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Dr. Atiur Rahman
Dr. Atiur Rahman
Bangabandhu Chair Professor and Former Governor, Bangladesh Bank.
20 Apr 2020 23:44:42

Focus on cash, liquidity for economic recovery

Focus on cash, liquidity for economic recovery

Like us, the whole world is going through a pandemic that does not resemble any other crisis. Being simultaneously a health as well as an economic crisis, one is not aware of its depth and breadth.

Fear gripped, people have embraced lockdown, clueless for how long -nobody knows. Social distancing has the potential of saving a life but not the economy. Never has the world looked so uncertain and clueless. Never had production lines halted at the same time without knowing when they will re-open. Governments and central banks around the world are announcing stimulus packages one after another without a clue when this social distancing will halt and people will get back to their normal lives, in business, start producing goods and offer services again.

Multilateral institutions are in a fix unable to tell the world what the growth trajectory could be like. IMF, the most conservative of these institutions, recently predicted that there will virtually be no global economic growth this year. The Global Financial Crisis (GFC) of 2009 was no doubt a devastating blow to the global economy, yet the global growth was 4.7% that year. The Asian Financial Crisis though more devastating than the Global Financial Crisis still yielded 1.3% global growth. Asian economies are downsizing their growth outlooks to an extent that never could have been comprehended in a normal year.

China had a growth rate of 6.1% in 2019. It is expected to go down to 1.2% this year. During the GFC, China navigated through with a growth figure of 9.4% - thanks to the stimulus of 8% GDP. No sensible expert can project that China can come up with a similar stimulus this year as its economy reeling under severe stoppage of production.

India had a growth figure of 4.2% in 2019 which may come down to 1.9% this year. The contraction in Australia, Thailand and New Zealand could be as high as negative nine percent.

Bangladesh with its record growth over 8% last year may end up with a 2-3 percentage point according to IMF. Yet it is not sure if Bangladesh will do that bad given its broad-based nature of the economy deriving its strength from agriculture and SMEs for which the Government has declared lavish stimulus. However, it all depends on how prolonged this health crisis will be and how efficiently these stimuli will be implemented. Given the double slowdown originating from China and the world, impacting on both the supply and demand chains of Bangladesh’s two major foreign exchange earning sectors i.e. RMG and remittances, the country will have to depend essentially on agriculture and SMEs for a reasonable growth figure even if the crisis can be mitigated shortly (which is quite unlikely).

As the global scenario of the spread of the virus indicates, the worst is yet to come. Given our lack of investment in the health sector and historic negligence towards our health service providers even during this on-going crisis, I do not feel so confident that we can mitigate this human disaster as expected. We are still too complacent and not focused enough to quickly capacitate our health infrastructure. Although our Prime Minister has been fighting this war from the frontline and encouraging others to stand by the health service providers with required protection, the bureaucratic machineries are yet to rise to the occasion, and that we all understand the gravity of this crisis and be ready to fight the war as an upright nation.

We have a strong legacy of fighting disasters and let us cash in on our experiences and courage to fight this invisible enemy. Our health personnel need the equipment which we can certainly provide given the strength of the RMGs, and we have enough human resources both in the government and non-government sectors. All we need is a coordinated and comprehensive approach to fight this war.

Given this broader perspective let us now throw some light on the policy response required to address this pandemic. The priority remains to be the consistent and enhanced support, and protect our fragile health sector to contain a further spread of the virus. Doctors and supporting service providers not only need flawless personal protection equipment but also infrastructure including desired ICUs, ventilators, testing machines, masks, face-shields, ambulances and, of course, other logistic support, while holding their morale high.

The stimulus and insurance declared by the government are welcome, provided they survive in a stable mental condition. As the spread widens, the pressure on the doctors and health service providers will be intensified. Therefore, we need to hurry and keep them in good humor. Allocating hotels for the doctors and nurses may not be sufficient. Do they have proper catering facilities, support services and logistics in these hotels? A double-check on these facilities should be called for before sending our precious health service providers into quarantine. This, then, will need extra resources. If space is not enough within the existing health budget, it would be better to reprioritize public spending and provide the money on an emergency basis.

Secondly, we need to look after the economy as the containment measures including sudden lockdown are having a serious impact on households and enterprises. They need cash and liquidity support which fortunately the government of Bangladesh along with the central bank have been very pro-active in designing stimulus packages.

