20 / -50 BANGLADESH -e0 130- 70- X 48- -20- -35 KENYA -I I I I I Ioo 138- 78- X o 4 - - .. . .'-------.... - -20-._.8 -50 KOREA -as I97 I I I1978 I I 1 1970 1972 1974 1978 1978 190e 1982 - 23 - Figure 2 (continued) - EX-POST REAL DiTEREST RATE ON TERM DEPOS1TS CO MONTH) ---- INFLATION RATE CDECEB4ER TO JUNE, ANNUALCZED) 130- lee- 70- X 48- 1 ............... ......................,,,,... -.... ,,,._ -20- 6-8 MOROCCO 138- leg- 78- 1800 130- 70- 4I . , . … -20- -50 PAKISTAN -80- I I I I I I I I I . 1970 1972 1974 1976 19711 1980 1982 - 24 - Figure 2 (continued) EX-POST REAL INTEREST RATE ON TERH DEPOSITS (a MONTH) --. INFLATION RATE (DECEMBER TO JIJNE, ANNUALIZED) 160- 130- 188- 708 408 -20 160- 130- t00- 70- A 40 -. -20- -50- THAILAND -80- I - X l l l 180 - : 130- 100- : ' 70- . ''. 40- 10- ....* *...--- .. .. -20 -50 TURKEY -80- 1970 1972 1974 1076 1978 1980 1982 - 25 - Figure 2 (continuedp EX-OST REAL INTEREST RATE ON TERIM DEPOSITS CO MONTH) . INFLATION RATE (DECEtUER TO %ANE, ANNUALIZED) 160- 130- le- . ---. 709 i80- 10.. -20- -so - -70- UITED STATES -69a- UNTE TAE 1970 1972 1i974 1970 1978 198n 1982 - 26 - Figure 3 Nominal Term Deposit Rate vs Devaluation-adjusted US T-Bill Rate - NOMINAL INTEREST RATES ON TERM DEPOSITS CO MONTH) .NOMINAL 6 MO. US T-3ILL RATE, ADJUSTED FOR DEVALUATION 120-. . x .9........ 39- O~~~~~~~~~- ------,,---, . ... . . -39- BANGLADESH X~ ~ ~~~~~~~~~~---- ---------. -30- KENYA -69- 120- 90- X eo- ' .... 30- -30 KOREA 1970 1972 1974 1978 1978 1980 1982 - 27 - Figure 3 (continued) NOMINAL INTEREST RATES ON TERM DEPOSITS C6 MONTH) . NOMINAL 6 MO. US T-SILL RATE, ADJUSTED FOR DEVALUATION 160 31.9 O-,9.-. . ...*-* -So MOROCCO -68-1 I * --T 120- 3130- ..... 139 -SO- NIGERIA 128 - X 69 ' ''' * SO- .. " " O- '. . - ~~~~..... .. ........ -358 PAKISTAN -60- - * I - I I I I I I 1970 1972 1974 1976 1978 19s 196Z - 28 - Figure 3 (continued) - NOMINAL INTEREST RATES ON TERM DEPOSITS CO MONTH) .-- NOM33rAL 6 MO. US T-FILL RATE, ADJUSTED FOR DEVALUATION 50- 30- 60- -30 - PERU 10 90 e460- 30 0. -30 THAILAND -60- 150- ." " 120- 90- . .". 30- 0-. ,*-- -30- TURKEY -80- I 97I 149 1 1 9- I 9 1970 1972 1974 1978 1978 Igoe 1 98Z - 29 - Figure 3 (continued) -NOMINAL INTEREST RATES ON TERM DEPOSITS CO MONTH) ..... NOMINAL B MO. US T-WILL RATE, ADJUSTED FOR DEVALUATION 159- : 90-~~ .' '." . x 0 69 - '- =i:: r URUGUAY 19710 1972 1974 1976 1976 1969 1962 - 30 - Figurei Nominal Rates on Domestic Currency and US$ Term Deposits Uruguay: 1978-82 80- 70- 80- se- %40 38- s _ 2e0 10 -........... 0 -.- " . 1 2 3 4 1 2 3 4 1 2 3 4 i 2 3 4 t 2 3 4 1978 1 979 1980 1 981 1982 - DOMESTIC CURRENCY RATES ....DOLLAR RATES - 31 - 4.14 Figure 4 plots the nominal interest rates on Feso and dollar deposits in Uruguay in each quarter between 1978 and 1982. As shown there, it took a few quarters for the market to adjust to its new freedom, but afterwards the spread between peso and dollar deposit rates remained fairly constant from the end of 1978 through the end of 1981. 18/ In particular, the spread fell from around 40%, in the first three quarters of 1978, to the 30-35% range in the last quarter, where it generally remained until mid-1982. After mid-1982, the spread shot up, reflecting the public's growing expectations of a maxi-devaluation--one that finally took place in November. Three of the observations with spreads outside the 30-35% range (below) occurred in the second and third quarters of 1981 and the first of 1982, when the Central Bank and the Banco de la Republica respectively offered inexpensive forward contracts for peso depositors. 19/ 4.15 The relatively constant spread between peso and dollar deposit rates implies that the real interest rate in local currency rose over most of this period. This rise was due to (1) the rise in dollar interest rates worldwide, and (2) the falling rate of inflation in Uruguay. By the end of 1981, the real deposit rate in pesos had reached 32.9%, ex-post. This experience illustrates the point that an open capital maLrket may produce exceptionally high positive real interest rates. 4.16 It should also be noted that the relatively constant spread between peso and dollar deposit rates in fact did not reflect the ex-post rate of devaluation. Between 1978 and mid-1982, the UrLguayan government slowed the rate of devaluation as an anti-inflationary umeasure. However, the spread did not decline by the same amount, as might have been expected from the theory. Moreover, during much of this period i:he rate of devalua- tion was pre-announced for the following six months. Tlus, the uncovered interest rate parity theorem can only be said to hold if it is assumed that the public's expectations were constant. This implies t:hat either (1) expectations were incorrect for about two and one-half years; or (2) the public's expectations of devaluation reflected not only the pre-announce- ment, but what was perceived as an increasing risk of a maxi-devaluation in 18/ The actual percentage point spreads between the nomninal 6 month peso deposit and the nominal 6 month dollar deposit, from 1978 Ql to 1980 Q4, are as follows: 41.4, 38.8, 42.8, 34.6, 34.0, 30.3, 32.4, 38.7, 34.2, 39.7, 36.7, 35.7, 33.5, 27.8, 29.2, 34.3, 28.6, 33.1, 45.7, and 56.0. 19/ In J. Hanson and J. Demelo, "External Shocks, Financial Reforms and Stabilization Attempts in Uruguay: 1974-1983," WorLd Development, 1985 regression analysis is presented which statistically supports the hypotheses of a constant spread between the peso and dollar deposit rates in this period, and of the spread-reducing effects of the guarantees. - 32 - excess of the schedule, owing to an increasing overvaluation of the Uruguayan peso.20/ V. FINANCIAL SECTOR LIBERALIZATION: THE "NEW" VIEW 5.01 A growing consensus has been forming in the development litera- ture regarding appropriate financial sector policies.21/ This "new" view eschews the "standard" policy prescription of simply maintaining positive real interest rates. Instead it emphasizes the need to achieve a general improvement in the functioning of the financial sector, through greater reliance on market forces. With respect to interest rate policies, the new view recognizes that in most developing countries interest rates do not fully reflect market forces but are influenced substantially by government interventions. These interventions often prevent interest rates from effectively performing the allocative and incentive functions of market determined prices. Instead, non-price rationing of credit at below-market rates plays an important role in financial markets and a large number of transactions either occur in fragmented or foreign markets or are supplanted by inefficient forms of self-finance. A growing recognition of the economic costS of the distortions and market failures induced by many forms of government intervention in financial markets, plus increased doubts as to the effectiveness of many such programs, have provided much of the impetus behind the wider acceptance of the more market-oriented approach to financial sector policy. 5.02 The objections raised to extensive and complex regimes of finan- cial sector interventions center on: (1) the rationality of the implicit incentive structure which develops, (2) the real costs associated with the 20/ This overvaluation reflected many factors: (1) the maintenance of a rate of devaluation below the rate of inflation; (2) the 1979 terms of trade shock; (3) the potential collapse of the Argentine export market--a loss which actually occurred after 1981; (4) the dependence on volatile foreign capital inflows to maintain the schedule of devaluations--an inflow which slowed sharply after the Mexican suspension of foreign debt service in August 1982; and 5) the risk that the Uruguayan fiscal deficit could explode at any time and require inflationary finance--an explosion which actually occurred in late 1981. See J. Hanson and J. DeMelo, "The Uruguayan Experience with Stabilization and Liberalization,1974-1981", Journal of Interamerican Studies and World Affairs, Nov. 1983 pp. 477-508 for a discussion of the pre-announcement policy and its relation to the overvaluation. 21/ Two seminal books for this perspective are Ronald I. McKinnon, Money and Capital in Economic Development, (Washington, D.C.: Brookings Institute, 1973); and Edward Shaw, Financial Deepening in Economic Development, (New York: Oxford University Press, 1973). Much of this "new" perspective, as it relates to World Bank work, can be found in Millard Long, "Review of Financial Sector Work," INDFD, 1983. - 33 - administration of such regimes, and (3) the effectiveness of the regimes in attaining their professed policy goals. Complex financiaL sector interven- tions are likely to generate an irrational incentive structure, since administered credit schemes, and the rationing mechanisms embodied in them, cannot be expected to effectively manage all the information necessary to ensure that available financial resources are matched wit!i the socially most productive set of real investment opportunities. In particular, directed credit schemes bias the credit allocation process towards per- ceived low-risk investments, i.e., capital intensive projects taken on by large firms (often parastatals) operating behind high tariff barriers or with local monopolies. The same credit rationing limits the amotnt of resources allocated to more labor intensive investments and to smaller enterprises with less collateral, uses of credit which would be economic- ally more efficient. The maintenance of such distortions can add up to large efficiency losses and worsen the distribution of income. 5.03 In addition, the distributional impact of such regimes is ques- tionable. Non-preferential borrowers, tax payers and depositors end up bearing the burden of directed credit at below-market rates. Non-preferen- tial borrowers pay through queueing costs and, when non-preferential rates are allowed to rise, through higher borrowing rates. Tax payers ultimately pay any direct sudsidies granted by the treasury. When the subsidies are covered through inflationary finance, all holders of finaLncial assets bear the burden of the inflation tax. Moreover, depositors are often forced to subsidize preferential borrowers through interest rate ceilings on deposits. Thus, the net distributional impact of directed credit is uncertain. In addition, the lower real returns implied by the ceilings on deposit rates induce savers to hold wealth in non-financial forms. Thus some of the potential efficiency gains from formal financial intermediation are lost. 5.04 Administrative costs associated with large scaLe intervention are also important. The sheer paper work associated with extensive regulations and the application and screening process absorbs a greal: deal of scarce skilled human resources, as do the various methods of evading control, such as overbranching to compete for deposits in the presence of deposit rate ceilings and sending capital abroad illegally. Other economic losses associated with intervention include the unintended suppression of equity markets, promotion of "groups" of interlocking banking aad industrial concerns, and promotion of abuses of discretionary power. 5.05 The development of equity markets is suppresse,1 by low lending rate ceilings, which makes formal credit artificially cheap for those firms that can obtain it. As mentioned previously, low lending rate ceilings cause credit to be allocated to the large, established firms with greater collateral. However, it is precisely these firms which would be best suited to raise capital in equity markets, as opposed to the small and medium enterprises. As a result, large firms refrain from equity finance and the equity markets do not develop. This overdependence on (debt finance is potentially destabilizing--as recent Latin American experience has made very clear. - 34 - 5.06 Low ceilings on lending rates and large directed credit programs also promote the formation of "groups" of banking and industrial concerns. These "groups" form either because the firms buy up the banks to assure themselves of access to cheap credit, or the banks buy up the firms to recapture the transfers to borrowers that are implicit in low lending rates. These "groups" are potentially destabilizing, because they stimulate less-than-arms-length lending practices. Moreover, the provision of low interest credit to the "groups" worsens the income distribution. 5.07 The mere act of "administering" financial transactions grants tremendous discretionary power to individuals and/or official bodies. Often this power provides too great an opportunity for abuses. These abuses can have tremendous moral as well as economic costs. While the total losses in equity and efficiency due to corruption and other by- products of financial market intervention are of course unfathomable, they do represent a potentially serious drain on the country's development effort, and thus every attempt must be made to weigh them against the anticipated gains from intervention. 5.08 In addition to the growing recognition of the costs associated with the distortions introduced by government intervention, there are growing doubts as to the effectiveness of many government programs in attaining such professed policy objectives as: (1) directing resources into a sector or subsector deemed by the authorities to have high social rates of return, and (2) increasing the flow of income towards identifiable groups in the population. In particular, the fungibility of financial resources allows substantial "leakages" of directed credit from targetted sectors into other non-targetted ones. Also, the politicized nature of the non-price rationing mechanism apparently often leads to income enhancement of politically powerful groups, rather than those ostensibly targetted in the programs. For example, credit which is supposedly directed to small farmers for grain production might wind up in the hands of large, politically influential farmers for the purchase of mechanized harvesting equipment. Or the credit provided by the programs might free up resources that otherwise would have been invested in the sector for investment in such areas as urban luxury housing. 5.09 In recognition of the above concerns, the market-oriented policy perspective suggests a multidimensional approach to financial sector policy. According to this view there are three broad objectives of financial sector policies: (1) to mobilize adequate amounts of resources, - 35 - both domestically and internationally;22/ (2) to allocate credit to its socially most productive uses; and (3) to provide a stable financial environment, which will encourage development. 5.10 In terms of interest rates, these objectives can best be achieved by allowing rates to vary according to the state of the business cycle, pressures on the foreign exchange market and the risk and maturity of the individual transactions. Accordingly: (1) Interest rates need not be always positive in real terms, as local and internationaL pressures may cause markets to clear at nominal rates below expected iiiflation. (2) There should be some correspondence between local interest rates and foreign rates adjusted for expected devaluation, lest exchange markets and capital flows become unstable. (3) Given that there is not one but many interest rates, greater reliance should be placed on market forces for interest rate determination, so as to adequately reflect all the multiple combinations of maturity, risk and administrative cost. 5.11 The new perspective recommends that subsidies and below-market rates generally should be avoided, since they encourage an inefficient allocation of resources, discourage resource mobilization, and have uncertain distributional implications. Correspondingly, complex systems of directed credit also should be avoided, since the interetst rate differentials which are established are unlikely to adequately reflect the relative productivities of financial resources across the sectors. Moreover, the fragmentation of financial markets necessary to make such a differentiation effective is neither feasible nor desirable. 5.12 The new perspective also recognizes the need for greater financial market supervision and greater consistency in the mix of fiscal, monetary, exchange, commercial and trade policy. A re-allocation of skilled human resources into the supervisory arm of the monetary authority is essential, since fraud and mismanagement are antitheitical to the development of a well-functioning financial market. Their potential negative externalities create a legitimate role for constructive regulation of the financial market place. 5.13 Lastly, the new perspective recognizes the complex and pervasive interrelationships between the real economy and the financial markets. Given these interrelationships it is crucial that the government closely 22/ Preliminary regression estimates of the demand fot financial assets using the data gathered for this study gave statistically significant positive real interest rate elasticities, both in the time series equations for each country and in a cross-sectiondL equation utilizing pooled period-average data. Given the important policy implications of the numerical values of these elasticities, and the possibility of imprecision given the small size of the data sample used here, the authors have decided to undertake a broader study of the demand for financial assets, involving more countries over a longer time period. See also A. Lanyi and R. Saracoglu, Interest Rate Policies in Developing Countries, IMF Occasional Paper, 1983, for a recent analysis of the effects of higher real interest rates. - 36 - coordinate its monetary, fiscal, exchange rate and trade policies. Even the best financial sector policy regime is unlikely to function properly in the face of contradictory signals coming from the real-side of the economy, i.e., where financial and economic rates of return differ widely. VI. FINANCIAL SECTOR REFORMS: THE RECORD 6.01 This section assesses the financial sector policies of Bangladesh, Kenya, Nigeria, Peru, Thailand, Turkey, and Uruguay, in terms of the growing consensus regarding the importance of a well-functioning financial system and the need for greater reliance on market forces. Evaluating the correspondence between this "new" view and the countries' policies is obviously much more difficult than comparing real interest rates. Both the "new" policy prescription and the evaluation of its impact require qualitative judgments of many factors, not simply a mechani- cal application of an interest rate formula. Moreover, all countries, even market-oriented, developed countries, intervene in financial markets to some extent, typically with government-imposed ceilings on interest rates and with programs to provide credit on preferential terms to sectors such as agriculture, housing, and small business. Thus, the central task of this analysis is to judge the degree to which such common interventions distort the mobilization and allocation of financial resources. 