Support during financial crisis

The world’s economic condition generally goes through fluctuation and growth trend depending on the given economic situation. The breaking out of natural disasters puts countries into difficulties and problems formidable and unforeseen. Both unemployment as well as increased poverty level befall the states hit-hard by natural calamities. Consequences include the commoners losing purchasing power capacity because of losing jobs. Money flow also declines.

Now, the onus is on the shoulder of the government to take care of those who are suffering financially. In absence of alternatives, the government sometimes tries to reach the doorstep of the commoners with cash incentives.

When coronavirus appeared to daunt the world, people from all walks of life were compelled to be confined in their dwelling places in fear of illness or even death.

The states hit-hard by the virus, were forced to announce lockdowns. The economic activities as well as international trade were in total shambles. The working-class people faced termination from their employers resulting in increasing unemployment and poverty rate. During Covid-19 peak time, developed economies in the world launched stimulus packages in a bid to keep the economy afloat. A wide range of supports under stimulus packages were provided by printing fiat currency. Fiat currency is money that is issued by a government authority that is not backed by a particular commodity such as gold.

Such kind of decision during recession in economy is taken based on theory titled ‘modern monetary theory’ (MMT).

Bangladesh was no exception. Soon after the havoc caused by the deadly Covid-19 virus, the government announced a set of financial support packages worth Tk 727.50 billion to shield the economy. The affected industries engaged in exporting goods, were brought under the packages. Then, cheap funds were provided to the small and large-scale producers. Besides, social-safety-net programmes during pandemic were notably expanded. Two more packages came with totaling more than Tk 1.0 trillion that was injected into the economy. The central bank of Bangladesh moved forward through forming a good number of refining schemes to revive the economy. The central bank loved to adopt ‘quantitative easing’ measures to stabilize the liquidity in the market.

Ultimately, Bangladesh followed the theory from developed economies during coronavirus. The US, European Union, Canada instantly applied ‘modern monetary theory’ in view of worsening economic situation during the pandemic. Noteworthy is that MMT helps to counter economic problems. ‘Modern Monetary Theory’ is an alternative economic theory that suggested the US government to create more money. According to MMT, the government keeps authority in respect of printing money in addressing the situation.

Modern Monetary Theory was pioneered by American economist and theorist Warren Mosler in 1992, along with Bill Mitchell, a university professor based in Australia. The idea of MMT was borrowed from earlier themes in Keynesian economics. It has been learned that MMT became popular during virus peak time starting in 2020.

Usually, the decision of printing fiat currency is taken in view of narrow fiscal space in an economy. When an economy is beset with low revenue earnings, the government prints money in addressing fiscal deficit. Another way of addressing fiscal deficit is borrowing from external sources. Apart from fiscal deficit, the government faces natural disasters and pandemics like Covid-19 some time. It is sheer difficult for any country to withstand the shock and effects of natural catastrophe or pandemic only with financial packages. The Covid-19 taught us this fact in many ways. Without finding no alternative sources to survive, the government of many countries printed fiat currency for tackling financial crisis. Bangladesh followed suit during pandemic. At that time, revenue earnings in Bangladesh were not significant in volume. Actually, sovereign governments never rely on tax income or borrowing for spending during critical moment since they are authorized to print as much money, they need to combat the crisis.

The current budget in Bangladesh was passed in the parliament in keeping close to 6.0 per cent deficit. The fiscal deficit is filled with domestic and external borrowings instead of printing money. Bangladesh’s tax-to-GDP ratio is the lowest in South Asia. Bangladesh could not bring dynamism in tax policy. As a result of back-dated taxation system in Bangladesh, the government is deprived of significant volume of revenue earnings. With little revenue earnings, it is not possible to address unexpected economic shocks caused by the pandemic or natural calamity. There are merits and demerits of every theory or model in economics. MMT is no exception in this regard. MMT has also advantages and disadvantages. There is a fear of rising inflation rate if MMT is applied. Since MMT adds more money in the economy, money supply is increased to a great extent resulting in increasing price level.

The US government during the great recession had to undertake quantitative easing measures through spending, cutting taxes and lowering interest rates to close to zero levels. Quantitative easing (QE) method is a strategy taken in monetary policy of printing money in addressing liquidity pressure that is implemented by the central bank to stimulate the economy. Then, the financial institutions are encouraged to increase lending and to make the money supply more liquid. Unrest in economy will be seen for brief period if MMT is adopted. Despite knowing this, Bangladesh has to adopt MMT with a view to tackling untoward situation in economy. If price levels reach its peak due to MMT, the government has to control the situation through prudent tax policy. Instead of borrowing from foreign sources, the government in Bangladesh might adopt Modern Monetary Theory like the Western economies.

The writer is economist. He can be reached at : mazadul1985@gmail.com