Unlike the Global Financial Crisis, this is a real economic shock. The people, jobs and, of course, financial institutions need support. To me, people come first. If they do not survive what is the need for the economy? They are the sources of demand and supply to the industry. Their health security deserves to be the top priority. Not only has industry, but agriculture also hovers around them. Financial institutions are dependent on their savings, consumption and as well as entrepreneurship. As such monetary policy needs to be wisely used to provide the cash and liquidity, ease the financial stress of industries and farmers including SMEs, and if necessary, relax macro-prudential regulations temporarily.

Bangladesh has been focusing on both - people and the economy. It has made a special move to enhance relief facilities to the poor, both urban and rural. It has been selling rice to the disadvantaged under the banner - Open Market Sale throughout the country using necessary ration cards. There were five million of them, and now the government has decided to expand the number by another five million to reach the hungry millions. Besides, the local administration and the local governments have been asked to prepare the list of the ‘vulnerable population’ including rickshaw-pullers, small ship-owners, urban workers in the service sectors, domestic helps who live mostly in the slums to provide cash support to them through bank accounts including mobile financial services.

Further, social protection programs for the old, widows and others have been revamped. Salaries of the RMG factories have been planned to be given through their bank and mobile financial services on behalf of their owners as loans with a nominal interest rate of only 2%. A total fund of one hundred thousand crore Taka has been created to provide stimulus to the export-oriented industries, small and medium enterprises, farmers, packaging industries involved in pre-shipment of export items which will be rolled out by the banks as soon as the recovery process will be initiated after containing the virus.

These targeted supports combined with demand stimulus in a recovery phase will certainly help reduce the fear of economic collapse. However, it will finally depend on the quality of implementation of these programs. Unless the benefits reach ordinary people and smaller firms, these stimulus packages will have not much impact on boosting domestic demands. We, however, have plenty of rich experiences in reaching them through our financial inclusion programs led by the central bank.

We, from the central bank, initiated several refinance lines to support small and medium enterprises including farmers and women through both inclusive and green finances. Footprints of these programs are all available in the banking sector and the central bank. The central bank will be well advised to initiate new refinance lines using its resources where MRA licensed MFIs can join the struggle for economic recovery at the grassroots as most of their borrowers have already graduated to become micro, small and medium enterprises. They will need partnerships with banks that will be provided with funds by the central bank which may have to take the hit on its balance sheet. Bangladesh Bank has already reduced repo, CRR and brought down interest rates to provide additional liquidity to the financial institutions. It has also opened the door for repurchasing government bonds in access of the SLR from banks and financial institutions for selective quantitative easing. If needed, it can even reduce SLR to give extra space to the banks to off-load the government bonds to the central bank at market price.

The government can also enjoy overdraft facilities from the central bank as it has already repaid most of the borrowings. Given the debt-GDP ratio in the range of thirties, Bangladesh can surely become more ambitious in terms of public borrowing from the central bank. It can allow banks and MFIs to borrow from the global market at terms and conditions set by the central bank. If the situation warrants the central bank may have to think “out of the box” and do whatever is required to keep the boat afloat. It will not have to be overcautious about inflation as the economy is now standing still and is at risk of a deflation. The falling oil price and import cost along with the stoppage of the movement of goods and services will keep the inflation subdued during this ‘new normal’ period. The central bank can certainly change its gear when the corona dust settles down and the economy starts to move forward. Thus, the central bank should not hesitate to use its balance sheet flexibly and aggressively to support banks and financial institutions lending to farmers, SMEs, and startups for a limited period to jumpstart the recovery process of the economy.

Bangladesh can also fall back on various financing tools of IMF and other multilateral institutions to complement its drive for an early recovery of the economy. For example, the IMF has in place two emergency financing instruments namely, the Rapid Credit Facility and the Rapid Financing Instrument. So have the ADB, AIIB and the World Bank to help their member countries to surmount the challenges of this crisis and limit its human and economic costs.

I understand Bangladesh is already in the process of having access to these emergency financing facilities from different multi-lateral institutions. Given its excellent record of timely debt repayment, I am confident that Bangladesh will be able to secure these external financing supports as quickly as it wants. But for now, it is the people who should matter the most.

Let us do our best to protect the lives and livelihoods of our people. We all must come forward and join hands with the government in helping the people survive. No layoffs, no job cuts, no bonus and no dividends at least for the next six months or so. If needed, we must be prepared to take pay cuts to save others’ jobs. Let’s be prudent and remain innovative to help the nation come out of this crisis. If we remain cautious and stand by the community Bangladesh will again surprise others by its resilience and capacity to mitigate disaster, be that human or natural.


Dr. Atiur Rahman, Former Governor of Bangladesh Bank