6.02 This section draws on the individual country analyses contained in Annexes 2-8, and the references cited there. It takes the following form: First the most common types of financial market interventions are discussed. Second, the degree of intervention across countries is assessed by evaluating the impacts of both the size of directed credit programs and the distortions implied by the structure of interest rates. Third, the progress toward greater reliance on market determination of f inancial markets in the seven countries is assessed in terms of increases in ceiling rates, simplifications and reductions in the scope of directed credit programs, and other market-oriented reforms. 6.03 Each of the seven countries maintained directed credit programs. Three types of instruments typically were used: (1) regulations on the portfolio composition of intermediaries; e.g., requirements to devote a certain portion of lending to specific activities; (2) Central Bank redis- counting of credits to priority sectors, usually at subsidized rates; and (3) control of financial intermediaries through direct ownership. These government controlled financial institutions included: commercial banks, mortgage banks, agriculture or industrial finance companies, export credit agencies, and institutions specializing in parastatal lending. 6.04 Public sector borrowing to finance the fiscal deficit and public enterprises was also an important factor in developing countries. Regula- tions often existed forcing the system to hold low-interest government debt: either directly, in the intermediaries' portfolios, or indirectly, through Central Bank reserve requirements, which in turn were used to pro- vide low-interest Central Bank credit to the public sector. - 37 - 6.05 Both the directed credit programs and the pubLic sector borrow- ings tended to reduce the supply of credit available to non-preferred borrowers, i.e., the well known "crowding out" phenomena. Increased competition for the remaining credit drove up interest rates, in some cases produced very high rates on non-preferential credits. M4oreover, the spreads between unsubsidized credits and deposit rates t:ended to widen, unless the preferential credits were at near-market rates, or the govern- ment compensated the financial sector for its lost revenues on low interest credits with direct subsidies. 6.06 Each of the seven countries also maintained some form of adminis- tered interest rate regime, with the exception of Uruguay after 1978. While these regimes varied substantially from country to country, they typically established ceiling deposit rates and some control over other interest rates, including those on both preferential and general bor- rowers. Thus the principal differences between the countries were in the relative size of the directed credit programs and in the interest rate differentials between the various types of preferential credits, between preferential and general credits, and between preferential credits and deposits. 6.07 While it is difficult to produce a precise estimate of the size of the directed credit programs, a rough idea can be derived from the following observations from Annexes: In Nigeria, government control of financial, resources was almost total, via establishment of detailed credit allocation guidelines for each of the sixteen sectors into which the economy was divided. In addition the government directly controlled the country's large oil revenue, much of which it: channelled into the priority sectors.23/ In Turkey, a recent World Bank study estimated that seventy five percent of total credit was subject to government regulations of the type described above. In Peru, the Banco de la Nacion, a public institution which functions primarily to finance the government and the public enterprises, accounted for 21% of total credits in June 1982. This large figure was, nonetheless, less than half of the Banco's average share of credit during the period 1976-78. In addition, in 1981 the State Banks and COFIDE, the government's apex industrial development institution, accounted for another 34% of total credit. Thus, the Peruvian authorities had substantial 23/ In oil-based economies the government typically plays a dominant role in credit allocation, not only through control of oil revenues but often through financial intermediation in foreigrL capital markets. For example, in Ecuador and in Indonesia after 19174, the government undertook foreign borrowings which exceeded its actual needs. The excess was allowed to accrue as deposits in the central bank while the central bank simultaneously expanded its lending. - 38 - influence in the allocation of more than half the country's credit. Even in Uruguay, despite the far-reaching liberalization measures, the publicly owned Banco de la Republica and Banco Hipotecaria accounted for 37% of all credit in 1982. While much of this credit was at market terms, a large share remained in targetted lending. Bangladesh allocated as much as 60-70% of all domestic credits to the public sector. In Thailand commercial banks were required to lend 15% of the previous year's deposits to agriculture. The share of directed credit in total credit was about 33%. In Kenya the commercial banks were required to commit 17% of their deposits to agricultural lending, though estimates are that the actual compliance was only about 13%. Moreover, in Kenya the government channelled a substantial amount of credit to the parastatals via the development banks, financing both investments and operating losses. In sum, government intervention in credit allocation was substantial, even in the countries with low inflation and relatively high real interest rates. 6.08 To get a better picture of the extent to which such directed credit policies distorted financial markets, it is necessary to analyze the differentials between rates on the directed credit and rates on general credits and deposit rates. Clearly, the data cannot provide a precise estimate of these distortions. However, a rough sense can be gathered from Table 5, which displays a sample of these differentials as of year-end 1982. Moreover, it should be noted that interest rate ceilings limited deposit rates in all the countries except Uruguay, as discussed in Section 5. 6.09 A word of caution is required before interpreting the figures in Table 4. Since the preferential rates cited for each country are quite dissimilar and the effective rates cannot be accurately computed, the calculated spreads are not overly precise. Moreover, there are numerous preferential rates and only one is cited here. Bearing these warnings in mind, it nonetheless seems that the countries fall into three distinct groups. The first group--Bangladesh, Kenya, Nigeria--appear to have limited the degree of subsidization, since the differential between the preferential rate and the rate on general credits was relatively small. However, this is not to say subsidization was absent, since subsidization may take the form of quantity rationing, longer grace periods, easier collateral requirements, or other adjustments to the lending terms. The middle country--Thailand--appears to have engaged in some subsidization through interest rates. In the third group--Peru and Turkey--subsidization was extreme. The countries also breakdown along the same lines when - 39 - Table 5 Nominal Interest Rate Differentials Year-end 1982 a/ (percent per annum) Preferential over Preferential over Country General Credits Term Deposits Bangladesh -4.0 1.0 Kenya -4.0 1.2 Nigeria -1.5 4.0 Thailand -11.0 -3.0 Peru -69.0 -42.2 Turkey -37.0 -32.0 Sources: Annex 1, Tables 4-6. a/ See Table 1, Note 5 for the specific categories of preferential lending. comparing preferential rates to deposit rates. Since the differentials in the first group were positive--preferential credit cost more than the returns on term deposits--their preferential rates were less likely to distort investment incentives and encourage diversion of directed credit than the preferential rates of the second or third groups. 6.10 In addition to the differentials between preferential lending rates, non-preferential rates and deposit rates, the differentials between various categories of preferential rates establish important incentives which may, or may not, be consistent with relative productivities of investments or overall policy objectives. There was considerable diversity among the countries in the complexity of preferential lending rates and in the degree of detailed specification of the targetted subsectors. This detail is difficult to summarize concisely, but some idea can be obtained from the tables in the Annexes (see Table 4, "The Pattern of Lending Rates" in each of the respective Country Annexes, 2-8). As shown there, the degree of specificity and the interest differentials vary widely. In general terms, the countries of the low-inflation group maintained relatively small differentials between the different sectors, although in some cases they did apply detailed breakdowns of subsidized credits. 6.11 The small differentials in the low inflation-high real rate countries probably reflect the fact that interest rates are low in these countries and thus the differentials simply could not be very great. In contrast, nominal rates in the high inflation countries tended to be somewhat higher. These higher nominal rates allowed mnore room for interest - 40 - differentials particularly in Turkey and Peru.24/ In Uruguay after the liberalization, however, the existence of market determined deposit rates limited the extent to which the state-owned financial institutions could subsidize credit, despite the important role of these institutions in the market. 25/ 6.12 Most of the seven countries in the sample initiated financial sector reforms in recent years, reducing the complexity of the preferential rate systems, raising nominal rates to accommodate market pressures and even releasing control over selected credits and deposits. On a country by country basis, starting with the three countries in the low inflation-high real rate group--Bangladesh, Kenya, Thailand--followed by the four higher inflation countries--Nigeria, Turkey, Uruguay and Peru--the reforms are summarized below: 6.13 Bangladesh markedly raised most ceilings on interest rates in late 1980. Recently the government also moved to ease the rigidities of its institution-specific ceiling on credit expansion. This was done by modifying some of the restrictions which previously prevented the trans- ferral of banks' resources to banks constrained by their credit meilings but with a surplus of investment opportunities, from banks below their credit ceilings but lacking good investment opportunities. 6.14 In Kenya, the structure of interest rates was substantially raised over the 1980-82 period. Beyond these readjustments, Kenya did not undertake any sweeping reforms. In large part, this was attributable to the country's history of relative price stability and relatively market- oriented economic policies, which kept pressures from building to a level that would force major reforms. However, the consequences of nearly a decade of fiscal imbalance and an abrupt constriction in the availability of foreign credits have resulted in a serious economic crisis, out of which some financial sector and macroeconomic policy reforms can be expected in the future. In particular, the authorities must find a way to finance 24/ The larger differential possible during inflationary periods also increase the "demand" for such subsidies. Given the politicized nature of the credit allocation process in most developing countries, this dynamic should be recognized as an important social cost of inflation. 25/ The Banco de la Republica has been accused of price leadership on interest rates--setting rates which provided a profitable cushion for the other banks. However, the evidence suggests that if this oligopolistic behavior did exist, then it was largely eliminated by the end of restraints on the entry of new financial intermediaries. See P. Spiller and E. Favaro, "The Effect of Entry Regulation on Oligopolistic Interaction: The Uruguayan Banking Sector", Bell Journal of Economics, 1984. - 41 - scaled-down public sector deficits domestically without stimulating infla- tion or burdening the relatively well-functioning financial system with larger quantities of forced lending. 6.15 Due to the country's long history as an open and relatively price stable economy, the policy makers in Thailand were nol: forced to undertake massive reforms. However, the government's overriding policy commitment to a freely convertible currency did require the authorilties to make some policy changes to manage developments which threatened convertibility. In particular, after roughly five years of increasing protectionism and sharply rising world interest rates, the authorities instituted a set of reforms, in 1980, which included an upward adjustment in the interest rate structure. 6.16 Since 1978, Nigeria has been raising its interest rate structure slowly, but rates have remained far below historical inflation. Up until 1981, when the countries oil revenues collapsed, the Nigerian authorities apparently felt little need to promote the domestic financial sector, as most of the country's investments were undertaken directly by the govern- ment with the oil earnings. However, since the long term outlook has soften for the oil sector, the need to stimulate domestic resource mobili- zation, and financial intermediation in general, probably will provide the impetus for further financial sector reforms in the nLear future. 6.17 In Turkey the financial sector was highly controlled by the authorities. Among the important government policy instruments were large directed credit programs and a highly complex set of interest rate con- trols. (A description of this regime is provided in Annex 7, Table 4.) In 1980 some these interest rates were liberalized, including term deposit rates and the ceiling rates on general credits. In addition, the share of total credit committed to the directed credit prograrns was scaled back somewhat. Moreover, the authorities have announced a policy of continuing to reduce the scope and complexity of the preferential credit schemes. 6.18 Peru initiated a shift in interest rate po:Licy in 1978, which continued through 1982. The shift included higher ceiling rates and allowed compounding on deposits and discounting on loans. These adjust- ments were part of a set of major reforms expressly aimed at giving market forces a larger role in the economy, which also included an opening of both the goods and capital markets and the legalization of dollar transactions such as deposits and loans. As part of these reforms, the Peruvian authorities reduced the vast number of controlled interest rates by simpli- fying the preferential lending categories (see Annex 5, Table 4 for a description of this scheme as of end of year 1982). They also reduced the reserve requirements and began paying interest on them. 6.19 Despite Peru's massive upscaling of its interest rate structure, the adjustments in the ceiling rates lagged behind increases in inflation, so real interest rates generally remained quite negative, with the excep- tion of 1981. While much of the increase in inflation was attributable to the government's use of the inflation tax to finance its deficit, this tax was simultaneously being rendered less effective by the decline in reserve requirements. The lower reserve requirements reduced the base of the tax - 42 - and thereby increased the inflation resulting from a given increase in central bank credit.26/ Given this potentially explosive situation and the lack of progress towards higher real rates, the Peruvian reforms were of rather limited success. 6.20 Uruguay, like Peru and Turkey, had a history of extremely high inflation, though its experience began much earlier. The combination of a stagnating economy, balance of payments problems and high inflation prompted the authorities to begin a liberalization process in 1974 that is almost without precedent in its dimension. By 1979 virtually all interest rate controls were dismantled, the fiscal deficit was closed, sectoral credit guidelines and reserve requirements on domestic currency deposits were eliminated, foreign currency transactions were legalized, including bank deposits and dollar loans. With the important exceptions of the operations of the publicly-owned Banco de la Republica and the Banco Hipotecario del Uruguay and the authorities' control over the exchange rate, control over the financial sector resided primarily in the hands of the private sector. 6.21 In sum, the above evidence indicates that in each of the seven sample countries, with the possible exception of Nigeria, there were definite moves toward greater market-oriented financial sector policies. These ranged from major reform movements, such as in Uruguay, to more limited realignments in the structure of nominal interest rates and directed credit programs. This could well be interpreted as a growing acceptance of the value of financial sector liberalization, in accordance with the "new" market-oriented perspective. However, it must be emphasized the influence of market forces still remains quite constrained by many factors, including a wide array of government regulations. 