Clean up excess liquidity from banks

Prominent think tank of the country, the Centre for Policy Dialogue, came up with the suggestion that the Bangladesh Bank should raise the cash reserve ratio to clean up excess liquidity from the banking system.

This advice came as a proposal for the effective implementation of the monetary policy.

According to the CPD researchers some portions of the excess liquidity, which reached an all-time high of Tk 231,462 crore in June, are being channeled to unproductive sectors due to a lack of direction to invest in the productive sector. They fittingly suggest that the central bank should strengthen its monitoring on the surplus fund as it has already created some kind of a bubble in the capital market.

No doubt, there is the need for the central bank to follow a cautious expansionary monetary policy to minimise the flow of funds to the unproductive sector.

Renowned economists of CPD expressed concern regarding implementation of the stimulus packages, as there is evidence that stimulus packages create avenues for corruption and malpractices, and as such suggest the central bank should be cautious about allocation of money while implementing the stimulus packages.

According to reports, the government and the central bank are implementing 28 stimulus packages involving Tk 131,000 crore, most of which is being channeled by the Bangladesh Bank (BB). They expressed concern regarding whether the loans under the stimulus packages are being disbursed judiciously. From the outset of the unveiling of the support packages, banks have been willing to lend more to large borrowers than small borrowers, paving the way for a "K-shaped" recovery of the economy.

According to economists, a K-shaped recovery takes place when different sectors experience different rates of recovery after a recession. CPD suggests a multi-stakeholder task force should be formed to monitor the stimulus packages and assess their effectiveness.

This is good news that BB has already sent circulars to commercial banks with instructions to send details of the clients who got loans from the stimulus packages. This would help BB to identify whether the low-cost funds have gone to productive sectors or not. Economists fear inflation will rise if the excess liquidity cannot be used in the productive sector.

The think tank also suggested the central bank should increase the grace period for stimulus packages as many borrowers were still struggling to keep their businesses afloat due to the recent wave of infections. And at least 30 per cent of the SME stimulus package should be disbursed among the new entrepreneurs.

The other issue that economists raised at the same time is the two per cent cash incentive offered to people working abroad for transferring money through banks. They argue that a two per cent cash incentive on remittance would put pressure on the excess liquidity, hence the government should reconsider this system. It has been further argued that the big sums of money sent by the migrant workers have created a surplus foreign fund in the financial sector, thus adversely affecting the exchange rate between the taka and the US dollar.

The most important suggestion that came from the economists was that the central bank should investigate to find out whether money launderers were bringing in the same money in the form of remittance after laundering them abroad to earn the two per cent incentive. We feel this needs to be checked with due seriousness to discourage money launderers from making double profit on the same amount.