6.22 A final point which the authors wish to strongly emphasize is that, based on the evidence presented above, financial sector liberaliza- tion is neither a simple matter, nor a painless one. Specifically, the success of the financial sector liberalization process is highly dependent on the mix of domestic fiscal, monetary, exchange, commercial and trade policies, particularly when the domestic financial market is open to international capital flows. 6.23 On this point, the record shows that both Peru and Uruguay made major changes in their financial sector policies in the latter part of the seventies which, among things, opened the financial sector to international 26/ See D. Mathieson and R. McKinnon, "Foreign Exchange and Financial Policies for Repressed and Liberalizing Economies," IMF Staff Papers, 1983 for a discussion of the difficulties created by cutting reserve requirements when the fiscal deficit is not under control. The dollarization of the Peruvian economy also reduced the base of the inflation tax. - 43 - markets.27/ However, when the exchange rate policy became inconsistent with domestic monetary, fiscal, and wage policies, a common pattern emerged of either high real interest rates in the local currencies, and/or "dollarization" and capital flight. This experience can be contrasted to that of Thailand, which also began to experience large capital outflows at the end of the seventies through its very open financial system. However, Thailand was able to escape the full impact of the crisis which struck Peru, Uruguay and much of the rest of Latin America, because its initial macro-policy framework was much more consistent, and because it adjusted its monetary, fiscal and trade policies more rapidly to the changing condi- tions. While a full exploration of these two experiences lies beyond the scope of this paper, there is general agreement that one of the crucial lessons of the liberalization process in Latin American was the centrality of a consistent macroeconomic policy package when the capital account is "open." Policy-makers contemplating financial sector liberal:Lzations and proponents of such reforms should take note of this lesson. 27/ A similar opening-up occurred in many of the other major Latin American countries at roughly the same time. While a full discussion of these experiences and of the pros and cons of financial opening-up is beyond the scope of this paper, it is worth noting that these opening-ups were motivated not only by the poteni:ial benefits of tying the local capital market to the international market, but also by the potential anti-inflationary aspects of the linkagJe. See N. Ardito Barletta, M. Blejer, and L. Landau, Economic Liberalization and Stabilization Policies in Argentina, Chile, and lJruguay...", World Bank, and J. Hanson, and J. DeMelo (1983,1984) for more extensive discussions of these experiences. - 45 - ANNEX 1 SUMMARY TABLES AND COUNTRY TABLES Summary Tables: Table 1. Ex-Post Real Return on Term Deposits Table 2. Ex-Post Real Interest Rates on General Credits Table 3. Ex-Post Real Interest Rates on Preferential Credits Table 4. Nominal Term Deposit Rates Table 5. Nominal Interest Rates on General Credits Table 6. Nominal Preferential Lending Rates Table 7. Devaluation Adjusted Yields on U.S. T-Bills Table 8. Devaluation Six Months Forward Table 9. Inflation Six Months Forward Table 10. Inflation over Previous Twelve Months Table 11. Weighted Average of Real Return on Financial Assets Table 12. Ratio of Financial Assets to GNP (GDP) Figure IA Nominal Term Deposit Rates versus Inflation over the Previous Twelve Months Country Tables: Bangladesh Table 1. Selected Interest Rates Table 2. Levels of Selected Financial Assets Kenya Table 1. Selected Interested Rates Table 2. Levels of Selected Financial Assets Korea Table 1. Selected Interest Rate Table 2. Levels of Selected Financial Assets Morocco Table 1. Selected Interest Rates Table 2. Levels of Selected Financial Assets Nigeria Table 1. Selected Interest Rates Table 2. Levels of Selected Financial Assets Pakistan Table 1. Selected Interest Rates Table 2. Levels of Selected Financial Assets Peru Table 1. Selected Interest Rates Table 2. Levels of Selected Financial Assets Thailand Table 1. Selected Interest Rates Table 2. Levels of Selected Financial Assets Turkey Table 1. Selected Interest Rates Table 2. Levels of Selected Financial Assets Uruguay Table 1. Selected Interest Rates Table 2. Levels of Selected Financial Assets SUMMARY: Table 1 Ex-Post Real Interest Rates on Term Deposits (6 month) End of Year, in percent per annum Country 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Bangladesh #N/A -18.2% -20.0% -32.2% 17.5% 12.4% -8.5% -0.4% -8.5% -5.8% -2.7% 13.6% 0.3% Kenya 0.3% 0.0% -5.9% -12.5% -18.0% -6.2% -16.9% -11.1% -0.6% -8.5% -5.2% -3.5% 2.5% Korea 1.8% -2.0% 5.0% -19.1% -15.8% 0.6% 1.5% -6.4% -8.8% -16.3% -0.4% 7.0% 4.0% Morocco #N/A #N/A #N/A fN/A -0.1% -4.5% -5.0% -3.5% 1.4% 0.0% -8.1% -0.1% 5.5% Nigeria -24.8% -3.9% -18.0% -10.1% -40.6% -12.2% -27.2% -15.5% -9.0% -3.5% -20.9% -2.4% -17.3% Pakistan -0.8% 1.6% -12.7% -5.9% -7.6% 5.4% 5.4% 5.9% 3.0% -3.4% 1.9% 8.4% 2.5% Peru 1.2% 0.0% -9.0% -15.3% -17.1% -16.1% -21.7% -42.1% -22.3% -13.7% -32.3% -3.4% -36.6% Thailand 5.3% -1.6% -12.6% -21.6% 3.2% 4.2% -6.1% -4.7% -3.2% -16.7% -6.8% 7.4% 4.9% Turkey #N/A IN/A IN/A -9.3% -14.3% -6.5% -13.4% -21.2% -38.2% -59.5% -0.4% 13.8% 22.1% Uruguay -4.5% -41.6% -38.1% -34.9% -17.8% 9.9% -22.1% 7.6% -18.9% 2.2% 14.6% 32.9% 0.5% Sources: Country Tables in Annex 1. Notes: Real rates were calculated ex-post, i.e., they reflect the inflation rate 6 months forward from December. SUMMARY: Table 2 Ex-Post Real Interest Rates on General Credits (short term) End of Year, in percent per annum Country 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Bangladesh #N/A -14.1% -15.9% -28.8% 24.7% 19.3% -3.8% 3.8% -4.7% -1.9% -0.2% 16.6% 3.0% Kenya - - - - - - - -7.2% 3.8% -4.5% -1.4% -0.9% 5.0% Korea 8.0% 4.5% 11.9% -13.8% -15.4% 2.1% 3.6% -4.6% -7.3% -15.0% 2.2% 9.2% 6.3% Morocco #N/A #N/A #N/A #N/A 3.7% 1.0% 0.4% 2.0% 5.7% 4.2% -4.7% 3.6% 8.9% Nigeria -21.1% 2.7% -12.9% -4.4% -36.8% -7.0% -21.8% -13.0Z -3.7% 1.5% -16.8% 2.7% -13.2% Pakistan 1.9% 4.7% -10.1% -3.4% -5.0% 7.6% 7.4% 8.3% 4.5% -2.1% 3.5% 9.0% 3.5% Peru 10.0% 8.7% -1.1% -7.9% -9.9% -8.9% -14.5% -36.9% -11.1% 0.2% -21.4% 17.3% -26.6% Thailand 13.2% 5.9% -6.1% -15.7% 10.9% 12.0% 1.0% 2.4% 4.1% -10.5% 0.0% 14.1% 11.6% Turkey #N/A #N/A #N/A -5.2% -11.9% -3.8% -10.9% -19.0% -37.7% -60.0% -5.0% 25.1% 34.3% Uruguay #N/A #N/A #N/A #N/A #N/A #N/A -3.1% 25.5% -2.6% 14.1% 25.9% 44.1% 6.6% Sources: Country Tables in Annex 1. Notes: Real rates were calculated ex-post, i.e., they reflect the inflation rate 6 months forward from December. '-' indicates not defined. SUMMARY: Table 3 Ex-Post Real Interest Rates on Preferential Credits (Various categories--see Notes), End of Year, in percent per annu Country 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Bangladesh #N/A -15.3% -17.1% -30.4% 21.9% 16.7% -6.0% 2.4% -5.9% -3.2% -3.6% 12.6% -0.6% Kenya 4.0% 3.6% -2.5% -10.8% -16.0% -3.9% -14.1% -8.1% 2.8% -5.4% -3.2% -2.6% 1.4% Korea -7.6% -9.2% 2.7% -20.1Z -20.2% -5.4% -5.2% -11.1% -15.1% -22.1% -2.0% 7.4% 6.3% Morocco #N/A #N/A #N/A #N/A 1.1% -3.6% -4.1% -2.6% 0.9% -0.5% -9.8% -1.1% 4.1% Nigeria - - - - - - - - -5.5% -0.3% -18.3% 0.9% -14.3% Pakistan 0.9% 3.5% -11.5% -3.8% -6.0% 6.5% 7.3% 8.3% 3.9% -2.6% 2.7% 9.2% 3.6% Peru -1.6% -2.8% -11.6% -17.7% -19.4% -18.5% -24.5% -44.7% -29.1% -20.6% -37.7% -23.6% -52.2% Thailand 6.3% -0.6% -11.8% -20.9% 3.2% 4.2% -6.1% -4.7% -3.2% -16.7% -9.3% 3.5% 1.2% Turkey #N/A #N/A #N/A -6.7% -12.7% -4.7% -11.8% -19.7% -38.8% -59.7% -14.4% -9.0% -4.0% Uruguay #N/A #N/A #N/A #N/A #N/A #N/A #N/A IN/A IN/A IN/A IN/A #N/A #N/A Sources: Country Tables in Annex 1. Notes: Real rates were calculated ex-post, i.e., they reflect the inflation rate 6 months forward from December. a/ Bangladesh: loans against jute, jute goods and tea; Kenya: loans from Ag. Finance Corp.; Korea: export loans; Morocco: cotton warrants; Nigeria: first class/prefered sector max.; Pakistan: credits from the Ag. Devel. Bank; Peru: rediscounts to the Banco Agrario; Thailand: export credit; Turkey: ag. credits; Uruguay: not available. '-' indicates not defined. SUMTARY: Table 4 Nominal Term Deposit Rates (6 month) End of Year, in percent per annum Country 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Bangladesh #N/A 4.8% 4.8% 4.8% 6.5% 6.5X 7.5% 7.5% 7.5% 7.5% 13.0% 13.0% 13.0% Kenya 3.8% 3.8% 3.8% 5.4% 5.4% 5.4% 5.'4% 5.4% 5.4% 5.4% 6.8% 11.0% 13.2% Korea 16.8% 14.4% 8.4% 8.4% 15.0% 13.8% 15.6% 13.8% 17.1% 17.1% 16.9% 14.6% 7.6% Morocco #N/A #N/A IN/A #N/A 4.0% 4.5% 4.5% 4.5% 6.0% 6.0% 7.5% 7.5% 8.5% Nigeria 3.0% 3.0% 3.5% 3.5% 3.5% 3.0% 2.5% 3.0% 5.0% 5.5% 6.0% 6.0% 8.5% Pakistan 5.2% 5.1% 5.6% 6.7% 8.2% 8.9% 9.1% 9.6% 10.0% 10.1% 10.2% 10.2% 9.9% Peru 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 11.0% 14.0% 31.5% 31.5% 31.5% 63.0% 71.2% Thailand 6.0% 6.0% 6.0% 6.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 10.0% 11.0% 11.0% Turkey #N/A #N/A IN/A 4.0% 6.0% 6.0% 6.0% 6.0% 9.0% 12.0% 32.0% 50.0% 50.0% Uruguay 15.0% 15.0% 15.0% 18.0% 30.0% 30.0% 30.2% 51.4% 42.6% 50.6% 50.3% 47.4% 66.2% Sources: Country Tables in Annex 1. SUMMARY: Table 5 Nominal tnterest Rates on General Credits (short term) End of Year, in percent per annum Country 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Bangladesh #N/A 10.0% 10.0% 10.0% 13.0% 13.0% 13.0% 12.0% 12.0% 12.0% 16.0% 16.0% 16.0% Kenya - - - - - - - 10.0% 10.0% 10.0% 11.0% 14.0% 16.0% Korea 24.0% 22.0% 15.5% 15.5% 15.5% 15.5% 18.0% 16.0% 19.0% 19.0% 20.0% 17.0% 10.0% Morocco #N/A #N/A #N/A #N/A 8.0% 10.5% 10.5% 10.5% 10.5% 10.5% 11.5% 11.5% 12.0% Nigeria 8.0% 10.0% 10.0% 10.0% 10.0% 9.0% 10.0% 6.0% 11.0% 11.0% 11.5% 11.5% 14.0% Pakistan 8.1% 8.3% 8.7% 9.4% 11.2% 11.1% 11.2% 12.1% 11.7% 11.6% 11.9% 10.9% 11.0% Peru 16.3% 16.3% 16.3% 16.3% 16.3% 16.3% 21.2% 24.2% 50.4% 52.7% 52.7% 98.0% 98.0% Thailand 14.0% 14.0% 14.0% 14.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 18.0% 18.0% 18.0% Turkey #N/A #N/A #N/A 8.8% 9.0% 9.07. 9.0% 9.0% 10.0% 10.8% 26.0% 65.0% 65.0% Uruguay #N/A #N/A #N/A #N/A #N/A #N/A 62.0% 76.6% 71.2% 68.1% 65.1% 59.8% 76.3% Sources: Country Tables in Annex 1. Notes: '-' indicates not defined. SUMARY: Table 6 Nominal Preferential Lending Rates (Various categories-see Notes), End of Year, in percent per annun Country 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Bangladesh IN/A 8.5% 8.5% 7.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 12.0% 12.0% 12.0% Kenya 7.5% 7.5% 7.5% 7.5% 8.0% 8.0% 9.0% 9.0% 9.0% 9.0% 9.0% 12.0% 12.0% Korea 6.0% 6.0% 6.0% 7.0% 9.0% 7.0% 8.0% 8.0% 9.0% 9.0% 15.0% 15.0% 10.0% Morocco IN/A IN/A IN/A IN/A 5.3% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 6.5% 7.0% Nigeria - - - - - - - - 9.0% 9.0% 9.5% 9.5% 12.5% un Pakistan 7.0% 7.0% 7.0% 9.0% 10.0% 10.0% 11.0% 12.0% 11.0% 11.0% 11.0% 11.0% 11.0% Peru 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 7.0% 9.0% 20.0% 21.0% 21.0% 29.0% 29.0% Thailand 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Turkey IN/A fN/A #N/A 7.0% 8.0% 8.0% 8.0% 8.0% 8.0% 11.5% 13.5% 20.0% 18.0% Uruguay IN/A IN/A #N/A IN/A IN/A #N/A IN/A #N/A tN/A IN/A IN/A IN/A #N/A Sources: Cbuntry Tables in Annex 1. Notes: Bangladesh: loans against jute, jute goods and tea; Kenya: loans from Ag. Finance Corp.; Korea: export loans; Norocco: cotton warrants; Nigeria: first class/prefered sector max.; Pakistan: credits from the Ag. Devel. Bank; Peru: rediscounts to the Banco Agrario; Thailand: export credit; Turkey: ag. credits; Uruguay: not available. '-' indicates not defined. SUMMARY: Table 7 Yields on Six Mbnth U.S. Treasury Bills, Adjusted for Ex-Post Devaluation End of Year, in percent per annum Oountry 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 U.S. 6 Mo. T-bill 4.9% 4.0% 5.3% 7.5% 7.1% 5.5% 4.5% 6.5% 9.5% 11.9% 13.7% 12.3% 8.1% Bangladesh #N/A 13.5% -12.9% 1.5% 205.9% 7.3% 12.6% 16.6% 12.3% -0.9% 41.1% 39.4% 11.9% Kenya 4.9% 4.0% -1.7% 15.2% 7.1% 9.9% 4.3% 2.8%. 11.6% 11.3% 53.8% 27.8% 17.1% Korea 43.8% 19.3% 5.3% 8.3% 7.1% 5.5% 4.5% 6.5% 9.5% 73.6% 22.6% 25.5% 16.3% Morocco 4.8% -4.6% -26.8% 10.7% -7.3% 18.6% 4.4% 0.8% 10.5% 15.5% 79.9% 50.5% 29.4% Nigeria 4.9% 4.0% 5.3% -5.4% 3.3% 5.5% 10.7% 3.8% -6.9% 4.7% 60.3% 26.3% 31.6% u. Pakistan 2.6% 451.0% -15.2% 7.5% 7.1% 5.5% 4.5% 6.5% 9.5% 11.9% 13.7% 70.5% 13.7% 1 Peru 4.9% 4.0% 5.3% 7.5% 7.1% 120.1% 38.6% 49.7% 44.2% 45.2% 71.5% 100.2% 177.5% Thailand 4.9% 4.0% 5.3% 7.5% 7.1% 5.5% 4.5% 6.5% 9.9% 11.6% 17.8% 12.3% 8.1% Turkey 185.9% -6.5% 5.3% -0.2% 9.4% 20.0% 17.6% 79.6% 114.5% 455.5% 71.5% 72.5% 52.1% Uruguay 4.9% 148.6% 51.2% 56.3% 112.0% 54.1% 41.2% 27.9% 37.9% 26.5% 30.3% 30.5% -1.0% Sources: U.S. 6 month T-bill rate data from the U.S. Federal Reserve Bank, Bulletin. Exchange rate data from the TMF, IFS, data tape. Notes: The country rates are the U.S. T-bill rates adjusted for the country's ex-post rate of devaluation from December to the following June. SUMMARY: Table 8 Devaluation Six Months Forward End of Year, in percent per annum Country 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Bangladesh #N/A 9.1% -17.3% -5.6% 185.6% 1.7% 7.8% 9.5% 2.6% -11.4% 24.0% 24.1% 3.6% Kenya 0.0% 0.0% -6.7% 7.2% 0.0% 4.2% -0.2% -3.5% 2.0% -0.5% 35.2% 13.9% 8.3% Korea 37.1% 14.7% 0.0% 0.8% 0.0% 0.0% 0.0% 0.0% 0.0% 55.2% 7.8% 11.8% 7.6% Morocco -0.1% -8.3% -30.6% 3.0% -13.5% 12.4% -0.1% -5.4% 0.9% 3.2% 58.1% 34.1% 19.8% Nigeria 0.0% 0.0% 0.0% -12.0% -3.6% 0.0% 5.9% -2.5% -15.0% -6.4% 40.9% 12.5% 21.8% Pakistan -2.2% 429.7% -19.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 51.9% 5.2% Peru 0.0% 0.0% 0.0% 0.0% 0.0% 108.6% 32.6% 40.6% 31.7% 29.8% 50.8% 78.3% 156.8% Thailand 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.4% -0.2% 3.6% 0.0% 0.0% Turkey 172.6% -10.1% 0.0% -7.1% 2.2% 13.8% 12.5% 68.7% 96.0% 396.7% 50.8% 53.7% 40.7% Uruguay 0.0% 139.0% 43.5% 45.4% 98.0% 46.1% 35.1% 20.1% 26.0% 13.1% 14.6% 16.2% -8.4% Source: The IMF, IFS, data tape. SUMMARY: Table 9 Inflation Six Months Forward End of Year, in percent per anmun Country 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Bangladesh -4.1% 28.0% 30.9% 54.6% -9.4% -5.3% 17.5% 7.9% 17.5% 14.2% 16.2% -0.6% 12.6% Kenya 3.4% 3.8% 10.3% 20.5% 28.5% 12.4% 26.8% 18.6% 6.0% 15.2% 12.6% 15.0% 10.5% Korea 14.8% 16.7% 3.3% 33.9% 36.5% 13.1% 13.9% 21.6% 28.4% 39.9% 17.4% 7.1% 3.5% Morocco 3.6% 0.0% -2.9% 14.9% 4.1% 9.4% 10.1% 8.3% 4.5% 6.0% 17.0% 7.7% 2.8% Nigeria 37.0% 7.1% 26.3% 15.1% 74.2% 17.2% 40.7% 21.8% 15.3% 9.3% 34.1% 8.6% 31.3% Pakistan 6.0% 3.4% 20.9% 13.3% 17.1% 3.2% 3.5% 3.4% 6.8% 13.9% 8.1% 1.7% 7.2% Peru 5.7% 7.0% 17.6% 26.3% 29.1% 27.6% 41.8% 97.0% 69.1% 52.3% 94.3% 68.8% 169.9% Thailand 0.7% 7.7% 21.3% 35.2% 3.7% 2.6% 13.9% 12.3% 10.5% 28.4% 18.0% 3.4% 5.8% Turkey 20.3% 6.4% 22.6% 14.7% 23.7% 13.3% 22.4% 34.5% 76.5% 176.8% 32.6% 31.9% 22.9% Uruguay 20.4% 97.0% 85.8% 81.2% 58.2% 18.3% 67.2% 40.7% 75.8% 47.4% 31.2% 10.9% 65.3% Source: CPI data from the IMF, IFS, data tape. SUMKARY: Table 10 -Inflation over Previous Twelve Months End of Year, in percent per annum Country 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Bangladesh #N/A 15.3% 46.1% 34.2% 76.1% -12.6% -0.1% 17.1% 9.6% 14.0% 13.2% 14.3% 4.9% Kenya 1.5% 7.2% 3.3% 15.2% 16.0% 20.3% 7.-6% 21.0% 13.7% 9.1% 13.1% 19.3% 13.3% Korea 10.5% 12.3% 7.8% 8.5% 26.5% 25.4% 10.5% 11.0% 16.4% 21.2% 34.6% 11.7% 4.8% Morocco 2.6% 4.7% 2.6% 8.7% 14.4% 6.1% 13.4% 9.0% 9.7% 9.0% 9.7% 13.2% 6.7% Nigeria 13.0% 15.0% -3.5% 17.8% 9.9% 43.1% 12.4% 31.3% 10.3% 11.5% 13.7% 17.4% 6.7% Pakistan 5.2% 5.8% 7.8% 37.8% 20.6% 12.7% 10.3% 7.3% 5.5% 9.0% 15.1% 10.4% 3.8% Peru 5.8% 7.6% 4.4% 13.8% 19.1% 23.9% 44.7% 32.5% 73.7% 65.8% 60.8% 72.7% 65.6% Thailand -1.3% 1.3% 8.8% 20.2% 17.9% 4.4% 3.4% 8.9% 7.8% 15.0% 16.4% 12.3% 2.6% Turkey 12.3% 17.6% 9.2% 16.8% 16.7% 19.6% 17.0% 44.6z 36.6% 81.1% 86.2% 3u.3a 32.8% Uruguay 20.1% 35.2% 95.6% 77.6% 106.8% 67.3% 39.4% 57.6% 45.8% 83.1% 42.9% 29.3% 20.5% Source: CPI data from the IMF, IFS, data tape. SUMMARY: Table 11 Weighted Average of Real Return on Financial Assets End of Year, in percent per annum Country 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Bangladesh #N/A -20.8% -22.6% -34.4% 12.6% 7.9% -12.4% -4.4% -12.3% -9.5% -8.5% 7.2% -5.0% Kenya -1.4% -2.7% -6.6% -14.6% -18.7% -9.7% -16 5% -13.8% -4.0% -10.0% -7.6% -8.2% -2.8% Korea -2.1% -4.7% 2.6% -20.8% -20.6% -4.3% -4.2% -10.8% -14.8% -20.7% -5.8% 2.2% 1.7% Morocco #N/A #N/A #N/A IN/A -3.6% -8.2% -8.7% -7.2% -3.6% -4.8% -13.47. -5.9% -1.2% Nigeria #N/A -5.6% -19.8% -11.9% -41.7% -13.5% -28.1% -17.0% -11.8% -6.7% -23.8% -5.8% -21.2% Pakistan -3.8% -1.3% -15.2% -9.2% -12.0% 0.4% 0.4% 0.8% -2.2% -8.5% -3.6% 2.7% -2.4% Peru -3.1% -4.0% -12.7% -18.7% -20.6% -19.1% -26.4% -45.8% -31.4% -21.7% -32.6% -12.0% -30.0% Thailand 2.4% -4.1% -14.8% -23.5% 0.5% 1.8% -8.2% -6.8% -5.3% -18.5% -9.47% 4.5% 2.4% Turkey IN/A #N/A #N/A -11.2% -16.9% -9.4% -16.2% -23.9% -42.1% -62.9% -18.8% -8.2% 1.2% Uruguay IN/A #N/A -43.7% -40.5% -21.2% 0.5% -27.4% -13.6% -28.9% -17.0% -4.2% 13.3% -33.4% Sources: COuntry Tables in Annex 1. Notes: The average return was calculated by weighting the ex-post real return on each instrument by its share of total financial assets. SLUMARY: Table 12 Ratio of Total Financial Assets to GNP (GDP) End of Year Country 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Bangladesh #N/A #N/A 18.9% 15.0% 9.9% 12.4% 15.8% 15.7% 16.0% 16.9% 17.0% 17.7% 19.5% Kenya 28.9% 28.5% 29.8% 31.4% 28.6% 28.5% 27.3% 33.4% 34.7% 34.8% 33.4% 33.2% 32.7% Korea 30.3% 30.4% 32.4% 32.0% 28.5% 26.9% 26.6% 29.2% 32.5% 33.1% 34.5% 38.9% 43.1% Morocco 29.0% 30.1% 32.6% 30.9% 32.7% 35.5% 36.1% 37.3% 40.6% 41.2% 41.5% 42.8% 42.6Z U, Nigeria a/ #N/A 13.7% 13.9% 11.4% 11.6% 15.9% 19.8% 24.9% 21.8% 23.7Z 33.3% 35.2% 36.7% Pakistan 41.3% 40.4% 37.6% 36.4% 30.2% 29.2% 31.8% 31.8% 33.9% 34.6% 33.9% 32.7% 34.4% Peru 21.0% 21.6% 22.1% 21.5% 21.3% 19.3% 16.5% 14.7% 14.3% 16.6% 19.4% 20.5% 20.2% Thailand 29.4% 31.3% 31.7% 30.2% 31.3% 33.0% 34.3% 35.1% 35.5% 33.7% 34.9% 36.7% 41.9% Turkey 26.1% 26.2% 25.9% 24.8% 23.6% 24.3% 23.6% 22.9% 19.4% 16.8% 16.3% 21.6% 25.5% Uruguay a #N/A #N/A 20.6% 14.9% 15.1% 16.0% 20.8% 22.7% 25.4% 27.6% 31.7% 40.7% 59.8% Sources: Country Tables in Annex 1. a/ For Nigeria and Uruguay the ratio is with repect to GDP, in all other cases it is with repect to GNP. The GNP and GDP figures have been logrithmically interpolated between the current year and one year forward so as to be expressed in December prices. - 58 - Fiaure 1A Nominal Term Deposit Rate versus Inflation - NOMINAL INTEREST RATES ON TERM DEPOSITS (6 MONTH) .....INFLATION RATE CPAST DEC. TO DEC. OF THE CURRENT YEAR) 46-_ x~~~~~~~~ 2S 48- 30: Oli ...... K~~K-Y 40. 38- X 25- KOR.' -10i I6- I I T 1-o-72 17 97 96ise16 - 59 - Figure IA (continued) NOMINAL INTEREST RATES ON TERM DEPOSITS C0 MONTH) .-- INFLATION RATE CPAST DEC. TO DEC. oF THE CJRRENT YEAR) 3.9- 25- 230, - ...... ... .... *" ,. -5- MOROCCO -Ie- 3- U. . * _ S 3 S Is U NIGERIk 40- 30 - .' " 20- _197 17 1 I I I 1 I 98 1 1970 1972 1974 1978 1978 19801 1982 - 60 - Figure 1A (continued) NOI.NAL INTEREST RATES ON Tr DEPOSITS Co MONTH) ..Z --FLATION RATE CPAST DEC. TO DEC. Of THE CURRENT YEAR) 10- 88- 80- PERU 20 .4 380 800 240- .' ' . 20- , -' 8 TURKEY -0-2 1970 1972 1974 19715 1978 1980 1982 - 61 - Figure 1A (continued) NOMINAL INTEREST RATES ON TERM DEPOSIT'; CO MONTH) .l- INFLATION RATE CPAST DEC. TO DEC. OF THE CURRENT YEAR) 100- ****'"t*. s*, ,, u"" 80- 0- URUGUAY -20- 1970 1972 1974 1978 1978 1988 1982 - 62 - BA1UALES~: Table I Selected Nminal and E-post Real Interest Rates In Sdveduled Bdks Erd of Year (amalized) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Deposits, darnstic denamn. DBMd NozLnal N/A O.04 o.04 0.0% 0 .1 0. .a O.% 041% O.CZ% o.0% 0.0% 0.0% 0.0% Ex-past real #NA -0.2 -0.2 -0.4 0.1 0.1 -0.1 -0.1 -0.1 -0.1 -0.1 0.0 -0.1 Savings (n rn-clidg) Naomnal IN/A 4.5% 4.5% 4.5X 6.0% 6.4 7.C% 7.C% 7.C1 7.0% 1OX1 10.41% 10.0O Ex-post real IN/A -18.4% -20.1% -32.4% 16.9% 11.9% -8.9% -0.8% -8.9% -6.3% -5.3% 10.6% -2.3% Temr, 6 mnth Nominal #N/A 4.&C 4.8% 4.8t 6.5% 6.5% 7.5% 7.5% 7.5Z 7.5t 134C 13.0% 13.0% Ex-post real #WA -18.2% -20.0% -32.2% 17.5% 12.4% -8.5% -0.4% -8.5% -51X% -2.7% 13.6% 0.3% Weighted average rate of return an above assets plus aurry Ex-post real #WA -20.8% -22.6% -34.4% 12.6% 7.9% -12.4% -4.4% -12.3% -9.5% -8.5% 7.2% -5.0% lndiax, damestic denam. NDnnal N&minal IN/A 10.0% 1O.OX 10.0% 13.0% 13. 13.C% 12.0% 12.0% 12.0% 16.0% 16.0% 16.0% E--post real IA -14.1% -15.9% -28.8% 24.7% 19.3% -3.8% 3.8% -4.7% -1.9% -0.2% 16.6% 3.0% Against jute, jute gDods ard tea Noinal IN/A 8.5% 8.5% 7.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 12.0% 12.0% 12.0% Ex-post real #N/A -15.3X -17.1% -30.64 21.9% 16.7% -6.0% 2.4% -5.9% -3.2% -3.6% 12.6% -4.6% Inflatimn (CPI) 6 nmths Forward frao December -4.1% 28.C% 30.9% 54.6% -9.4% -5.3% 17.5% 7.92 17.5% 14.2% 16.2% -0.61 12.6% Devaluatimx 6 mnths Forward fran Declrber #N/A 9.1% -17.3% -5.6% 185.6% 1.7% 7.8% 9.5% 2.6% -11.4% 24.0% 24.1% 3.6% Inflatian (CPI) over Prior December #N/A 15.3% 46.1% 34.2% 76.1% -12.6% -0.1% 17.1% 9.6% 14.0% 13.2% 14.3% 4.9% Scurces: Interest rates are fran the Berladesh Bark, Ecnomic Trends. CPI data are fran the Iff, IFS, data tape. Weights for wighted average are fran BargLadesh Table 2. (See note regardiig disposition of savings.) Notes: Real rates wre calailated ex-post, i.e., they reflect the inflation rate six nonths forvard fram Deceier. In 1977, 1978 anl 1979, premiums were paid to ural depositors of .75 & 1.5 percentage points an savirgs and tenn deposits, respectively. - 63 - P&GLALESH: Table 2 Levels of Selected Financial Assets End of Year (in biili.ic. of Taka) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 xerrcy, dmestic Nordnal IN/A 2.1 2.9 3.2 4.0 3.7 3.9 5.0 6.6 7.2 8.7 9.7 9.9 In 1980 prices #N/A 10.3 9.9 8.2 5.8 6.2 6.4 7.1 8.5 8.2 8.7 8.5 8.3 % of GNP #tN/A [EN/A 5.9% 4.2X 2.9% 3.3X 3.5Z 3.7% 4.0% 3.9% 3.9% 3.8% 3.6% % of total assets #N/A 37.8% 31.0Z 27.8% 29.4% 26.6% 22.0% 23.3Z 25.2% 22.9% 23.1% 21.7% 18.7% Deposits, doxmestic currency Ded Notdnal IN/A 1.8 3.9 4.9 5.4 5.5 6.8 7.5 8.8 10.2 10.6 12.3 14.8 In 1980 prices N/A 9.0 13.3 12.4 7.7 9.2 11.3 10.6 11.3 11.6 10.6 10.8 12.4 % of GNP #N/A #N/A 7.9% 6.3X 3.9% 4.97 6.1X 5.4% 5.4% 5.4% 4.8% 4.9% 5.4% % of total assets #N/A 33.17. 41.7% 42.37. 39.1% 39.5X 38.87 34.77. 33.5% 32.3% 28.4% 27.5% 27.9% Term Noidnal #N/A 1.6 2.5 3.4 4.3 4.8 6.9 9.1 10.8 14.2 18.2 22.8 28.5 In 1980 prices IN/A 7.9 8.7 8.8 6.2 7.9 11.4 12.9 13.9 16.0 18.2 19.9 23.7 % of 1P AN/A. #N/A 5.2X 4.57 3.1Z 4.27. 6.2% 6.6% 6.6% 7.6% 8.2Z 9.0% 10.4% % of total assets 1tN/A 29.0% 27.3% 29.9% 31.5% 33.9% 39.2% 42.1% 41.2% 44.8% 48.5% 50.8% 53.5% Total Ninal #N/A 5.5 9.3 11.5 13.7 14.0 17.6 21.6 26.2 31.7 37.5 44.9 53.2 In 1980 prices WN/A 27.3 31.9 29.3 19.8 23.2 29.1 30.6 33.8 33.8 37.5 39.3 44.4 % of GMP #N/A #N/A 18.9% 15.0% 9.9% 12.4% 15.87 15.7% 16.0% 16.9% 17.07 17.7% 19.57 CPI, December (Dec.80-100) 17.4 20.0 29.3 39.3 69.2 60.5 60.4 70.8 77.5 88.4 100.0 114.3 119.9 GNP, Dec., n.rnal ItN/A #N/A 49.3 76.8 137.9 112.8 111.3 138.0 .63.9 187.8 221.0 253.9 273.3 Sources: Asset data are from the Bangladesh Bank, Bangladesh Barn Bulletin, and Econcioac Trends. GNP data are frcn Bangladesh Bureau of Statistics, Fconaiic Irdicators of Bargladesh, and from the Bangladesh Bark, Econrsinc Trends. CPI data are fran the INF, IFS, data tape. Notes: GNP data are for the fiscal year begirnnig in the current year, therefore incone is expressed in Defcanber prices. - 64 - KENL: Tdhle I Salected -a-1 ai bc-post 1 al sntearat Rite End of Yer (annalized) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Deaprits. uinin- rate N UK.OX O.X 0.0% 0.OX O.OX 0.0% O.OX 0.0% O.OX O.X% 0.0% .OXZ 0.0% fl-pwt ial -3.31 -3.72 -9.12 -17.0% -22.n -11.0 -21.Z -15.7% -5.7% -13.22 -11.22 -13.0% -9.52 N.0x3.0x3.0% 3.0% . M.0 5.0 5.0% 5.0 5.0% 5.0% 5.0% 6.x% 10.0% 12.52 ftP eal -0.47 -0.8x -6.6x -14.5x -18.3x -6.6x -17.Z1-11.5x -0Xx.9x -s.6.X -58 4.3t 1.9x Trem, 6 unth Noodnal 3.82 3.R2 3.8x 5.4% 5.42 5.4% 5.42 5.42 5.42 5.42 6.82 11.0% 13.2X fl-Vost real 0.3X 0.0% -5.92 -12.52 -18.0% -6.2 -16.92 -11.11 -0.62 -.52 -5.22 -3.52 2.52 Privae Flxiial Institutions Nmal O.O% O.X% 0.0% O.OX 0.0% 0.0% 0.0% 0.0% 0.0% 0.0 % M0.0M 0.0% nx-poat real -3.31 -3.72 -9.3 -17.0% -22. Z -11.0% -21.2x -15.7% -5.7% -13.2n -11.2x -13.0% -9.5s Savinip Noadml 3.0% 3.0% 3.0 t 3.0% 5.0% 5.0% 5.0t 5.0% 5.0t 5.0% 8.0% 10.0% 12.52 ft-post real -0.4% -0.8 -6.61 -14.57 -18.3 -6.61 -17.1 -11.52 -0.92 -8.92 -4.0% -4.3 1.9% Term, l_Wat cateqory z-j)at real 2.52 2.1 L -3.9% -10.82 -16.4 -4.42 -14.9% -8.3 2.61 -5.6Z -1.4% -0.4% 5.1 Post offc SffIo8 an Nomiral 3.0% 3.0% 3.0% 3.0% 3.0% 5.0% 5.0% 5.0% 5.0% 5.o 6.0% 10.0% 10.02 &C-Post real -0.4 -0.82 -6.61 -14.5 -19.9% -6.61 -17.2 -11.52 -0.9% -8.9% -5.8s -4.3 -0.4t W'gbed ! rte of retur=an abw s amts pl curec Ei-pat ral -1.4Z -2.7% -6.61 -14.61 -18.7% -9.7% -16.2 -13.8 -4.0% -10.0% -7.6% s.2n -2.82 L, drg, de n. Mmdmm (less than 3 yr.) N l - - - - - - - 10.02 10.02 10.0% 11.0% 14.0216.0% - et - - 7.2A 3.8% --4.5% -1.4% -0.9% 5.0o tkadrul 7.0% 7.0% 7.0% 7.0% 8.0 8.0% - - - -s lt-post real 3.5% 3.U.2 -3.0% -11.22 -16.0% -3.9% - - - - Nintal-E- Jlnece Corp 7.5% 7.5Z 7.52 7.5% 8.t1 8.0% 9.02 9.' 9.C7 9.C% 9.0% 12.0% 12.0% E&c-t real 4.0% 3.6% -2.5% -10.8% -16.0% -3.9% -14.U% -8.U% 2.8% -5.4% -3.22 -2.6% 1.4X Inflation (CPI) 6 mths Forard frcm Decmbr 3.4% 3.8% 10.31 20.5% 28.5X 12.4% 26.8% 18.6% 6.0% 15.1 12.6% 15.0% 10.5% rvalu3atimn 6 nmihat Forward frm a 0.0% O.Z -6.7% 7.2Z 0.0% 4.22 -0.22 -3.5% 2.0% -0.5% 35.22 13.92 8.3Z Inflatijc (CPI) over Prior lcmr 1.5% 7.2% 3.12 15.22 16.'J2 20.3X 7.6Z 21.0% 13.7% 9.t2 13.1% 19.3% 13.3% SWces: Interest rates are froa T1e Central Bark at Kenya, Foc and 781nan1 Review, k aal Report, mid &real of Satistics FiLrxce ard Plannirg, Enmic &irvey. CPI datE are frao the IMF, IFS, data tape. Weights for wg$itei average are ftrm Kenya Table 2. NDotes: Real rates wre calculated ex-post, i.e., they reflect &te inflatimn rate six smths forward frar Decemr. Ihe average rate of tetur s calaolated asumrg each asset yielded the ainimn rate and that aLl term depcsitS in the Private Finadcal instiutlcxu were In the laget tens cat ory. '-' indicates not defined. - 65 - l2YA: Table 2 Levels of Selected Financial Assets Fzd of Yrear (in biLiUal of 9illings) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Currency, dampstic NcoinaLe 0.7 0.7 0.9 1.0 1.1 1.2 1.6 2.2 2.3 2.7 3.0 3.6 3.7 In 1980 prices 2.3 2.2 2.6 2.5 2.4 2.3 2.8 3.1 2.8 3.0 3.0 3.0 2.8 X of (NP 5.8X 5.6% 6.0% 5.6% 5.2x. 4.9% 5.2% 5.8% 5.6% 5.7X 5.5% 5.72 5.2% % of total assets 2).7% 19.5% 20.1% 17.8% 18.1% 17.3% 18.9% 17.5% 16.0% 16.3X 16.6% 17.3% 15.8% Deposits, dczestic currency Camercial Bank DeaMn Nouinal 1.2 1.3 1.5 2.0 2.1 2.4 3.0 4.3 4.7 5.6 5.2 5.6 6.0 In 1980 prices 3.9 3.9 4.5 5.0 4.7 4.4 5.1 6.1 5.8 6.3 5.2 4.7 4.4 % of af 9.9% 9.7% 10.2% 11.Z% 10.L% 9.7% 9.5% 11.6% 11.4% 11.8% 9.6X 9.0% 8.32 % of total assets 34.4% 34.0% 34.1% 35.5% 35.4% 34.0% 34.7% 34.8% 32.8% 33.8% 28.6% 27.1% 25.5% Savin NmLnal 0.7 0.8 0.9 1.0 1.2 1.3 1.5 2.1 2.4 2.7 3.0 3.5 3.9 In 1980 pries 2.2 2.3 2.5 2.6 2.6 2.4 2.6 2.9 3.0 3.0 3.0 2.9 2.9 % of GP 5.7% 5.7% 5.8% 5.77 5.6% 5.7Z 4.9% 5.6% 5.8% 5.6% 5.4% 5.6% 5.5% % of total assets 19.9% 19.9% 19.4% 18.7% 19.6% 18.37 17.8Z 16.8% 16.6% 16.7% 16.Z% 16.9% 16.7% Term Nokrinal 0.5 0.6 0.6 0.9 0.8 1.1 1.4 2.3 3.0 3.1 3.7 4.1 5.6 In 1980 prices 1.7 1.8 1.8 2.2 1.8 2.0 2.3 3.3 3.6 3.5 3.7 3.5 4.2 % of (N' 4.5% 4.4% 4.2% 4.9% 3.9% 4.5% 4.4% 6.2X 7.1% 6.5% 6.8% 6.6% 7.8% % of total assets 15.4% 15.5% 14.0% 15.7% 13.7% 15.7% 16.0X 18.6% 20.5% 18.6% 20.4% 20.0% 24.0% Private Finarnial Inst. Dad Nkinal 0.0 0.0 0.0 0.0 0.0 0.1 0.0 01.3 0.2 0.3 0.1 0.2 0.2 In 1980 prices 0.1 0.1 0.0 0.0 0.0 0.2 0.0 0.5 0.2 0.3 0.1 0.2 0.2 % of GNP 0.3X 0.7% 0.1% 0.1% 0.0% 0.4% 0.LX :x.9% 0.4% 0.5% 0.2% 0.4X 0.3% % of total assets 1.L% 0.6% 0.4% 0.3% 0.1% 1.3% 0.3% 2.8% 1.3% 1.6% 0.5% 1.1% 1.0% Savings a/ NomLnaT 0.1 0.1 0.1 0.2 0.2 0.1 0.3 0.2 0.5 0.5 0.6 0.6 0.6 % of GNP 0.6% 0.8% 0.9% 1.1% 1.0% 0.6% 0.9% 0.6% 1.1% 1.0% 1.1% 0.9% 0.9% % of total asses 2.0% 2.6% 3.1% 3.5% 3.5% 2.1% 3.2% 1.9% 3.3% 2.7% 3.2% 2.8% 2.7% Term a/ kio*inal 0.1 0.2 0.3 0.4 0.4 0.7 0.6 0.8 1.2 1.5 2.3 2.6 2.9 In 1980 prices 0.4 0.6 0.8 1.0 1.0 1.2 1.0 1.1 1.4 1.7 2.3 2.2 2.1 % of GN4P 1.1% 1.4% 1.9% 2.1% 2.1% 2.7% 2.0% 2.1% 2.8% 3.2% 4.2% 4.2% 4.0% % of total assets 3.8% 5.0% 6.2X 6.8% 7._7 9.3% 7.7% 6.37 8.0% 9.3% 12.7% 12.7% 12.7% Post (fice Savins Bank Nordt,al 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.3 0.3 0.4 0.5 In 1980 prices 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0-3 0.4 0.4 % of IN' 0.9% 0.8% 0.8% 0.7% 0.7% 0.6% 0.5% 0.5% 0.5% 0.5% 0.6% 0.7% 0.7% % of total assets 3.L% 2.9% 2.6% 2.3% 2.X% 2.0X 1.9% 1.5% 1.5% 1.5% 1.9% 2.t% 2.L% Total NMcinal 3.4 3.8 4.4 5.5 6.0 7.1 8.6 12.5 14.4 16.4 18.3 20.6 23.6 En 1980 prices 11.2 11.5 13.0 14.1 13.2 13.0 14.6 17.5 17.8 18.6 18.3 17.3 17.4 % of IN' 28.9% 28.5% 29.8% 31.4% 28.6% 28.5% 27.3% 33.4% 34.7% 34.8% 33.4% 33.D. 32.7% CPI, Dti17ber (Dec.80-100) 30.8 31.0 34.1 39.3 45.5 54.8 58.9 71.3 81.0 88.4 100.0 119.3 135.2 GNP, Dec. adjusced, nirnal 11.9 13.3 14.9 17.6 21.0 25.0 31.4 37.4 41.5 47.2 54.8 62.2 72.1 Sorces: Asset data are fr-c Thne Central Bank of Kenya, Ectnomic ad Firnancial Review. GNP and CPI data are tram tte IIF, LFS, data tape. Notes: The GNP data have been logrittincally interpolated betuee the current year and one year fo ward so as to he expressed in Deeasber prices. a/ Savirn and term deposits in the Private Financial Instiutions were assured to be distribu:ed 1:2 for tths years 1970-72, and in aLl other years as reported. -66- KOA__On _ Selected N rl ar l-post i lIwtert bkt B31 Of Year (animlzed) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 198a 1981 1932 Deposits, dmestic derx. Dod Chddng Nkulnal 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.O% Ex-pet real -12.9% -14.3t -3.2% -25.13 -26.7% -11.6% -12.2% -17.7% -22.1% -28.5% -14.8% -6.6% -3.4% Passbook Nominal 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.B% 1.8% 1.8% 1.8% E3-l"t reel -11.32 -12.8% -1.4% -24.0S -25.42 -10.0% -10.6% -16.2% -20.7% -27.32 -13.3 -4.9% -1.6X Tecpotary Nlrndni 1.0% 1.0% 1.02 1.0% 1.0% 1.0% 1.0% 1.02 1.0% 1.0% 1.0% 1.8% 1.8% Fz-ixst real -12.0% -13.5% -2.2% -24.6% -26.(X -10.7% -11.4% -l6.9% -21.3l -27.8% -14.0% -4.92 -1.6% SIVpand tem Noinal 9.6% 8.7% 4.8% 4.8% 4.8% 0.0% 0.0% 0.0% 0.0% - - - - Ec-pOst reAl -4.5% -6.9% 1.5% -21.7% -23.2X -11.6% -12.2% -17.7% -22.1% - - - - Notice Nominal 5.07 5.0% 3.7% 3.7% 3.7% 6.0% 6.0% 10.0% 10.02 10.0% 10.5% 12.0 - ia-pet real -8.57 -10.1% 0.4% -22.6% -24.1% -6.3% -7.0% -9.5% -14.13 -21.4% -5.9% 4.6% - Installment savins 1al 23.0% 23.0% 12.0% 12.0% 13.2% 13.2% 14.0% 14.2% 15.Z% 18.2% 19.5% 16.2% 8.0% Err-pt real 7.2% 5.4% 8.5% -16.4% -17.1% 0.1% 0.2% -6.0% -10.3% -15.5% 1.8% 8.5% 4.32 Worma's proert a, Nuinal - - - - - - 19.2% 19.2% 23.0% 23.2% 24.5% 21.22 21.0% E-"t real - - - - - - 4.6Z -1.9X -6.42 -12.0% 6.0% 13.2X 16.9% Nasinel - - - - - - - 13.2% 12.6% 12.6% 12.3X 14.4% 8.0% t- t real - - - -6.9% -12.32 -19.5% -4.3S 6.8% 4.31 Term, 6 wnnth NIbinal 16.8% 14.4% 8.4% 8.4% 15.0% 13.8% 15.6% 13.8% 17.12 17.1% 16.9% 14.6% 7.6% t-Veot real 1.8% -2.0% 5.0% -19.1% -15.8% 0.6% 1.5% -6.47. -8.8% -16.3 -0.4% 7.0% 4.0% Di eits, foreign denm. esidet eporters Ntd.nal(in U.S.$) 11.0% 11.0% 8.0% 9.07 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 17.62 14.5% EK-pl t reel (in wm) 32.6% 9.1% 4.6% -18.0% -15.8% 1.7% 0.9% -5.42 -10.4% 27.5% 5.6% 22.8% 19.0% d avere rate of rtn on aboe assM FE-post ree -2.1U -4.7% 2.6% -20.8% -2D.6% -4.3 -4.22 -10.8% -14.8% -20.7% -5.8% 2.20 1.7% Lersing. daetic dmu. Genera 6nblrre 24.0% 22.0X 15.5% 15.5% 15.5% 15.5% 18.0% 16.0% 19.0% 19.0% 20.0% 17.0% 10.0% Ex-poet real 8.0% 4.5% 11.9% -13.8% -15.4% 2.17 3.6% -4.6% -7.3X -15.02 2.22 9.2% 6.3 For exports NconLnat 6.0% 6.0% 6.0% 7.0X 9.0% 7.02 8.0% 8.0% 9.0O 9.02 15.0% 15.0% 10.0% Ex-poet real -7.t% -9.2X 2.7% -20.1% -20.2% -5.4. -5.22 -11.17 -15.1% -22.1% -2.(% 7.4% 6.3X Inflation (CPI) 6 mxths Forward froi Deceer 14.9% 1.77 3.37. 33.9% 36.5% 13.1% 13.9% 21. f- 28.4% 39.9% 17.42 7.17 3.5X Devaluation 6 rmoths Forward fr.e fW1cenber 37.1U 14.7% 0.0 0.8% 0.0% 0.0% 0.0% 0.0% 0.0% 55.2% 7.8% 11.8% 7.6% Inflatires (CPI) over Prior f eC or 10.52 12.3 .8% 8.5% 26.5% 25.4. 10.5% 11.O% 16.4% 21.2% 34.6% 11.7% 4.8% Serces: Interest rate data are Eree The sanik of Knreea. ?ntshy Ecoemic Statistics. (YI, Echage Rate and LIkBR data are from the fIT, IFS, data tape. Noxes: Real rates were caculaced ex-posc, i.e., they reflect rhe inflation rate six wontbs forward Eras Dtosereer. a/ For 1976-81, the interest rate paid on l-rkmsn's ?roperty Forartion accoarts wea assurd to le the rate paid on Installment Savirp acas,ts plos 5 percentge points. In 1982, the rate is the actual nrdnss. 6/ Er weighted average ~as calculated assurting all Istailnent acnmnts were paid the rate orn Installjrent Savings account lTe weights were derived frm IKorea Table 2. -b7I lAvels of Selscted financial %sset$ in DOEptei Nos aka tod at Year 1970 1971 1972 1973 1974 13975 1924 1977 1978 1979 1980 1981 1982 .0 ,11t ~~~~133.7 162.1 217.7 111.4 411.5 507.2 676,9 953.4 1364,4 1604.0 18 56.- 2025.0 2573.7 In 1980 prices 647.7 699.4 8'1.8 11-.96 1198.4 1180.4 1425.4 1809. 8 2225.0 2158,2 18 56.,4 1812.7 2197.6 2 of GNP 4.40 4.32 4.60 4,90 4..70 4.30 4.3Z 4.60 5.30T 4.70 4.5Z 4.22 4.72 I of total assets 14.50 14.3% 14.20 1 5 .3% 1s.0 .92 16.02 [5.60 15.30 14,22 13.31 10.71 10.90 Deposits, domestic currency Demand Chocking Nominal 27.0 29.8 45.9 74 4 i134.4 12'S8 I4 1, 239.9 3 53. 9 07 .9 541.41 710.6 772.0 in 1980 prices 130.6 12 4 .3 .83.8 274.6 324.4 192,9 ~02,4 453.4 577.0 414.3 541.4 636.L 659.2 I of GNP? 0.92 0.80 1.02 i.22 1.20 1.2% 0.92 2.12 1.30 0.92 1.3% 1.51 1.42 I of total aSsets 2.92 2.52 3.00 3.70 4.17 "I"%1 3,40 3,91 4.02 2.72 3.82 3.82 3.31 Passbook Nominal 103.9 117.4 165.5 246.7 293.4 3.9.', '.24. 623.4 940. 4 900'.4 979.8 1105.6 1905.8 to 1990 prices 503.2 506.6 664.6 9iG.8 951.7 89., 40-3.5 1183.3 1370.5 1211.5 979.9 989.5 1627.3 2 of GNP 3.40 3.12 3.50 1.90 3.42 0,17 2.7% 7.02 3.12 2.60 2.41 2.32 3.52 2 Of total assets 11.32 10.32 10.80 12.12 11~.70; 11.00 1). 20 10.2Z 9.40 8.00 6.92 5.82 8.12 Temporary NomLIna 73.0 110.2 101.4 173.3 701I.?- 2Y7.C, 395.4 739.9 1323.5 1869.0 2145.3 3403.9 4303.6 In 1980 prices 3533.5 475.7 '24.2 639.6 3899. 644.S 802.7 1404.3 2158.3 2514.9 2145.3 3047.0 3676.7 0 of ON? 2,4Z 2.90 3.8z 2.70 2.321% 2.32 2.5% 3.52 4.82 5.52 5,21 7.02 7.82 I of total assets 7.90 9.7% 11.8% 9.50 9. 11 9970 94Z4 12.12 14.8% 16.60 33.12 18.02 19.22 Savings and Tar, Now Hoousehoid Nominal 30.8 37.4 59.6 66.9 43.2 0.0 , .1I 0.1 - - - - - in 1980 prices 149.0 161.3 234.5 25' .. 124" 1 15 C.3 0.2 - - - - 2 of ON? 1.02 i.00 1.22 1.1% 0,30% 4.0 '2 0.02 - - - - 2 Of total assets 3.30 3.3% 3,41 3..2 3.77 11,10 2,0 .02 - - - Notice Nomina.l 17.3 11., 23.1 39.1' 39.~ i8. 133.3 247.9 c19.5 592.3 803 2 815.7 - to 1980 prices 84.9 47.9 80.7 142.7 11C4- le3.4 293.3 470.4 682.5 797.0 803.2 730.2 - 2 of ONP 0.60 13. 30 .40 C. 62 0.02 ,7t 0. 9% 1.22 1.32 1.70 9.92 1.72 - 2 of total "esst. 1.90 1.00 1.30 1.90 1.4 2.0 . 3.3 4.02 ,. 71 5.32 5.62 4.32 - instalments Nomin.l. 203.4 2 5 5.7 335.4 49S.0 649.3, 809.2 ij21- 1386.5 1902. 3 2536.3 2722.6 3173.6 3046.2 In 1910 prices 985.5 1103.5 1342.9 1827.4 1906,2t 20149.4 236-1. 2631.9 3LO57. 3 3372.3 2722.6 2840.8 2599.3 % of ON? 6.72 6.62 .1 7.: % 7. 30 1 '105 '. 6.62 4,92 7.42 6.62 6.52 9.52 2 of total "Ssets 22.12 22.52 21.9%234.32 24,10 27.90 26.60 22.nt 21..32 22.22 19.12 16.82 12.92 Workman's Property Nominal - - - 2'.8 104,2 2C5.1 283.6 406,4 626.0 1083.6 to 1980 prices - 5 4.6 1.96.0 334.5 3S1. 4286.4 560.4 925.2 2 of ON? - - -12% 0.52 0. 72. 0.92 1.00 1.32 2.02 I of total, assets - .. - - - lia 1.72 7.311, 2.5% 3.02 3.32 6.62 savings so,s± n.l - - - . - 142.3 339.3 545. 1 694.4 1593.7 3280.0 Ont 1980 price - - . - 194.2 553.3 479.6 694.4 1426).6 2783.6 2 of ON?P - - .50 .2:: 1.3T 3.70 3.32 5.92 O of total. "sets - - .1.7% 3.911 4.30 4.90 9.40 13.82 Term Nominal. 318.0 395.8 485.4 593,.5 '04.' ' 4 .4247. 1615.3 210.4 2631.4 3923.2 5285.7 6269.0 In 1980 prices [340.5 1708,0 1947.3 2399.3 203S6.' 2.5. 2 . 096.3 3419.1 35 40.9 3923.2 '.731.4 5352.9 2 of ON? [0.52 10.62 17.32 4, ~4% B.z .0 9 1. 815 1.7% 7 . 71 7.1% 9.32 10 .90 11.40 2 of total aSsets 36.52 34.92 31.70 29,3% 29 .0 0.2 29. 4% 26.42 2 3.61: 20.3% 27.5% 27.90 26.52 Depos.its foreian core"ocy) omn l. Tin olars) 0.0 0.0 O.1 0. 31 . 0.2 31.2 0.1 0.2 0.3 0.6 NomInal (in von) ~~~~13.9 1. 249 2. 3.3 24.4 .7.3 113.6 92.9 71.9 150).5 199.0 445.2 In 1980 prices b7.2 79.4 80.5 ., 17 .3.11.4 571, 99.6 215.6 1035.2 Onb.' 150).5 169.2 380.1 2 of GON? 0.50 0.3% 1,40% ).7.3 1.. .2 1).72 0,.30 7, 3 0. 0.42 0.42 0.82 I of total assets 1.52 1 .1n -10 1.4% .i '.92 .12 1.92 r .91 16 1.12 1.02 1.92 4021.0 :136.7 1731.9 2012.9 948-. 53.18- 41.14 4123,2 89 336. 11271.9 142431.2 18929.6 2 36 57.1I In 1980 prices 4447.1 480,15 41303.3 733)4,9 723'1.2 '0.39. 98,4. 11621.. 1.57'.C 734~6.' 1424 1.3 15943.7 20199.9 2 of ONP 30. 30 3C.4Z 17.,% 02.' 28.3 726. 154 , -2 29.22 30,.72 33.12 3cL. 50 38.90 43.11 CPI. December (Dec.80-100) 20.6 23,2 .0 27.1 34.3 '.. i 52.7 bi., 7c3 '.0 31.7 117.1 Ezcbaaog rate, Dme..ebr 316.7 371:2 178,3 3747, ,44 . 8-r.~6 . 494.,. 34.2 441 6c'3.9 700.3 748.8 CH?. Dec. Wd3oted, nomelnl 3038.7 3744.1 4724.9 4352.6 97.0:A 1 1915.r, 07. 211449.8 25133.' 3409',1 4i1258.2 49688.2 36937.3 Sources: Asset date are tram Th. SBank of Xcres, 9,3>_rnr ccs GNP sond CPI dateaore troo the 1".9 19, otoLoe Notes: The GNP? data hae" been 1o.gr4tr,alc.118 lrtro.e ,'nc .crc,y r-r n a.trod srO. be .opr ....d 1a December prices. i-te1ens lnc'de 1--1oIo-n .Ž..,,8... 4.lanrad 1-1 lrg 0~.1e,o - Indicates not defi-ed. - 68 - MOROXXCO: Table I Selected Naninal ard FK-post Real Interest Rates End of Year (arnnalized) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Deposits, damestic denom. Demand Ninal 0.07 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.07. O.O/ O.C. 0.0% Ex-post real -3.5% 0.0% 3.0% -13.0% -4.0% -8.6% -9.1% -7.7% -4.3% -5.7X -14.5% -7.1X -2.7% Term, 6 wmnths Ex-post real IJN/A ltN/A #N/A JN/A -0.1% -4.5% -5.0% -3.5% 1.4% 0.0% -8.1% -0.1% 5.5% Importation NaomLnal ltN/A lN/A #lN/A JtN/A 2.0% 2.3% 2.3% 2.3% 3.0% 3.0% 3.87 3.8% 4.3% Ex-post real I/N/A #N/A ltN/A ltN/A -2. L% -6.6% -7.1% -5.6% -1.5% -2.8% -11.T3% -3.6% 1.4% Weighted average rate of return on above assets plus currency. Ex-poet real IrN/A MIN/A JtN/A #N/A -3.6% -8.2X -8.7X -7.2% -3.67 -4.8% -13.4% -5.9% -1.27 Lading, dcmestic denon. General short term (max) Nominal #N/A #N/A #iN/A ltN/A 8.0% 10.5% 10.5% 10.5% 10.5% 10.5% 11.5% 11.5% 12.0% Ex-post real ltN/A JIN/A (TN/A IlN/A 3.7% 1.0% 0.4% 2.0X 5.7% 4.2% -4.7% 3.6% 8.9% Cotton wzrants Nominal ltN/A MIN/A ltN/A JtN/A 5.3X 5.5% 5.5X 5.5% 5.5% 5.5% 5.5% 6.5% 7.0X EXc-po"t real #N/A ltN/A JkN/A OVN/A 1.1% -3.6% -4.1% -2.6% 0.9% -0.5Z -9.8% -1.1% 4.1% Inflation (CPI) 6 months Forward from Decembr 3.6% 0.0% -2.9% 14.9% 4.1% 9.4% 10.17 8.3% 4.5% 6.0% 17.0% 7.7% 2.8% 1ivaluation 6 months Forward from December -0.1% -8.37. -30.6% 3.0% -13.5% 12.4% -0.1% -5.4X 0.9% 3.2Z 58.1% 34.1% 19.8% Inflation (CPI) over Prior December 2.67 4.7r 2.6% 8.7% 14.4X 6.1% 13.4% 9.0% 9.7% 9.0% 9.7% 13.2% 6.7% Sources: Interest rate data are fran le Banque du Maroc, Rapport. CPI and Exchange Rate data are froan the EMF, IFS, data tape. Weights for weighted average are fran Morocco Table 2. Notes: Real rates were calculated ex-post, i.e., they reflect the inflation rate six months forward from December. I[he interest rate paid on Thportation Deposits were assumed to be half the rate paid on 6 mDnth term deposits. - 69 - TCO: Table 2 levels of Selected Firanil Assets End of Year (in billicar of Dirhans) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Currency, daostic Noinal 2.3 2.5 2.9 3.4 4.1 4.7 5.7 6.7 7.7 9.0 9.8 11.1 12.0 in 1980 prices 5.2 5.4 6.3 6.7 7.0 7.5 8.2 8.7 9.2 9.9 9.8 9.8 10.0 % of GNP 11.o% 11.1% 12.2% 11.5% 11.2Y 11.6% 12.3% 12.4% 12.8% 13.4% 13.2% 13.4% 13.0% % of total assets 38.0% 36.87 37.3 37.1% 34.3X 32.6% 33.9% 33.2f 31.6% 32.5% 31.8% 31.3 30.4% Deposits, daestic cirrency NoLlnal 3.3 3.7 4.4 5.2 6.8 8.2 9.4 11.2 13.0 14.3 15.5 17.9 19.9 In 1980 prices 7.6 8.2 9.4 10.2 11.,6 13.3 13.5 14.7 15.5 15.7 15.5 15.8 16.5 % of GNP 16.07. 16.9% 18.2% 17.37 18.7% 20.3 20.1% 20.9% 21.6% 2L.3% 20.9% 21.5% 21.5% X of total assets 55.1% 56.0% 55.7% 56.1% 57.17 57.47 55.7% 55.9% 53.3Z 51.6% 50.3 50.2Z 50.4% Temn 'md.nal 0.4 0.5 0.5 0.6 1.0 1.4 1.8 2.2 3.0 :3.7 4.6 5.9 7.3 In 1980 prices 0.9 1.0 1.2 1.2 1.7 2.3 2.5 2.9 3.5 4.0 4.6 5.2 6.1 % fc GP 2.0% 2.1% 2.3Z 2.1% 2.8. 3.6% 3.7% 4.1% 4.9% 5.5% 6.3% 7.1% 7.9% % of total assets 6.9% 7.17 6.9% 6.7% 8.5% 10.1% 10.4% 10.9% 12.2% 13.2% 15.1% 16.5% 18.5% Importation Nirnal 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.7 0.8 0.9 0.7 0.3 In 1980 prices 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.9 0.8 0.9 0.6 0.2 % of GNP 0.0% 0.0% 0.0% 0.0% C1.0 0.0% 0.0O 0.0% 1.2% 1.1% 1.2% 0.8% 0.3X % of total assets 0.0% 0.0% 0.0% 0.0a 0.0. 0.0( 0.0% 0.0% 2.9% 2.7% 2.8% 2.0% 0.77. Total Nbilnal 6.0 6.7 7.9 9.2 11.8 14.3 16.9 20.0 24.3 27.8 30.8 35.6 39.6 In 1980 prioes 13.7 14.7 16.9 18.1 X).4 23.2 24.2 26.3 29.1 30.5 30.8 31.4 32.7 % of GNP 29.0% 30.1% 32.6% 30.9% 32.7% 35.5% 36.1% 37.3 40.6% 241.2% 41.5% 42.8% 42.6% CPI, Deember (Dec.8D'100) 43.4 45.5 46.7 50.8 58.1 61.6 69.9 76.2 83.7 91.2 100.0 113.2 120.8 GNP, Dec. adjusted, noaLnal 20.5 22.2 24.2 29.8 36.2 40.2 46.8 53.8 59.9 i57.4 74.3 83.2 92.9 Saurces: Asset data are fram le Banque du Mroc, Rapport. L ard CPI data are fran the 2F, llS, data tape. Notes: The GNP data have been logrithmically interpolated between the carrent year and 4xv year forward so as to be expressed in December prices. - 70 - N(ERLA: Table 1 Selected Ntoinal and EK-post Real Interest Rates Eid of Year (annalized) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Deposits, domestic denon. Dad Nomdnal 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Ex-poet real -27.0% -6.7% -20.8% -13.1% -422.6% -14.7% -28.9% -17.9% -13.3% -88.5% -25.4% -7.9% -23.8% SaviTW Nominal 3.0% 3.0% 3.0% 3.0% 3.0% 4.0% 4.0% 4.0% 5.0% 5.0% 6.0% 6.0% 8.5% Ex-post real -24.8% -3.9% -18.4% -10.5% -40.9% -11.3% -26.1% -14.6% -9.0% -4.0% -20.9% -2.4% -17.3% Term, 6 mnth Nominal 3.0% 3.0% 3.5% 3.5% 3.5% 3.0% 2.5% 3.0% 5.0% 5.5% 6.0% 6.0% 8.5% Er-post real -24.8% -3.9% -18.0% -10.1% -40.6% -12.2% -27.2% -15.5% -9.0% -3.5% -20.9% -2.4% -17.3% Weighted average rate of return on abowe assets plus awrerwry Er-post real #N/A -5.6% -19.8% -11.9% -41.7% -13.5% -28.1% -17.0% -11.8% -6.7% -23.8% -5.8% -2 1.2% Lenirg.dcaestic dern. Cerral advances Nkdrnal 8.0% 10.0% 10.0% 10.0% 10.0% 9.0% 10.0% 6.0% 11.0% 11.0% - - - Er-post real -21.1% 2.7% -12.9Z -4.4% -36.8% -7.0% -21.8% -13.0% -3.7% 1.5% - - - First class avances Nominal 7.0% 7.07 7.0% 7.0% 7.0% 6.0% 6.0% 6.0% 7.0% 7.5% - - - Ex-post real -21.97 -0.1% -15.3% -7.0% -38.6% -9.6% -24.7% -13.07. -7.2% -1.7% - - - General nwdmn Nardnal - - - - - - - - 11.0% 11.0% 11.5% 11.5% 14.07 Ex-post real - - - - - - - - -3.7% 1.5% -16.8% 2.7X -13.2Z Perfered sector marinum Nosdnal - - - - - - - 9.0% 9.0% 9.5% 9.5% 12.5% Ex-post real - - - - - - - - -5.5% -0.3% -18.3% 0.9Z -14.3% Inflation (CPI) 6 moznths Forward from December 37.0% 7.1% 26.3% 15.1% 74.2% 17.2% 40.7% 21.8% 15.3% 9.3% 34.1% 8.6% 31.3% Devaluation 6 months Forward from Deceuber 0.0% 0.0% 0.0% -12.0% -3.6% 0.0% 5.9X -2.5% -15.0% -6.4% 40.97 12.5% 21.8% Inflation (CPI) over Prior December 13.0% 15.0% -3.5% 17.8% 9.9% 43.1% 12.4% 31.3% 10.3% 11.5% 13.7% 17.4% 6.7% Sources: All pre-1982 interest rates are from the Central Bank of Nigeria, Economic and Financial Review or Amial Report. except the gereral mrdnun and prefered sector maxini lerndirg rates and all 1982 figures, which are from World Bank data. CPI data are from the IMF, , data tape. Notes: Real rates were calculated ex-post, i.e., they reflect the inflation rate six nonths forward from December. The weighted average uses weights from Nigeria Table 2 and assumes all tinm deposits vield at the 6 onth rate. -' indicates not defined. - 71 - NIGR: A. le 2 levels of Setetad ?inmidal Aosets Ehd of Year (in bd-llions of Naira) 1970 1971 1972 1973 1974 1975 1976 1977 1978 197Sc 1980 1981 1982 0, datic 1oinl #N/A 0.4 0.4 0.4 0.6 1.0 1.4 1.9 2.2 2.4 3.2 3.9 4.2 In 1980 price IN/A 1.3 1.5 1.4 1.7 2.1 2.5 2.7 2.7 2.7 3.2 3.3 3.4 X of gp IN/A 4.8% 4.6% 3.5% 3.1% 4.5% 5.1% 6.8% 6.4% 5.i% 7.3 8.7% 9.2% % of total aswts eN/A 34.9% 33.2% 30.8% 26.4% 28.5% 25.6% 27.5% 29.Z% 23.1% 22.0? 24.8% 25.0% Dqlits, d-tiC currency DTd Nomirl EN/A 0.3 0.3 0.4 0.6 1.0 1.9 2.9 2.6 3.8 6.0 5.9 5.8 In 1980 pric #N/A 1.1 1.2 1.3 1.8 2.1 3.6 4.0 3.3 4.3 6.0 5.0 4.7 2 Of d IN/A 3.9% 3.8% 3.2% 3.3X 4.4% 7.3 iO.1% 7.8% 9.U% 13.9% 13.3% 12.7% 2 of total assets #N/A 28.1% 27.1% 27.7% 28.2% 28.0% 36.8% 40.4% 35.5% 38.5% 41.8% 37.8% 34.5% S-q Nbslml #N/A 0.2 0.2 0.2 0.3 0.5 0.7 0.9 1.1 1.3 1.7 2.0 2.3 In 1980 price N/A 0.6 0.8 0.7 0.9 1.1 1.3 1.3 1.4 1.15 1.7 1.7 1.9 2 df (1W ENA 2.2% 2.4% 1.9% 1.6% 2.3% 2.7% 3.3Z 3.22 3.1% 3.8% 4.5% 5.0% 2 of toa assets EN/A 16.7% 17.3 16.2 13.5 14.6Z 13.6% 13.3 14.72 13.1% 11.5% 12.8% 13.7% Iml IN/A 0.2 0.3 0.4 0.7 '.1 1.3 1.3 1.5 2.4 3.6 3.8 4.5 In 1983 prii Es/A 0.8 1.0 1.2 2.0 2.2 2.3 1.9 1.9 2.7 3.6 3.3 3.6 2 oi CUP IN/A 2.92 3.1% 2.9% 3.7% 4.6% 4.8% 4.7% 4.5% 5.8% 8.2% 8.6% 9.8% Nnal EN/A 1.0 1.2 1.4 2.2 3.6 5.3 7.1 7.4 9.9 14.5 15.5 16.9 In 198D prio EN/A 3.8 4.4 4.6 6.4 7.5 9.7 9.9 9.4 11.2 14.5 13.2 13.5 % of G1W EN/A 13.7% 13.9% 11.4% 11.6% 15.9% 19.8% 24.9% 21.8% 23.7% 33.3% 35.Z% 36.7% CPI, leber (Dec.80-100) 23.6 27.1 26.1 30.8 33.9 48.4 54.4 71.5 78.8 87.9 100.0 117.4 125.2 GDP. Dec. adijusted, tnir 6.3 7.4 8.3 12.4 18.6 22.8 26.7 28.4 33.9 41.6 43.4 44.2 46.0 Sourcs: Asset data are frum the Central Beric of Nigerls, satLX x. CPI ard GDP datL are froa the DIF, IFS, data tape. Notes: The CP data ham been logrithdica.ly interpolated beoieen the current year and oe year forwarrd so as to be expressed ir Decwber prics. -72 - PAKISTAN: Table 1 Selected Nominal and Ex-post Real Interest Rates End of Year (annualized) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Deposits, domestic denom. Demand Nominal 0.0% 0.0% 0.0% 0.1% 0.1% 0.1% 0.1% 0.1% 0.3% 0.1% 0.1% 0.1% 0.0% Ex-post real -5.7% -3.3% -17.3% -11.7% -14.5% -3.0% -3.3% -3.2% -6.1% -12.1% -7.4% -1.6% -6.7% Savings Nominal 4.2% 4.1% 4.9% 5.8% 6.1% 6.6% 6.7% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% Ex-post real -1.7% 0.6% -13.2% -6.7% -9.3% 3.3% 3.1% 4.0% 0.7% -5.6% -0.5% 5.8% 0.4% Term, 6 months Nominal 5.2% 5.1% 5.6% 6.7% 8.2% 8.9% 9.1% 9.6% 10.0% 10.1% 10.2% 10.2% 9.9% Ex-post real -0.8% 1.6% -12.7% -5.9% -7.6% 5.4% 5.4% 5.9% 3.0% -3.4% 1.9% 8.4% 2.5% Weighted average rate of return on above assets plus currency tx-post reail -3.8% -1.3% -15.2% -9.2% -12.0% 0.4% 0.4% 0.8% -2.2% -8.5% -3.6% 2.7% -2.4% Lending, domestic denom. Weighted average of all advances from the Scheduled Banks Nominal 8.1% 8.3% 8.7% 9.4% 11.2% 11.1 11.2% 12.1% 11.7% 11.6% 11.9% 10.9% 11.0% tx-post real 1.9% 4.7% -10.1% -3.4% -5.0% 7.6% 7.4% 8.3% 4.5% -2.1% 3.5% 9.0% 3.5% Short term credits from the Ag. Deve]Lopment Bank Nominal 7.0% 7.0% 7.0% 9.0% 10.0% 10.0% 11.0% 12.0% 11.0% 11.0% 11.0% 11.0% 11.0% Ex-post real 0.9% 3.5% -11.5% -3.8% -6.0% 6.5% 7.3% 8.3% 3.9% -2.6% 2.7% 9.2% 3.6% Inflation (CPI) 6 months Forward from December 6.0% 3.4% 20.9% 13.3% 17.1% 3.2% 3.5X 3.4% 6.8% 13.9% 8.1% 1.7% 7.2% Devaluation 6 mionths Forward from December -2.2% 429.7% -19.5% 0.0% 0.07 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 51.9% 5.2% Inflation (CPI) over Prior December 5.2% 5.8% 7.8% 37.8% 20.6% 12.7% 10.3% 7.3% 5.5% 9.0% 15.1% 10.4% 3.8% Sources: Interest rates are from The State Bank of Pakistan, Bulletin. CPI and exchange rate data from the IMF, IFS, data tape. Weights for the weighted average of returis are from Pakistan Table 2. Notes: Real rates were calculated ex-post, i.e., they reflect the inflation rate six months forward from December. Deposit rates are weighted averages of interest actually paid of all deposits. - 73 - PAKISIAN: Table 2 Levels of Selected Financial Assets Enid of Year (in billions of Rupees) 1970 1971 1972 1973 1974 1975 1976 1977 1978 L979 1980 1981 1982 Currency, dmestic Nmdnal 8.1 7.3 6.5 8.6 10.6 11.7 13.8 17.3 21.0 26.4 32.5 34.5 41.1 In 1980 prices 27.0 23.3 19.0 18.4 18.7 18.4 19.6 22.9 26.3 30.4 32.5 31.2 35.9 % of CNP 16.4% 14.1% 10.7% 11.2% 10.6% 9.57 9.5% 10.0% 10.4% 11.3% 11.6% 10.6% 11.0% % of total assets 39.8% 34.8% 28.5% 30.9% 35.1% 32.4% 29.8% 31.4%; 30.8% 32.8% 34.3Z 32.3X 31.9% Deposits, dui-stic currency Demand Nomxnal 3.6 4.0 5.2 6.0 6.4 7.0 9.1 9.5 11.7 14.1 16.4 17.1 18.8 In 1980 prices 12.0 12.8 15.2 12.7 11.3 11.0 12.9 12.5 14.7 16.2 16.4 15.5 16.4 % of CNP 7.32 7.7% 8.6% 7.8% 6.4% 5.7X 6.2% 5.5S 5.8% 6.1% 5.9% 5.2% 5.0% % of total assets 17.6% 19.1% 22.9% 21.4% 21.3% 19.4% 19.6% 17.Z: 17.2% 17.5% 17.3% 16.0% 14.6% Savins NomLnal 4.3 5.5 6.5 7.9 8.3 10.5 14.0 17.2 22.0 25.3 28.6 34.2 41.8 In 1980 prices 14.4 17.4 19.0 16.9 14.6 16.5 19.9 22.7 27.6 29.1 28.6 31.0 36.4 % of GNP 8.7% 10.5% 10.7% 10.3% 8.3% 8.5% 9.6% 9.9%,9 11.0% 10.9% 10.2% 10.5% 11.2. % of total assets 21.1% 26.IZ 28.5% 28.4Z 27.5% 29.0% 30.2% 31.3! 32.3% 31.5% 30.Z% 32.1% 32.4% Term Nm.nal 4.4 4.2 4.6 5.4 4.8 6.9 9.4 11.0 13.4 14.6 17.3 20.9 27.1 In 1980 prices 14.6 13.3 13.4 11.5 8.5 10.9 13.4 14.6 16.8 16.9 17.3 19.0 23.6 % of GNP 8.9% 8.1% 7.6% 7.0% 4.8% 5.6% 6.5% 6.4t 6.7% 6.3% 6.2% 6.4% 7.2% % of total asets 21.5% 19.9% 20.2% 19.3% 1.6.1% 19.2 20.4% 20.0Y 19.7% 18.2% 18.2% 19.6% 21.0% Total Inal 20.3 21.1 22.7 27.9 '30.1 36.2 46.3 54.9 68.1 80.4 94.8 106.7 128.8 In 1980 prie 68.0 66.8 66.7 59.5 53.2 56.7 65.8 72.7 85.5 92.6 94.8 96.6 112.4 % of GM 41.3% 40.4% 37.6% 36.4% :0.2% 29.2% 31.8% 31.8% 33.9% 34.6% 33.9% 32.7% 34.4% CPI, Dlcw er (Dec.8DI100) 29.8 31.6 34.0 46.9 56.6 63.8 70.3 75.5 79.7 86.9 100.0 110.4 114.6, QGP, Dec. adjusted, nowinsl 49.1 52.2 60.4 76.7 99.6 123.8 145.6 172.9 200.7 232.6 279.6 326.1 374.4 Sources: Asset data are from Ihe State Bark of Paldstan, Billetin. GNP and CPI data are frao the IDF, IFS, data tape. Notes: The GNP data have been logrithuically interpolated betwei the current year and one year forard so as to be expressed in Decanber prices. - 74 - PERU: Table I Selected Effective and Ex-Post Real Interest Rates a/ End of Year (annualized) 1970 1971 1972 1973 1974 1975 L976 1977 1978 1979 1980 1981 1982 Deposits, domestic denom. Demand Nominal 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 10.0% Ex-post real -5.4% -6.5% -15.0% -20.8% -22.5% -21.6% -28.0% -48.2% -39.7% -33.0% -47.5% -39.6% -59.2% Savings Nominal 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 9.0% 11.5% 29.0% 30.5% 30.5% 50.5% 55.0% Ex-post real -0.7% -1.9% -10.7% -16.9% -18.7% -17.7% -23.1% -43.4% -23.7% -14.3% -32.8% -10.9% -42.6% Term, 6 month Nominal 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 11.0% 14.0% 31.5% 31.5% 31.5% 63.0% 71.2% Ex-post real 1.2% 0.0% -9.0% -15.3% -17.1% -16.1% -21.7% -42.1% -22.3% -13.7% -32.3% -3.4% -36.6% Morgage bank certificates Nominal 9.0% 9.0% 9.0% 9.0. 9.0% 9.0% 11.0% 14.0% 31.5% 33.0% 33.0% 61.6% 71.2% Ex-post real 3.1% 1.9% -7.3% -13.7% -15.6% -14.6% -21.7% -42.1% -22.3% -12.7% -31.5% -4.3% -36.6% Deposits, foreign denom. Nominal (in U.S.$) 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 4.6% 9.1% 11.4% 14.9% 11.0% 6.7% Ex-post real (in Soles) -0.7% -1.9% -10.7% -16.9% -18.7% 71.7% -1.8% -25.4% -15.0% -5.1% -10.8% 17.2Z 1.6% Weighted average rate of return on above assets plus currency Ex-post real -3.1% -4.0% -12.7% -18.7% -20.6% -19.1% -26.4% -45.8% -31.4% -21.7% -32.6% -12.0% -30.0% Lending, domestic denom. General Nominal 16.3X 16.3% 16.3% 16.3% 16.3% 16.3% 21.2% 24.2% 50.4% 52.7% 52.7% 98.0% 98.0% Ex-post real 10.0% 8.7% -1.1% -7.9% -9.9% -8.9% -14.5% -36.9% -11.1% 0.2% -21.4% 17.3% -26.6% Rediscount rates to the Banco Agrario Nominal 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 7.0% 9.0% 20.0% 21.0% 21.0% 29.0% 29.0% Ex-post real -1.6% -2.8% -11.6% -17.7% -19.4% -18.5% -24.5% -44.7% -29.1% -20.6% -37.7% -23.6% -52.2% Inflation (CPI) 6 months Forward from December 5.7% 7.0% 17.6% 26.3% 29.1% 27.6% 41.8% 97.0% 69.1% 52.3% 94.3% 68.8% 169.9% Devaluation 6 months Forward from December 0.0% 0.0% 0.0% 0.0% 0.0% L08.6% 32.6% 40.6% 31.7% 29.8% 50.8% 78.3% 156.8% Inflation (CPI) over Prior December 5.8% 7.6% 4.4% 13.8% 19.1% 23.9% 44.7% 32.5% 73.7% 65.3% 60.8% 72.7% 65.6% Sources: 1970-77 interest rates are from La Superiritendencia de Banca y Seguros, Boletin Estadistico. 1978-82 interest rates are from El Banco Central de Reserva del Peru, Boletin, CPT, exchange rate and LIBOR rate data are from the IMF, IFS, data tape. Weights for the weighted average are frum Peru Table 2. Notes: Real rates were calculated ex-post, i.e., they reflect the inflation rate six months forward from December. a/ The 1982 ceiling rate on demand deposits was 55%, actual rates paid were typically 10%, with 20% paid on large deposits. For 1981, term deposits and morgage hank certificates were compounided quarterly. For 1982, compounding was monthly. For 1970-76, dollar deposits were assumed to yield 5x. For 1977-82, the yield was assumed to be LIBOR minus three percentage poiits. The effective, general lending rates were the ceiling rates plus 2 percentage points commission adjusted for 100% prepayment of interest and commisslons. - 75 - PERU: Table 2 Levels of Selected Finracial Assets in tte Banking System End of Year (in bilUions of Soles) 1970 1971 1972 1973 L974 1975 1976 1977 1978 1979 1980 1981 1982 Currenxy, damestic lNoinal 16.3 18.9 21.9 27.2 33.5 42.6 49.6 60.8 91.0 162.0 273.4 436.2 627.9 In 1980 prices 272.7 294.0 326.2 356.1 368.2 377.9 304.0 281.4 242.5 260.4 273.4 252.6 219.6 Z of GP 6.5% 6.8% 6.8. 6.8% 6.8%. 6.6% 5.6% 4.7% 4.2% 4.3% 4.3% 4.1% 3.3% % of total assets 31.2% 31.6% 30.7% 31.8% 32.0% 34.5% 34.1% 32.0% 29.1% 25.8% 22.3% 2D.0% 16.6%. Deposits, daaestic qwrency Demwd kdna1 16.7 17.4 22.0 25.9 33.9 37.2 47.5 60.3 86.0 154.3 268.5 367.8 461.0 in 1980 prices 279.4 270.6 327.7 339.1 372.6 330.0 291.1 279.0 229.2 248.1 268.5 213.0 161.2 % of UP 6.77. 6.3% 6.8% 6.5% 6.9% 5.8Z 5.47 4.7% 3.9% 4.17. 4.3Z 3.5% 2.5% % of total assets 31.9% 29.1% 30.9% 30.3X 32.4% 30.1% 32.7% 31.7% 27.5% 24.6% 21.9% 16.9% 12.2% Sav Nomlnal 8.0 8.9 10.0 11.3 12.8 15.0 17.1 21.6 30.2 67.0 137.8 355.7 680.2 In 1980 prices 133.8 138.4 149.0 148.0 140.7 133.1 104.8 100.0 80.5 107.7 137.8 206.0 237.9 % of (NP 3.2Z 3.2% 3.1% 2.8% 2.6% 2.3% 1.97 1.7% 1.4% 1.8% 2.27 3.3% 3.6% X of total assets 15.37 14.9X 14.0% 13.27 12.27 1Z.2% 11.8% 11.4% 9.6Z 10.7% 11.2% 16.3% 18.0% Term Nomtnal 5.8 7.3 7.6 8.6 9.1 9.7 9.9 16.4 24.4 39.5 60.8 114.5 222.1 in 1980 prices 97.0 113.5 113.2 112.6 100.0 86.1 60.7 75.9 65.0 63.5 60.8 66.3 77.7 % of QP 2.37 2.6% 2.4% 2.2% 1.8% 1.5Z 1.1% 1.3% 1.1% 1.0% 1.0% 1.1% 1.2% % of total assets 11.1% 12.2% 10.7% 10.1% 8.7% 7.9% 6.8% 8.6% 7.8% 6.3% 5.0% 5.3% 5.9% MbrSW bsrk certificates Nominal 5.1 7.1 9.5 12.1 14.6 18.2 19.8 23.8 30.8 59.1 107.1 242.4 322.3 In 1980 prices 85.3 110.4 141.5 158.4 160.5 161.5 121.4 110.1 82.1 95.0 107.1 140.4 112.7 % of GP 2.0% 2.6% 2.97 3.0% 3.0% 2.8% 2.D. 1.8% 1.4% 1.6% 1.7% 2.3% 1.7% % of total assets 9.8% 11.9% 13.37. 14.2% 13.9% 14.7% 13.6% 12.5% 9.8% 9.4% 8.7% 11.1% 8.5% teposits, foreign wrrency N1binal in dollars 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.4 0.7 1.5 1.9 2.9 Nominal in sole 0.4 0.2 0.3 0.4 0.8 0.7 1.5 7.2 50.6 146.6 378.2 662.1 1470.4 in 1980 prices 6.7 3.1 4.5 5.2 8.8 6.2 9.2 33.3 134.8 235.7 378.2 383.4 514.2 % of total assets 0.8% 0.3% 0.4% 0.5% 0.8% 0.6% 1.0% 3.8% 16.2% 23.3% 30.9% 30.4% 38.9% Total Nmdral 52.3 59.8 71.3 85.5 104.7 123.4 145.4 190.1 313.0 628.5 1225.8 2178.7 3783.9 In 1980 prios 874.9 930.1 1062.1 1119.5 1150.8 1094.7 891.2 879.7 834.1 1010.4 1225.8 1261.6 1323.3 % of QP 21.0% 21.6% 22.17 21.5% 21.3% 19.3% 16.5% 14.7% 14.3% 16.6% 19.4% 20.5% 20.2% CPI December (Dec.80-100) 6.0 6.4 6.7 7.6 9.1 11.3 16.3 21.6 37.5 62.2 100.0 172.7 285.9 Ewcclwe rate, Daember 38.7 38.7 38.7 38.7 38.7 38.7 45.0 69.4 130.4 196.2 250.1 341.2 506.2 GNP, Dec. adjusted, ixinal 249.6 277.0 322.2 397.2 492.1 640.6 882.7 1290.4 2188.6 3790.7 6308.5 10639.2 18760.0 Sources: Asset data are fromu the Banco Central de Reserva del Perm, mria. GNW and CPI data are from the IMF, MFS, data tape. Notes: The GNP data have been logrtt±mically interpolated betwen the ctrrent year and am year forward so as to be expressed in Decermr prices. The figures exclude the non-baxk financial sector, except for deposits in the banking system. - 76- THAILAND: Table I Selected Nominal and Ex-Post Real Interest Rate Ceilings Erd of Year (annualized) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Deposits, domestic denom. Dermand Nominal 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Ex-post re!al -0.6% -7.1% -17.6% -26.0% -3.6% -2.6% -12.2% -11.0% -9.5% -22.1% -15.3% -3.3% -5.5% Savings Nominal 3.5% 3.5% 3.5% 3.5% 4.5% 4.5% 4.5% 4.5% 4.5% 5.5% 8.0% 9.0% 9.0% Ex-post real 2.8% -3.9% -14.7% -23.5% 0.8% 1.8% -8.3% -7.0% -5.4% -17.9% -8.5% 5.4% 3.1% Term, 6 months .Nominal 6.0% 6.0% 6.0% 6.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 10.0% 11.0% 11.0% Ex-post real 5.3% -1.6% -12.6% -21.6% 3.2X 4.2% -6.1% -4.7% -3.27 -16.7% -6.8% 7.4% 4.9% Weighted average rate of return on above assets plus currency Ex-post real 2.4% -4.1% -14.8% -23.5% 0.5% 1.8% -8.2% -6.8% -5.3Z -18.5% -9.4% 4.5% 2.4% Lending, domestic denom., Ceneral loarLs & overdrafts Nominal 14.0% 14.0% 14.0% 14.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 18.0% 18.0% 18.0% Ex-post real 13.2% 5.9% -6.1% -15.7% 10.9% 12.0% 1.0% 2.4% 4.1% -10.5% 0.0% 14.1% 11.6% Export (discount rate) Nominal 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Ex-post real 6.3% -0.6% -11.8% -20.9% 3.2% 4.2% -6.1% -4.7% -3.2% -16.7% -9.3% 3.5% 1.2% Inflation (CP.) 6 months Forward from Decenber 0.7% 7.7% 21.3% 35.2% 3.7% 2.6% 13.9% 12.3% 10.5% 28.4% 18.0% 3.4% 5.8% Devaluation 6 months Forward fromn December 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.4% -0.2% 3.6% 0.0% 0.0% Inflation (CPI) over Prior December -1.3% 1.3% 8.8% 20.2% 17.9% 4.4% 3.4% 8.9% 7.8% 15.0% 16.4% 12.3% 2.6% Sources: Interest rates are from the Bank of Thailand, Monthly (Quarterly) Bulletin. CPI data are from the IMF, IFS, data tape. Weights for weighted average are from Thailand Table 2. Notes: Real rates were calculated ex-post, i.e., they reflect the inflation rate six months forward from December. - 77 - THAILWAD: Table 2 Levels of Selected Financial Assets End of Year (in billions of Baht) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Curreny, d>TPstic Noxinal 11.9 13.1 15.3 18.6 20.4 22.3 25.7 28.5 33.0 40.6 45.7 47.5 53.7 In 1980 prices 31.4 34.2 36.7 37.3 34.7 36.2 40.3 41.2 44.2 47.3 45.7 42.3 46.6 % of GNP 8.4% 8.5% 8.1% 7.7% 7.2% 7.0% 7.1% 6.7% 6.5% 6.7% 6.4% 6.0% 6.2% % of total assets 28.7% 27.1% 25.5% 25.5% 22.9X 21.3% 20.6% 19.1% 18.4% 19.9Z 18.3% 16.4% 14.9% Deposits, domestic uirrcy Demn tbidnal 6.9 7.7 8.8 10.6 12.5 13.0 15.1 16.4 21.1 22.2 25.1 25.0 23.5 In 1980 prices 18.4 20.2 21.2 21.1 21.1 21.2 23.8 23.7 28.2 25.8 25.1 22.3 20.4 % of GNP 4.9% 5.0% 4.7% 4.4% 4.4% 4.1% 4.2Z 3.8% 4.2% 3.7% 3.5% 3.2% 2.7% % of total assets 16.8% 16.0% 14.8% 14.4% 13.9% 12.5% 12.1% 11.0% 11.8% 10.9% 10.0% 8.6% 6.5% Savinp Nmuinal 2.7 3.0 3.9 4.9 6.3 7.2 8.9 10.7 14.2 1'.2 27.1 36.8 60.0 In 1980 prioes 7.2 7.7 9.3 9.8 10.7 11.8 14.0 15.4 19.1 20.0 27.1 32.7 52.1 : of CQP 1.9% 1.9% 2.0% 2.C% 2.27 2.3% 2.4% 2.5% 2.8% 2.8% 3.8% 4.6% 7.0% % of total assets 6.6% 6.1% 6.4% 6.7% 7.1% 6.9% 7.1% 7.1% 8.0% 8.4% 10.8% 12.7% 16.6% Tenn Noautal 19.8 24.5 31.9 39.1 50.1 62.1 74.9 94.1 110.7 124.0 152.3 181.1 223.3 In 1980 prics 52.4 64.2 76.6 78.2 85.1 100.9 117.7 135.8 148.3 144.4 152.3 161.3 193.9 % of total assets 47.9% 50.9% 53.3% 53.4% 56.1 59.3X 60.1X 62.9% 61.9% 60.8% 60.9% 62.4% 61.9% Total Nomial 41.3 48.3 59.8 73.2 89.3 104.6 124.6 149.7 179.1 204.0 250.3 290.4 360.5 In 1980 prices 109.5 126.3 143.8 146.4 151.7 170.1 195.8 216.0 239.7 237.5 250.3 258.6 313.0 % of GW 29.4% 31.3% 31.7% 30.2Z% 31.3X 33.0% 34.3% 35.17 35.5% 33.7% 34.9% 36.7% 41.9% CPI, Deer (Dec.80-100) 37.7 38.2 41.6 50.0 58.9 61.5 63.6 69.3 74.7 85.9 100.0 112.3 115.2 GNP, Dec. adjusted, rmdnal 140.5 154.2 188.4 242.5 285.1 316.9 362.7 426.2 503.8 606.2 716.9 791.6 860.1 Soarces: Asset data are fran the Bark of Thailand, Quarterly (mthly) Bulletin. GNP and CPPI data are fron the IMF, IFS, data tape. Notes: The GNP data have been logrithmicaUy interpolated between the current year and oa- year forward so as to be expressed in Deaenber prices. Deposits are nCn-goveLrmvt deposits in the ccnmrcial banks, Wlich are 80-90% of all private deposits. - 78 - TURKEY: Table I Selected Nominal and Ex-post Real Interest Rates End of Year (annualized) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Depositss Ioustic denom. Demand Nominal #IN/A #N/A ltNiJA 0.0% 2.0% 2.0% 2.0% 2.0% 0.0% 0.0% 0.0% 0.0% 0.0% Ex-post real #N/A #N/A ItN/A -12.8% -17.5% -10.0% -16.7% -24.2% -43.3% -63.9% -24.6% -24.2% -18.6% Savings Nominal #N/A 9iN/A ON/A 2.5Z 3.0)% 3,0% 3.0% 3.0% 3.0% 3.0% 5.0% 5.0% 5 0% Ex-post real i#N/A #N/A #tN/A -10.7% -16.7% -9.1% -15.8% -23.4% -41.6% -62.8% -20.8% -20.4% -14.5% Term, 6 month Nominal #N!A #N/A #N/A 4.0% 6.0% 6.0% 6.0% 6.0% 9.0% 12.0% 32.0% 50.0% 50.0% Ex-post real #hN/A dN/A #N/A -9.3% -14.3% -6.5% -13.4% -21.2% -38.2% -59.5% -40.4% 13.8% 22.1% Weighted average rate of return on above assets plus currency Ex--p06t real #N/A #NR/A #N!A -11.2% -16.9% -9.4% -16.2% -23.9% 42.1% -62.9% -18.8% -8.2% 1.2% Lendi.g. domestic denom. General, saort term Nominal #NN/A 'A N/A #N/A 8.8% 9.0% 9.09% 9.0% 9.0% 10.0% 10.87 26.0% 65.0%a/ 65.0% a/ Expost real #N/A #1N/A #1N/A -5.2% -11.97 -3.8% -10.9% -19.0% -37.7% -60.0% -5.0% 25.1%. 34.3% Ag. credits, short term Nominal #N/A i#N/A (#N/A 7.0% 8.0Z 8.(% 8.0% 8.0% 8.0% il.5% 13.5% 20.0% 18.0% Ex-post real #N/A #/N/A ('N/A -6.7% -12.7% -4.7% -11.8% -19.7% -38.8% -59.7% -14.4% -9.0% -4.0% inflation (CPI) 6 months Forward from December 20.3% 6.4% 22.6% 14.7% 23.7% 13.3% 22.4% 34.5% 76.5% 176.8% 32.6% 31.9% 22.9% Devaluation 5 months Forward from December 172.6% -10.1Z 0.0% -7.1% 2.22 3. 8% 12.5% 68.7% 9h.0% 396.7% 50.8% 53.7% 40.7% Inflation (CPT) over Prior Deceamber 12.3% 17.6% 9.2% 16.8% 16.7% 19.6% 17.0% 44.6% 36.67 81.17 86.2% 30.3% 32.8% Sources: Interest rates are from the Central Bank Quarterly Bulletin, and World Bank data. CPI data are from the ŽF, IFS, data tape. Weights for weighted average are from Turkey Table 2. NJotes: Real rates were calculated ex-post, i.e., they reflect the inflation rate six months forward from December. a; Wcrld Bank staff estimate. - 79 - TURKEY: Table 2 Levels of Selected Financial Assets End of Year (In billions of Turkish Lira, TI.) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Currency, domestic Nominal 11.9 13.9 16.0 20.7 26.2 32.9 42.5 63.0 93.8 143.7 217.5 280.6 411.9 In 1980 prices 194.1 192.7 203.2 225.0 244.1 256.3 283.0 290.1 316.3 267.5 217.5 215.4 238.1 X of GNP 7.1% 6.5% 5.9% 5.7% 5.5% 5.5% 5.5% 5.9% 5.6% 4.6% 4.0% 3.7% 4.1% X of total assets 27.0% 24.6% 22.6% 23.0% 23.2% 22.5% 23.5% 25.9% 28.6% 27.4% 24.7% 17.2% 16.1% Deposits, domestic currency Demand Nominal 6.6 8.7 11.8 16.0 22.6 32.1 44.9 63.0 86.0 154.5 286.0 458.5 651.3 In 1980 prices 107.7 120.6 149.8 173.9 210.5 250.1 299.0 290.1 i90.0 287.7 286.0 352.0 376.5 % of GNP 3.9% 4.0% 4.3% 4.4% 4.7% 5.3% 5.8% 5.9% 5.1% 4.9% 5.3% 6.1% 6.5% Z of total assets 15.0% 15.4% 16.7% 17.8% 20.0% 22.0% 24.8% 25.9Z 26.3% 29.4% 32.5% 28.1% 25.5% Savings Nominal 16.8 20.9 24.9 32.9 39.7 52.2 62.7 82.4 1.03.3 143.7 197.4 228.5 275.5 In 1980 prices 274.0 289.8 316.2 357.6 369.8 406.6 417.5 379.5 :148.3 267.5 197.4 175.4 159.3 2 of GNP 10.0% 9.7% 9.1% 9.0% 8.3% 8.7% 8.2% 7.8% 6.1% 4.6% 3.7% 3.0% 2.8% % of total assets 38.1X 37.0% 35.2% 36.5% 35.1% 35.7% 34.7% 33.9% 31.5% 27.4% 22.5% 14.0% 10.8% Term Nominal 8.8 13.0 18.0 20.5 24.6 29.0 30.8 34.4 44.4 83.3 177.9 665.1 1212.2 % of GNP 5.2% 6.0% 6.6% 5.6% 5.1% 4.8% 4.0% 3.2% 2.6% 2.7% 3.3% 8.8% 12.1% % of total assets 20.0% 23.0% 25.5% 22.8% 21.8% 19.8% 17.0% 14.2% 13.6% 15.9% 20.2% 40.7% 47.5% Total Nominal 44.1 56.5 70.7 90.1 113.1 146.2 180.9 242.8 327.5 525.2 878.8 1632.7 2550.9 In 1980 prices 719.3 783.4 897.8 979.3 1053.5 1138.9 1204.6 1118.1 1104.2 977.8 878.8 1253.3 1474.7 2 of GNP 26.1% 26.2% 25.9% 24.8% 23.6% 24.3% 23.6% 22.9% 19.4% 16.8% 16.3% 21.6% 25.5% CPI, December (Dec.80-100) 6.1 7.2 7.9 9.2 10.7 12.8 15.0 21.7 29.7 53.7 100.0 130.3 173.0 GNP, Dec. adjusted, nominal 168.7 215.4 273.1 363.8 478.3 601.3 767.6 1061.4 1684.9 3123.3 5391.5 7560.5 10017.9 Sources: Asset data are from the Central Bank of the Republic of Turkey, Quarterly Bulletin. CPI and GNP data are from the MF, IFS, data tape. Notes: The GNP data have been logrithmically interpolated between the current year and one year forward so as to be expressed in December prices. - 80 - URUWAY: Table I Selected Nasinal and Ex-post Real Interest Rates End of Year (annualized) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 a/ 1982 Deposits, domestic deno.. Demand Nominal 0.0% 0.0% 0.0% 0.0% 10.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Ex-post real -16.9% -49.2% -46.2% -44.8% -30.5% -15.5% -40.2% -28.9% -43.1% -32.1% -23.8% -9.8% -39.5% Savirgs Nominal 6.0% 6.0% 6.0% 8.0% 18.0% 18.0% 21.6% 25.5% 22.8% 24.0% 25.2% 24.0% 24.2% Ex-post real -12.0% -46.2% -43.0% -40.4% -25.4% -00.2% -27.3% -10.8% -30.1% -15.9% -4.6% 11.8% -24.9% Term, 6 month Nominal 15.0% 15.0% 15.0% 18.0% 30.0% 30.0% 30.2% 51.4% 42.6% 50.6% 50.3% 47.4% 66.2% Ex-post real -4.5% -41.6% -38.1% -34.9% -17.8% 9.9% -22.1% 7.6% -18.9% 2.2% 14.6% 32.9% 0.5% Deposits, foreign denom. Demand Nominal (in U.S.S) tN/A JN/A 5.5% 5.5% 5.5% 5.5% 5.6% 5.4% 5.5% 5.5% 5.7% 5.5% 5.8% Ex-post real (in NS) tN/A JN/A -18.5% -15.3% 32.0% 30.3% -14.7% -10.0% -24.4% -19.0% -7.7% 10.5% -41.4% Term, 6 month Nominal (in U.S.$) tN/A JN/A 8.0% 8.0% 8.0% 8.0% 7.4% 7.5% 8.0% 11.9% 14.6% 13.1% 10.2% Ex-post real (in N$) tN/A #N/A -16.6% -13.3% 35.2% 33.4% -13.2% -8.2% -22.6% -14.1% 0.1% 18.5% -39.0% Weighted average rate of return on above assets plus currency Ex-post real (1) tN/A #N/A -43.7% -40.5% -21.2% 0.5% -27.4% -13.6% -28.9% -17.0% -4.2% 13.3% -33.4% Ri-post real (2) IN/A #N/A -43.7% -4Y.4% -20.8% 1.1% -26.9% -12.8% -28.2% -15.1% -1.5% 16.9% -31.7% iing, domestic denom. -xed term up to 6 mo.) Average Nominal IN/A IN/A #N/A IN/A IN/A IN/A 62.0% 76.6% 71.2% 68.1% 65.1% 59.8% 76.3% Ex-post real IN/A #N/A #N/A tN/A tN/A tN/A -3.1% 25.5% -2.6% 14.1% 25.9% 44.1% 6.6% Prime Nominal #N/A #N/A *N/A #N/A IN/A IN/A 47.6% 65.8% 59.7% 49.9% 49.8% 46.5% 56.7% Ex-post real IN/A IN/A IN/A tN/A IN/A IN/A -11.7% 17.9% -9.1% 1.7% 14.2% 32.1% -5.2% Preferential NomLinal IN/A IN/A #N/A #N/A #N/A IN/A #N/A #N/A #N/A IN/A IN/A #N/A #N/A Ex-post real IN/A IN/A #N/A #N/A IN/A IN/A #N/A IN/A #N/A IN/A #N/A #N/A IN/A Lening, foreign deno . Average Nominal (in U.S.S) IN/A IN/A IN/A #N/A IN/A #N1/A 12.0% 13.8% 14.2% 16.3% 18.5% 18.4% 18.2% Ex-post real (in NS) IN/A #N/A IN/A IN/A #N/A #N/A -9.5% -2.8% -18.1% -10.3% 3.5% 24.1% -34.5% Prime Nominal (in U.S.S) IN/A #N/A #N/A #N/A IN/A #N/A lN/A IN/A #N/A 15.8% 17.4% 16.8% 17.2% Ex-post real (in NS) #N/A #N/A IN/A #N/A IN/A #N/A IN/A #N/A #N/A -11.1% 2.5% 22.4% -35.1% Inflation (CPI) 6 months Forward from December 20.4% 97.0% 85.8% 81.2% 58.2% 18.3% 67.2% 40.7% 75.8% 47.4% 31.2% 10.9% 65.3% Devaluation 6 months Forward from December 0.0% 139.0% 43.5% 45.4% 98.0% 46.1% 35.1% 20.1% 26.0% 13.1% 14.6% 16.2% -8.4% Inflation (CPI) over Prior December 20.1% 35.2% 95.6% 77.6% 106.8% 67.3% 39.4% 57.6% 45.8% 83.1% 42.9% 29.3% 20.5X Sources: Interest rate data are from Banco Central del Uruguay, boletin Estadistico. CPI and exchange rate data are fro the IMF, IFS, data tape. Weights for the weighted average are from Uruguay Table 2. Notes: Real rates were calculated ex-post, t.e., they refLect the tiflation (and devaluation) rate six months furward from December. Weighted average (1) assumes that all foreign assets are savings deposits; (2) assumes all time deposits. a/ Since the real rates look forward six months from December, the 1981 figures do not reflect the November 1982 devaluation. - 81- UN.: Table 2 teves of Selected Fiandal Asets zId Of Year (leyels in billias of Nw Peae or U.S.S) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 a/ Cwurrcy, dstic Nakntnl 0.1 0.1 0.2 0.2 0.3 0.5 0.8 1.1 1.8 3.2 5.1 6.1 7.8 In 1980 prices 7.8 8.5 10.4 5.8 4.4 3.9 4.7 4.2 4.7 4.5 5.1 4.7 5.0 X of (DP #N/A #N/A 11.3X 5.9% 5.2X 4.6% 4.9% 4.5X 4.3t 4.3t 4.6% 4.8% 5.1% % of total assets #N/A #N/A 54.8% 39.6% 34.2% 28.8% 23.8% 19.6% 16.8% i5.6% 14.7% 11.7% 8.5% Deposits, dcmstic orrency Demark Ndmlrnd #N/A #N/A 0.1 0.1 0.2 0.4 0.5 0.8 1.3 2.6 3.6 3.6 3.6 In 1980 pric FN/A FN/A 3.6 3.8 3.2 3.0 3.3 2.9 3.3 3.7 3.6 2.8 2.3 X of GDP #N/A FN/A 3.9% 3.8% 3.7% 3.5% 3.4% 3.05 3.0% 3.6% 3.3t 2.8% 2.4% % of total assets FM/A #N/A 18.8% 25.6% 24.6% 21.7% 16.6% 13.31 11.8% 12.9% 10.5% 6.8% 3.9% Saving N?kenal #N/A #N/A 0.0 0.0 0.1 0.1 0.3 0.4 0.8 1.5 2.7 3.9 4.3 In 1980 prices FN/A FN/A 1.6 1.4 1.0 1.2 1.7 1.5 2.0 2.2 2.7 3.0 2.8 X of C( FN/A FN/A 1.8% 1.4% 1.2% 1.4% 1.8% 1.6% 1.8X 2.1% 2.5% 3.0S 2.8% % of total assets #N/A #N/A 8.7% 9.6% 8.0% 8.7% 8.7% 7.2% 7.1% 7.6% 7.9% 7.4% 4.7% Term Ncoinal #N/A PN/A 0.1 0.1 0.2 0.3 0.6 0.8 2.4 5.3 11.4 15.1 15.5 In 1980 prices FN/A FN/A 2.6 2.7 2.5 2.8 3.4 3.2 6.2 7.6 11.4 11.7 9.9 X Of GOP FN/A #!/A 2.9% 2.7% 2.9% 3.2t 3.6% 3.4% 5.6% 7.2% 10.4% 11.8% 10.0% % of total assets FN/A FN/A 13.9% 18.31 19.5% 20.1% 17.1% 15.0% 22.2% 26.1% 32.9% 28.9% 16.8% Subtotal dastic assets ',ufasl /#NA FN/A 0.4 0.5 0.8 1.3 2.2 3.1 6.2 12.6 22.8 28.7 31.3 In 1980 pri±es FN/A FN/A 18.2 13.7 11.1 10.8 13.1 11.9 16.2 18.1 22.8 22.2 20.1 X of GP N/A FM/A 19.8% 13.9% 13.0% 12.7% 13.7% 12.5% 14.7% 17.2% 20.9% 22.3% 20.3t % of total assets #N/A FN/A 96.2% 93.1% 86.1X 79.2% 66.2% 55.1% 57.9% 62.2% 65.92% 54.8% 33.9% Deposits. foreign currency d and term Noidnal U.S.S F/A FMA 0.0 0.0 0.1 0.1 0.3 0.5 0.6 0.9 1.2 2.0 1.8 Naninal, damtic #N/A FM/A 0.0 0.0 0.1 0.3 1.1 2.5 4.5 7.7 11.8 23.7 61.1 In 1980 prices #NMA FM/A 0.7 1.0 1.8 2.8 6.7 9.7 11.8 11.0 11.8 18.3 39.2 X of (IF FN/A FN/A 0.8% 1.0% 2.1% 3.3% 7.0% 10.2% 10.7% 10.4% 10.8: 18.4% 39.5% Tbtal domestic ard foreign Nrinal #N/A #N/A 0.4 0.5 0.9 1.6 3.3 5.6 10.7 20.3 34.6 52.4 92.4 In 1980 prices FN/A FN/A 18.9 14.7 12.9 13.7 19.8 21.5 28.1 29.0 34.6 40.5 59.3 % of DP #N/A #N/A 20.6% 14.9% 15.1% 16.0% 20.8% 22.7% 25.4X 27.6% 31.7% 40.7% 59.8% CPI, December (Dec.80-100) 0.7 1.0 1.9 3.4 7.1 11.9 16.6 26.2 38.2 70.0 10D.0 129.3 155.9 Fzdunw rate, Demr 0.3 0.4 0.7 0.9 1.7 2.7 4.0 5.4 7.1 8.5 10.0 11.6 33.8 GIF, Dec. adjusted, ntmnal #N/A #N/A 1.8 3.4 6.1 10.2 15.9 24.8 42.2 73.6 109.1 128.7 154.5 Sources: Asset andl CUP data are fraa the Banao Central del Ungusy, Boletin Estadistico. Excharig rate ard CPI data are fran the hF, In, data tape. Notes: The GW data have been logrithoically interpolated between the xirrent year and one year fcivard so as to be expressed in December prices. a/ The draiutic rise in assets for 1982 is a result of a rtusive devaluation. This shld not. be interpreted as financial deepenirg, since foreign lUabilities have also risen. - 83 - ANNEX 2 BANGLADESH Government Intervention in Financial Markets 1. Since Independence, the authorities in Bangladesh have! assumed a large and influential role in virtually every aspect of the country's financial system. Shortly after December 1971, when Bangladesh was formally severed from West Pakistan, many of the major enterprises were nationalized. Through the government's jurisdiction over the nationalized commercial banks and the central bank, the authorities controlled the creation and allocation of nearly all formal credit. The demand for credits was also largely under the control of the authorities, through the jurisdiction over the public enterprises. This situaticn has changed only slightly in recent years. Despite the growth in private demand for credit, claims on the public sector still represent 60-70% of domestic credit, down from 70-80% in the first half of the 1970's. 2. The monetary authorities at the central bank---The Bangladesh Bank--managed the quantity and allocation of credit with the standard policy instruments found in most developing countries. Among them were reserve requirements on the commercial banks' total deposits (5%) and liquidity requirements on demand and time deposits (25%), in the form of cash, deposits with the Bangladesh Bank, and "unencumbered approved securities,' i.e., government securities and debentures of either the public enterprises or financial institutions. Other poLicy instruments included an administered regime of interest rates and a comprehensive set of credit expansion ceilings for each financial institution. These ceilings were issued on a quarterly basis for the commercial banks and annually for the Bangladesh Shilpa Bank, an industrial development finance institution, and for the Bangladesh Krishi Bank, an agricultural development bank. 3. In addition to the above instruments, the Bangladesh Bank was heavily involved in the allocation of credit by way of its directed credit programs. These programs designated priority sectors, imposed compulsory lending targets and established refinancing facilities. Among the sectors receiving preferential treatment in some form, were agriculture, small industry, exports, residential housing, transportation, public enterprises and the private jute trade. 4. Although the regime of interest rate and credit ceilings was by-and-large quite rigid, there was some limited moves toward financial sector liberalization recently. Since the institution-by-institution credit ceilings created rigidities which discouraged inter-bank transfers, the authorities recently introduced three categories of bank credits, making the credit ceilings more flexible and freeing-up this important channel for transferring resources among intermediaries. The three categories of bank credits were: (1) advances not sub'Ject to the ceilings--primarily government securities and public sector debentures; (2) advances that can be made in excess of the ceiling, if the bank can meet certain liquidity requirements; and (3) advances l:hat are strictly - 84 - subject to the ceilings. The effect of establishing the second category was to allow banks with surplus funds to lend to banks with a surplus of investment options, even though the recipient bank had extended its maximum allowance of credit. In light of the economy's heavy reliance on bank intermediation for savings mobilization this was a constructive change. 5. A large upward shift in the level of the interest rate ceilings which occurred in October of 1980 can also be viewed as an important financial sector reform, one that was in response to market pressures and in the direction of market-determined interest rates. However, the fact that some lending rates were reestablished at levels below those paid on time deposits is an indication of how far the system remains from market determinated rates (see Table 1, also Tables 3 and 4). The Development of Interest Rates 6. Despite the upward ratcheting of the nominal levels in the interest rate regime, which is evident in Table 1, rates were fairly rigid over time. The nominally fixed rates, together with large changes in the rate of inflation, produced wide swings in the real rates ex-post. From 1971 up until the 1975 stabilization program, Bangladesh experienced high and rising inflation rates. The resultant highly negative real deposits and lending rates can be seen in Table 1, extending from the end of year rates for 1971 through 1973. The 1975 devaluation of the Taka and reduction of the government deficits produced a deflationary period from 1975 through 1976. As a result, the ex-post real rates swung highly positive in December 1974 and December 1975. From 1976 to 1980 the real rates remained a few points negative, as inflation fluctuated between 8% and 18%. A sharp drop in inflation during 1982, produced relatively high positive real rates at the end of 1981 (13.6% and 16.6%, for term deposits and normal credits, respectively), which declined as inflation accelerated during the first half of 1983. 7. Despite the predominance of negative real deposit rates, beginning in 1975 financial assets grew steadily, doubling in real terms from 1974 to 1982, and growing from 9.9% of GNP to 19.5% (see Table 2) There seems to be some evidence that remittances from Bangladesh nationals working in the oil producing regions and elsewhere played an important part to the growth in financial assets. Between 1974 and 1982 remittances totaled about 30 billion Taka, versus an increase in financial assets of about 40 billion. However, the yearly increments in financial assets do not correlate well with the yearly remittances, suggesting that the linkage is not strong. In particular, an examination of the growth in financial assets reveals a pattern of steady but moderately accelerating growth. Remittances, on the other hand, had a very steep growth path. Thus, in the early part of the period, annual remittances were much less than the increment to financial assets, while, in the latter part, remittances substantially exceeded asset growth. In sum, the causal link between remittances and growth of financial assets is unclear. - 85 - BAUES: Table 1 Selected Nmur1nal and Ex-xst Real Interest Rates in Sche&aed BaTis Erd of Year (arualized) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Deposits, domatic denu. Dwmed Ncudral. #N/A O.% 0.1% O.% O.CZ% o.a O..% 0.0% O.C0 O.X% 0.% o..:1 0.0% EC-post real #N/A -0.2 -0.2 -0.4 0.1 0.1 -0.1 -0.1 -0.1 -0.1 -0.1 0.0 -0.1 Sirgs ( c ) Nominal #N/A 4.5% 4.5% 4.5% 6.C% 6.a% 7.0: 7.0% 7.C% 7.0% 1O.CX 10.% 10.0% Er-post real N/A -18.4% -20.1% -32.4% 16.9% 11.9% -8.9% -0.8% -8.9% -6.3% -5.3% 10.6% -2.3% Tenn, 6 munth Nao.nal #N/A 4.8% 4.8% 4.8t 6.5% 6.5% 7.5% 7.5% 7.5% 7.5Z 13.0% 13.0 13.0% E -post real #N/A -18.2% -20.0% -32.2% 17.5% 12.4% -B.5% -0.4% -6.5% -5.8% -2.7% 13.6% 0.3% Weighted averagpe rate of return an above assts plus currency Ei-post real #NA -20.8% -22.6% -34.4% 12.6% 7.9% -12.4% -4.4% -12.3% -9.5% -8.5% 7.2% -5.0% Iendirg, domstic denm. NoD22 Nominal #N/A 10.0% 104.0 10.0% 13.0% 13.0% 13.C0 12.aP 12.0% 12.0% 16.C% 16.0% 16.0% E -post real #WA -14.1% -15.9% -28.8% 24.7% 19.3% -3.8% 3.0 -4.72 -1.9% -0.2% 16.6Z 3. Agairst jute, jute gods nd tea Nominal #N/A 8.5% 8.5% 7.5% 10.5% 10.5% 10.5% 10.5; 10.5% 10.5% 12.0% 12.0% 12.0% Ex-post real #N/A -15.3Z -17.1% -30.4% 21.9% 16.7% -6.0% 2.4: -5.9% -3.2% -3.6% 12.6% -0.6% Inflatim (CPI) 6 mnxths Fonard fran Decmer -4.1% 28.0% 30.9% 54.6Z -9.4% -5.3% 17.5% 7.9,2 17.5% 14.2Z 16.2% -0.6% 12.6% Devaluatian 6 muths Foraird frm December #/A 9.1% -17.3% -5.6% 185.6% 1.7% 7.8% 9.51 2.6% -11.4% 24.0% 24.1% 3.6% Inflation (CPI) over Prior Decsber #N/A 15.3% 46.1X 34.2% 76.1% -12.6% -0.1% 17.1X 9.6% 14.0% 13.2% 14.3% 4.9% Souroes: Interest rates are fran the Bawgladesh Bak, Ecrmic Trends. CPI data are fran the IMF, IFS, data tape. Weights for weighted average are fran Bargiadesh Table 2. (See note regardirg dispositian of savirgs.) Notes: Real rates were calculated se-post, i.e., they reflect the inflation rate six ianths fDroard fran December. In 1977, 1978 and 1979, premiums were psid to rural depositors of .75 & 1.5 percentage points on savirgs and tenm deposits, respectively. - 86 - WaANd: Tale 2 Levels of Seected FinncIl masts End of Year (in billia of Taka) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Qzecy, d stic Nmdnal IN/A 2.1 2.9 3.2 4.0 3.7 3.9 5.0 6.6 7.2 8.7 9.7 9.9 In 1980 prices YN/A 10.3 9.9 8.2 5.8 6.2 6.4 7.1 8.5 8.2 8.7 8.5 8.3 % of GNP YN/A #N/A 5.9% 4.2Z% 2.9% 3.3t 3.5% 3.7% 4.0% 3.9% 3.9% 3.8% 3.6% % of total tI/A 37.8% 31.0Z 27.8% 29.4% 26.6X 22.0% 23.3 25.2Z 22.9% 23.1% 21.7% 18.7% eposits, dotic currmy Demi Nominal #WA 1.8 3.9 4.9 5.4 5.5 6.8 7.5 8.8 10.2 10.6 12.3 14.8 In 1980 prices #N/A 9.0 13.3 12.4 7.7 9.2 11.3 10.6 11.3 11.6 10.6 10.8 12.4 % of G MN/A IN/A 7.9% 6.3Z 3.9% 4.9% 6.1% 5.4% 5.4% 5.4% 4.8% 4.9% 5.4% % of total sN/A 33.1% 41.7% 42.3% 39.1% 39.5% 38.8% 34.7% 33.5% 32.3 28.4% 27.5% 27.9% Term N's1zl #N/A 1.6 2.5 3.4 4.3 4.8 6.9 9.1 10.8 14.2 18.2 22.8 28.5 In 1980 prices MIA 7.9 8.7 8.8 6.2 7.9 11.4 12.9 13.9 16.0 18.2 19.9 23.7 % of GNP #WA #I/A 5.2% 4.5% 3.12 4.2% 6.2% 6.6% 6.6% 7.6% 8.2% 9.0% 10.4% X of total asses IN/A 29.% 27.3% 29.9% 31.5% 33.9% 39.2% 42.1% 41.2% 44.8% 48.5% 50.8% 53.5% Total ruiilral IN/A 5.5 9.3 11.5 13.7 14.0 17.6 21.6 26.2 31.7 37.5 44.9 53.2 In 1980 prices IN/A 27.3 31.9 29.3 19.8 23.2 29.1 30.6 33.8 35.8 37.5 39.3 44.4 % of GNP IWA IN/A 18.9% 15.C% 9.9% 12.4% 15.8% 15.7% 16.0Z 16.9% 17.0% 17.7% 19.5% CPI, Deember (Dec.80-100) 17.4 20.0 29.3 39.3 69.2 60.5 60.4 70.8 77.5 88.4 10X.0 114.3 119.9 GNP, Dec., nauinal IN/A #N/A 49.3 76.8 137.9 112.8 111.3 138.0 163.9 187.8 221.0 253.9 273.3 Souroes: Asset data are fron the Bargladesh Bfnk, Banglad.h Bak lletin, and Econocic Trends. GNP data are fron BAngladesh Bureau of Statistics, Econumic Indicators of Bengladesh, and frmn the Bangladesh Bank, Economic Trends. CPI data are fran the IF, IFS, data tape. Notes: GNP data are for the fiscal year beginning in the airrent year, therefore inccse is expressed in Decet er prices. - 87 - 8. Overall, the interest rate regime was not suEficiently flexible to dampen the movement of the real rates by adjusting the nominal rates to accommodate swings in inflation. Although, some positive real rates occurred, these were only in deflationary periods. The Pattern of Deposit Rates, End of Year 1982 9. Table 3 displays the nominal interest rates, as of December 1982, on savings and term deposits of various maturities. At first glance, it seems that the two percentage point spread between six month and three year deposits was inadequate to compensate asset holders for the additional risk of committing funds long term, particularly in light of the country's recent experience with inflation rates in the teens. However, long term deposits remained a very large share of all term deposits. In fact, term deposits with maturities in excess of three years were roughly 60% of all term deposits throughout the 1978-82 period, rising from 34% in 1975. Furthermore, the figures show an eleven-fold increase in deposits of 3+ year maturities over deposits with 2-3 year maturities, where there is only a 0.5 percentage point spread. This suggests that the explanation for the popularity of the 3+ year term deposits involves issues beyond the interest rates. Precisely what these issues are and what part, if any, remittances play remains an open question. Table 3 The Pattern of Deposit Rates, End of Year 1982 Savings Deposits Nomina]. with checking 8.5% without checking 10.0% Time Deposits 3-6 months 12.0% 6-12 months 13.0% 1-2 years 14.0% 2-3 years 14.5% 3+ years 15.0% Source: The Bangladesh Bank, Economic Trends. The Pattern of Lending, End of Year 1982 10. The first observation that can be made regarding the lending rates displayed in Table 4 is that many were at or below rates the paid on time deposits. Thus, even without accounting for reserve and liquidity requirements or the cost of intermediation, it appears that the lending rates were well below the marginal cost oE the funds and a substantial amount of subsidization of borrowers was taking pilace. - 88 - 11. As far as the structure of the lending rates is concerned, the most concessional rate charged, the rate on non-traditional export credits, was approximately two thirds of the rate charged for general lending. Such a disparity may be questioned on efficiency grounds, particularly if a substantial portion of the concessionary credits were merely diverted into deposits paying rates higher than the borrowing rate. However, an assessment the size of the distortions introduced by the credit programs requires a close examination of the returns on the actual uses of the funds and those foregone by the diversion of the funds and the cost of administering the programs, including the subsidies. Table 4 The Pattern of Lending Rates, End of Year 1982 nominal Agricultural production 12.0% Industry 14.5% Specific industries in less developed areas 13.0% Export credit traditional items 12.0% non-traditional items 11.5% Loans for Socio-economic objectives 13.0% Loans given in the Chittagong Hill Tracts 13.0% General loans 16.0% Source: The Bangladesh Bank, Economic Trends. - 89 - ANNEX 3 KENYA Government Intervention in Financial Markets 1. The financial sector in Kenya is quite well developed in comparison to most countries in its income range ($341) U.S. pier capita in 1982). It is vigorous and sophisticated and, as measured by the ratio of financial assets to GNP, relatively deep (see Table 2). Institutionally, the financial sector contains a number of financial institutions of various types, with some of the more advanced forms, such as insurance companies, having an importance not usually associated with countries at Kenya's income level. In contrast with many developing countries, this institutional diversity is not associated with badly fragmented financial markets, but rather there appears to be a fair amount of competition across institutional types and between institutions in each category. 2. While the authorities have allowed market forces to play a relatively influential role in the financial system, the government maintained a formidable presence in the financial market place. The most important facets of the government's intervention in the financial sector were: (1) ownership of commercial banks, finance coumpanies, the largest pension fund, and an insurance company, which provided the government with extensive direct control over credit allocation; (2) a regime of minimum interest rates on deposits and maximum lending rates; and (3) extensive borrowing by the government to finance its deficit arLd to relend to the parastatal enterprises. Other important policy instruments used by the authorities included such traditional measures as: reserve requirements, liquidity requirements and regulations governing the financial institutions' portfolio composition, including the share of deposits committed to agricultural lending and the share held as low yielding government securities. The government also guaranteed many of the credits extended to the parastatals, and placed some restrictions on foreign owned enterprises' access to domestic credit. 3. By imposing ceilings on the lending rates the authorities reduced the amount of credit that the financial intermediaries could profitably extend by: (1) preventing intermediaries from charg:Lng a premium to cover the additional costs and risks of term finance and oil lending to smaller borrowers and those with little collateral, thereby reducing such lending, and by (2) limiting the interest rates payable on deposits, thereby suppressing the mobilization of financial savings and thus restricting the pool of loanable funds. As a direct result, the commnercial banks maintained loan portfolios composed primarily of short term credits to the major private firms and the parastatals. While the finance companies enjoyed somewhat looser regulation and were able to extend a larger share of their loans to the smaller firms, the interest rate ceilings were generally binding on such lending and formal credits to these enterprises remained far less than demanded. - 90 - 4. The bias towards short term lending to the large firms and the parastatals has serious distributional and efficiency implications. Investments undertaken by the major firms tended to produce relatively fewer low-skilled employment opportunities than investments by smaller concerns, and tended to enhance the earnings of the groups which owned the firms. In addition to the questionable distributional impact of channelling an exceptionally large share of the country's financial resources to the parastatals, these enterprises were also notoriously inefficient. Economic efficiency was further diminished by the scarcity of long term credits. Despite the regularity with which short term obligations were rolled-over, the inability of firms to lock-in the terms of their borrowings greatly indreased the risk of undertaking projects with long gestation or payback periods. 5. The volume of borrowing by the government also threatened to hold back Kenya's growth potential by placing a severe strain on the financial system and shifting the allocation of the country's resources excessively towards the public sector. Between 1976 and 1982, government expenditures rose dramatically, from approximately one quarter to one third of GNP. A large fraction of this growth came through the expansion of the parastatals, financed by government intermediation between the public enterprises and the financial system and foreign capital markets--often with negative spreads. By engaging in intermediation on such a large scale, the authorities, in effect, established a system of directed credit comparable to that which many developing countries implement through regulation of their banking systems. This led to substantial crowding out of private investment, through both the reduction in available credit and the preemption of private investments opportunities by the parastatals. 6. The massive public sector financing requirements are also a serious impediment to interest rate reforms. While the recent increase in interest rates raised the allowable returns on private deposits and loans, it also placed upward pressure on the yields the government had to pay on its securities, raising government debt service and increasing pressures on the fiscal deficit. This presents the authorities with a serious dilemma, since the abrupt decline in the country's access to foreign credits (due to Kenya's large foreign debt of $2.4 billion in 1982, and the general constriction of credits to the developing countries), has placed a premium on mobilizing domestic resources and allocating them more efficiently, suggesting the need for further interest rate liberalization. 7. As noted, such reforms would however increase the public sector deficit, forcing the authorities to resort to either: (1) increased inflationary finance, or (2) increased forced holding of government securities, or (3) a reduction in public expenditures. Each of these policy options has its costs. Increased inflation would jeopardize the country's tradition of relative price stability, upon which the successful development of the financial sector has depended. An increase in forced holding of government securities at below market rates would increase intermediation costs, possibly resulting in high real lending rates and/or lower real deposit rates. This would tend to depress the economy further and partially defeat the purpose of the initial reforms--increased domestic - 91 - resource mobilization. Finally reductions in public expenditures would result in lower short term employment levels, if cuts were made in current expenditures, or lower long term growth, if the cuts rere out of development expenditures. Apparently, the authorities have chosen to limit the increases in the level of interest rates, lower ea;penditures primarily through lower development expenditures, and resort to some inflationary finance. Clearly, this solution is going to be costly in the long term if it is maintained, and the government is faced with a great challenge to its political and management skills, a challenge with very serious consequences for the country's current and future welfare. The Development of Interest Rates 8. Since 1977, the low ceilings on lending rates provided little incentive to raise deposit rates much above the minimuLm set by the government. These minimums, which are displayed in Table 1, were predominantly negative in real terms ex-post. Only recently did this pattern change, due to the combined effect of declining inflation and higher minimum deposit rates. Table 1 shows that at l:he end of 1982 term deposits and savings accounts in the commercial banks and private finance companies yielded positive returns ex-post. In addition to the upward adjustment in the deposit rate ceilings, the maximum nominal lending rates were increased over the period, reaching 16.0% in 1982. 9. The ceilings on lending rates implied slighl:ly negative real rates on average over the period. The evidence also suggests that the effective rates were commonly increased a couple of percentage points above the ceiling rates by compensating balances and various other adjustments to the repayment schedules. This was true particularly on loans from the less well regulated Finance Companies, which accounted for a growing share of the market. However, these effective rates were not sufficient to encourage substantial lending at term or to non-blue chip entities. 10. A comparison between the rates on loans for land purchases from the Agricultural Finance Corporations and the ceiling rates on general credits from the commercial banks reveals that the land purchase loans were only a couple of percentage points lower than the general category. Thus these rates were also only slightly negative in real terms on average, and were not exceptionally concessional. However, the terms of these loans may have been considerably easier than those on general credits, making the spread in effective rates somewhat wider and the land purchase lending correspondingly more concessionary. 11. Although the ceilings on lending rates were increased, the minimum rates for deposits were increased more. Thus the spread between term deposits and the ceilings on general credits decLined from 4.6% in 1979 to 2.8% by 1982. This decline suggests that the profitability of intermediation was reduced, and financial institutions increasingly had to resort to devices such as fees and compensating balances to maintain profits. This squeezing of margins tends to restrict formal finance and encourage expansion of less efficient forms of informal or self-finance. - 92 - 5el1-t1 -1m1 -d at-Pm 1al Iztamt hzt VId of Yer (amnzlizmd) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1961 1982 Iqpaits, uinim rat camdral Bws Dean Nomd .Oa O.O O.OX O.Ot 0.0% O.2 O.O O.0 O.OX O.X O.X O.X 0.02 Er-pot ral -3.3X -3.72 -9.13 -17.0X -22.2X -11.OX -21.2X -15.72 -5.72 -13.2X -11.2X -13.0X -9.5X 1 3.0X 3.0 0 3.02 3.0 X 3.02 5.02 5.0 X 5.0 X 5.02 5.02 5.02 6.02 1O.02 12.5X bEpt real -0.42 -0.8X -6.62 -14.52 -18.3X -6.6X -17.2X -11.52 -0.92 -6.92 -5.8X -4.31 1.9X Term, 6 wnth ?N1M1 3.8X 3.8X 3.62 5.4 5.4X- 5.4X 5.4X 5.4X 5.4X 5.4X 6.8X 11.02 13.2% Ex-ixt real 0.31 O.OX -5.92 -12.5X -18.02 -6.2X -16.92 -11.12 -0.62 -8.52 -5.2X -3.5X 2.52 Private F1znal Irstitutia Nmil OaO OaO O.O OaO OaO OaO O.OX OaO una oao oao oao o.ox rEx.t rea -3.13 -3.7X -9.3 -17.0 -22.2X -11.0 -21.2 -15.7X -5.7X -13.2% -11.2X -13.02 -9.5S :m l 3.02 3.02 3.02 3.02 5.0 X 50 5.0X 5.02 5.02 5.02 8.02 10.02 12.52 b-9It ral -0.4X -0.62 -6.6X -14.5X -18.3X -6.62 -17.2% -11.52 -0.9X -8.92 -4.02 -4.3S 1.92 Term, lonpt tegry b-pot real 2.52 2.12 -3.92 -10.86 -16.4X -4.42 -14.92 -8.31 2.62 -5.6X -1.42 -0.4S 5.2% Pot Office &vLqp B -k N 1 3.0kI 3.0 3.0 3.02 3.02 3.02 5.02 5.02 5.02 5.0X 5.02 6.02 10.02 10.0% bE-pot real -0.42 -0.6 -6.6X -14.52 -19.92 -6.62 -17.2% -11.52 -0.92 -8.9X -5.8% -4.3X -0.4X Agtedt erate of ..-turn an aw aset i-put ral -1.4X -2.72 -6.62 -14.62 -18.72 -9.72 -16.5X -13.8S -4.02 -10.0% -7.6S -8.2% -2.8S !-Ai ,detic dunce. comwial ak~ md.un (less than 3 yr.) Nra - - - - - - - 10.02 10.0 10.02 11.0 14.02 16.0X b-pot real - - - - - - - -7.2S 3.8X -4.5Y -1.4% -0.9S 5.02 Nkualm 7.02 7.02 7.02 7.02 8.02 8.02 - - - - - - - b-put real 3.5X 3.1U -3.02 -11.2X -16.02 -3.9X - - - - - - - 11 ~ ~ Finalce GDrp 7.5Z 7.52 7.52 7.52 8.02 8.0Z 9.0Z 9.0Z 9.0Z 9.0a 9.0X 12.02 12.02 EM-Wet real 4.02 3.62 -2.5Z -10.82 -16.02 -3.9% -14.12 -8.12 2.82 -5.4Z -3.22 -2.6% 1.42 Inflati (CPI) 6 nths Forward frtm Dber 3.42 3.82 10.31 20.5X 28.5Z 12.42 26.8Z 18.6Z 6.0Z 15.2% 12.6Z 15.02 10.5% 1evaluatime 6 onths Forward from Deilber 0.0 0.02 -6.72 7.2% 0.02 4.2Z -0.2% -3.5Z 2.0% -0.5% 35.Za 13.9% 8.3t Infladtin (CPI) over Prior De-i- 1.52 7.2X 3.31 15.2% 16.0Z 20.3. 7.6% 21.02 13.7Z 9. U 13.1U 19.3X 13.3% 9swces: Interest rates are frcm The Central B*k af Kenya, E mic and Ftn Review, rual Report, and reaj of Statistics Finrwe ad Plaug, Sey. CPI data are irr the IMF, IFS. data tape. ltigts for wigited awras are frmm Kenya Table 2. Notes: Raal rates wm cal-atd ex-Wet, i.e.,* they reflect the inflation rae six mnths forw.rd frum December. lhe awerae rate of retuzr wo calojlaced asmadTi asch set yielded the ldnImn rate and that all term deposits in the Private Final istituticn were In the lmngat term catagory. '-' indicates rot defined. - 93 - In fact, the formal financial sector appears to have contracted slightly (See Table 2). The ratio of total financial assets to GNP declined from approximately 34.8%, in 1979, to 32.7% by the end of 1982. 12. Alternative explanations for the decline in the ratio of financial assets to GNP between 1979 and 1982 include: (1) portfolio adjustments the post-coffee boom years; (2) capital flight associated with the growing economic crisis; and (3) a drawing-down of parastatal deposits which are not netted out of the asset data. In contrasi: to that decline, Table 2 reveals a sharp upward shift in the ratio of tot:al financial assets to GNP from 27.3% in 1976 to 33.4%. in 1977, and 34.7% in 1978. This shift corresponds to large foreign exchange inflows associated with the coffee boom in these years and probably reflects a substantialLy more optimistic economic outlook. The softening of the economic picture in the post-boom years could then have accounted for the subsequent declLne in the ratio over 1979 to 1982. The growing economic crisis and the associated internal and external imbalances could also have been responsible for the decline in the ratio, as agents with access to foreign asset markets--legal or otherwise--shifted capital offshore, thereby reducing the relative amount of domestically mobilized resources. Finally, the paraatatals, under the pressure of rising losses, drew down accounts built-up during earlier years. Thus, a variety of factors contributed to the reduction in the depth of the formal financial system. The Pattern of Deposit Rates, End of Year 1982 13. At the end of 1982, the official minimum deposit rates displayed in Table 3 indicated a rather small spread for maturity--only one percentage point between deposits of one month and deposits up to twenty four months. As discussed in paragraph 8, the ceiling on lending rates and the cost of intermediation combined to limit the rates financial intermediaries paid on short term deposits to roughly the minimums. Given uncertainties over future interest rates, banks also had little incentive to offer rates above the minimums on longer term deposits. In combination with a liquidity squeeze, this caused a switch into maturities of almost exclusively less than three months. 14. A couple of difficulties arise from a predominantly short term deposit base. First, it discourages term financing, since banks must keep a shorter loan portfolio to match the greater volatility of their liabilities (Of course, firms may not desire term finance if there is a reasonable chance that interest rates will decline). Second, the banks suffer greater exposure to potentially destabilizing out-flows of funds. This can have serious repercussions for the entire financial system if the system does not have adequate institutional resources to cope with a major banking crisis. Since the short maturity of the deposit base can be related to the lack of an adequate premium for long term deposits, which in turn can be traced partly to the lending ceilings, these dangers add weight to the argument for allowing interest rates to move toward market-determined levels. - 94 - KgJYA: Table 2 Levels of Selected Financial Assets Fnd of Year (in biLLions of %ditlins) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 198.) 1981 1982 Currency, drmstic C dmnal 0.7 0.7 0.9 1.0 1.1 1.2 1.6 2.2 2.3 2.7 3.0 3.6 3.7 In 1980 pric 2.3 2.2 2.6 2.5 2.4 2.3 2.8 3.1 2.8 3.0 3.0 3.0 2.8 X of GNP 5.82 5.6% 6.0% 5.62 5.2% 4.9% 5.2% 5.82 5.62 5.7% 5.5X 5.7X 5.2% % of total assets 30.2% 19.5% 20.1X 17.8% 18.1% 17.3% 18.9% 17.5% 16.0% 16.3% 16.62 17.3% 15.8% Deposits, danstic currency Cmrcial Bark Demnsd Nomdzul 1.2 1.3 1.5 2.0 2.1 2.4 3.0 4.3 4.7 5.6 5.2 5.6 6.0 In 1980 prics 3.9 3.9 4.5 5.0 4.7 4.4 5.1 6.1 5.8 6.3 5.2 4.7 4.4 X of 1W 9.9% 9.7Z 10.2% 11.2% 10.1% 9.72 9.5% 11.62 11.42 11.8% 9.62 9.0% 8.3X Z of total assets 34.4% 34.0% 34.12 35.5% 35.4% 34.0% 34.7X 34.8% 32.8% 33.8% 28.6X 27.1% 25.5% Savinp Noinal 0.7 0.8 0.9 1.0 1.2 1.3 1.5 2.1 2.4 2.7 3.0 3.5 3.9 in 1980 prices 2.2 2.3 2.5 2.6 2.6 2.4 2.6 2.9 3.0 3.0 3.0 2.9 2.9 X of 1W 5.77 5.72 5.8% 5.77 5.62 5.2X 4.9% 5.62 5.8% 5.6% 5.4% 5.6X 5.5% % of total assets 19.9% 19.9% 19.4% 18.2% 19.6% 18.3% 17.8% 16.8% 16.62 16.2% 16.2% 16.9% 16.72 Term Nminal 0.5 0.6 0.6 0.9 0.8 1.1 1.4 2.3 3.0 3.1 3.7 4.1 5.6 In 1983 prices 1.7 1.8 1.8 2.2 1.8 2.0 2.3 3.3 3.6 3.5 3.7 3.5 4.2 X of GMW 4.52 4.4% 4.2% 4.9% 3.9% 4.5% 4.4% 6.2Z 7.1% 6.5% 6.8% 6.62 7.8% % of total assets 15.4% 15.5% 14.0% 15.7% 13.72 15.72 16.0% 18.62 20.5% 18.62 20.4% 20.0% 24.0% Private Financial Inst. Dem3W Nominal 0.0 0.0 0.0 n.0 0.0 0.1 0.0 0.3 0.2 0.3 0.1 0.2 0.2 In 1980 prices 0.1 0.1 0.0 0.0 0.0 0.2 0.0 0.5 0.2 0.3 0.1 0.2 0.2 2 of GNP .3X% 0.2% 0.1% 0.1% 0.0% 0.4% 0.1% 0.9% 0.4% 0.5% 0.2% 0.4% 0.3% 7 of total assets 1.1% 0.62 0.4% 0.3% 0.1% 1.3% 0.3X 2.8% 1.3% 1.6% 0.5% l.U% 1.0% Savings a/ snir 0.1 0.1 0.1 '3.2 0.2 1.1 0.3 0.2 0.5 0.5 0.6 0.6 0.6 2 of (W 0.62 0.8% 0.9t 1.l1 1.0% 0.67 0.9% 0.62 1.1% 1.0% 1.12 0.9% 0.9% 2 of total assets 2.0% 2.6X 3.1% 3.5% 3.5% 2.1Z 3.M 1.9% 3.3X 2.72 3.2X 2.8% 2.7% Tetm a/ Sni~nal 0.1 0.2 0.3 0.4 0.4 0.7 0.6 0.8 1.2 1.5 2.3 2.6 2.9 In 1980 prices 0.4 0.6 0.8 1.0 1.0 1.2 1.0 1.1 1.4 1.7 2.3 2.2 2.1 % of 1W 1.1% 1.4% 1.9% 2.12% 2.1% 2.72 2.0% 2.1U 2.8% 3.Z% 4.2% 4.2% 4.0% Z of total assets 3.8% 5.0% 6.2g 6.8% 7.37, 9.3% 7.2X 6.37 8.0% 9.3% 12.72 12.7% 12.2X Post Office Swins Bank Noinal 0.1 0.1 0.1 0.1 0.L 0.1 0.2 0.2 0.2 0.3 0.3 0.4 0.5 In 1980 prices 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.4 0.4 Z of GNP 0.9% 0.8% 0.8% 0.7% 0.7% 0.6% 0.5% 0.5% 0.5% 0.5% 0.62 0.7% 0.72 2 of total assets 3.U% 2.9% 2.6% 2.32 2.3% 2.07 1.9% 1.5% 1.5% 1.5% 1.9% 2.UL 2.L% Total Nridnal 3.4 3.8 4.4 5.5 6.0 7.1 8.6 12.5 14.4 16.4 18.3 20.6 23.6 In 1980 prices 11.2 11.5 13.0 14.1 13.2 13.0 14.6 17.5 17.8 18.6 18.3 17.3 17.4 X of 11W 28.9% 28.5X 29.8% 31.4% 28.6% 28.5% 27.3% 33.4% 34.7% 34.8% 33.4% 33.2% 32.7% CpI, D tember (Oec.80-100) 30.8 33.0 34.1 39.3 45.5 54.8 58.9 71.3 81.0 88.4 [D)0.O 119.3 135.2 GNF. Dec. adjusted, noinal 11.9 13.1 14.9 17.6 21.0 25.0 31.4 37.4 41.5 47.2 54.8 62.2 72.1 Sources: Asset data are frxau tle Cencrai Bark oft Keya, Economic arv3 Finrmcial Review. GNP acd CPL data are frmn the LIF, LFS, data tape. Notes: I-re GE data have been I ntr icAWly interpoxlated betven the Lurrenc year ivJ ale year forward so as to be expressed in Decmber prices. a/ Savinp and term deposits in the Private Financial Institutions were asmsed to be distributed 1:2 for the years 1970-72, and in all other years as reporced. - 95 - Table 3 Commercial Bank Minimum Deposit RatesL On Account Less than Shs 1 million, End of Year 1982 Nominal Savings deposits 12.5% Term deposits 7 day call free one month 12.5% 1-3 months 12.5% 3-6 months 12.7% 6-9 months 13.2% 9-12 months 13.4% 12-24 months 13.5% Source: Central Bank of Kenya, Economic and Financial Review. The Pattern of Lending Rates, End of Year 1982 15. The structure of lending rates in Kenya at the end of 1982 does not appear to have been particularly complex nor highly distortionary, as evidenced by the array of lending rates displayed in Table 4. Outside of the rates established for direct credits from the Central Bank, the number of specified lending categories and rates were few and the spreads rela- tively small. Thus, while other "non-price" rationing mechanisms may have introduced substantial distortions, the margins within the regime of interest rates do not generate the massive subsidies typically found in statutory interest rate regimes. This is not to say that subsidization was absent, but merely that interest rate subsidies and the distortions they produce were low in comparison to most developing countries. 16. The agricultural sector benefited most from the preferential lending rates, i.e., the rates on rediscounts and advances from the Central Bank and loans from the Agricultural Finance Corporation. In addition, the Kenya authorities required the commercial banks to commit 17% of their net deposit liabilities to agricultural lending; the corresponding figure for the non-bank financial institutions was 10%. However, the evidence suggests that enforcement of these requirements was loose and that compliance was less than full. Evidence also indicates that much of the "agricultural" lending was, in fact, only marginally related to agricul- ture, and that there was substantial diversion of agricultural credits from the agricultural sector. This suggest that targetted lending in reasonably - 96 - well integrated capital market is likely to be limited in effectiveness or to require large expenditures to monitor. Moreover, even monitoring could not prevent potential investors in targetted sectors from borrowing subsi- dized funds to replace their own and subsequently investing their funds elsewhere. Table 4 The Pattern of Lending Rates, End of Year 1982 Central Bank of Kenya Rediscount Rate for T-Bills 13.48% Advances against T-Bills 14.50% Bills and Notes Under Crop Finance Scheme Rediscounts and Advances CSFS & AFC 13.75% Finance of Export Bills 14.00% Other Bills and Notes Rediscounts 14.50% Advances 15.00% Advances against Government Securities 14.50% Kenya Commercial Banks Loans and Advances (minimum) free (maximum) 16.00% Other Financial Institutions Agricultural Finance Corporation Land Purchase Loan 12.00% Seasonal Crop Loan 14.00% All other loans 13.00% Hire Purchase Companies and Merchant Banks Loans 16.00% Building Societies Loans 16.00% Source: Central Bank of Kenya, Economic and Financial Review. 17. In sum, the financial system in Kenya is one of the most market oriented in the developing countries and among the freest from interest rate induced distortions. However, the size and growth of public sector borrowing has placed a large strain on the system, one that threatens to limit its development. - 97 - ANNEX 4 NIGERIA Government Intervention in Financial Markets 1. The Nigerian authorities' intervention in the financial markets was among the most extensive of all the market-oriented developing countries, during the 1970-82 period. In addition to extensive use of such commonly encountered policy instruments, as administered interest rates, directed credit, minimum reserve and liquidity ratios, &Lnd mandatory bank holdings of government securities, the Nigerian government exercised direct and indirect control over a large portion of the country's financial resources and financial transactions. This was primarily due to the government's control over the country's oil revenues and. its ownership position in the commercial banks. 2. The public sector used the country's oil revenues to undertake a major fraction of total investment, by-passing the financial sector. In addition, the government used its privileged borrowing position to engage in extensive intermediation between sources of foreign and domestic capital and the Nigerian public and private sectors. Finally, the authorities maintained extensive indirect influence over the financial resources not under their direct control by virtue of the government's ownership of most of the large commercial banks. In short, the authorities exerted substantial control over virtually all of the financial savings available to the economy. 3. The government also intervened in the financial markets through a wide ranging and complex system of directives and guideLines. The monetary authority annually established a regime of interest rates, which covered all deposit and lending rates in the formal financial market. This regime included a maximum and minimum lending rate and a set oi differential rates involving a number of preferential categories. 4. Policy goals relating to the financial sector typically were pursued through credit allocation guidelines or specific lending directives. The Central Bank of Nigeria issued guidelines to the commercial banks specifying, among things, the aggregate credit expansion, the share of credit allocated to each of 16 sectors into which the economy was divided, the share of credit allocated to indigenous borrowers (which is further subdivided by size of enterprise and other criteria), and the share of credits by term. So complex and internally inconsistent was the system that it defied compliance and violations occurre