Is printing banknotes only way out?

The novel coronavirus has wreaked havoc on the economy both on a national and global scale. Lockdown has forced everything from production and marketing to movement of people and goods to a stall. Income sources of the people of all strata are squeezed or come to a halt. Drying of income sparks shortage of cash flow. Many have already spent their last buck facing the question of survival. Some lack working capital to restart production.

To cater to the demands of a large number of people, Bangladesh needs a huge amount of money. A section of policymakers or sector insiders are batting for printing banknotes while others don’t want to fill stereotype of printing paper currency. Rather the latter section proposes supplying cash to the market in a raft of ways including suspending the unnecessary government projects. If not resorted to the alternative ways, printing banknotes may spell disaster for the economy, they observed.    

Coronavirus has harmed not only the high-end consumers but also the common people. Industrialists have kept their factories closed. Productions and sales stopped. Earlier, they ran the industries, sold their products, made profit to pay the workers’ wages and deposited the surplus profit in their bank accounts too. Now, they are either looking for bailout packages from the government or refinancing from the banks as they have no income. They are taking loans to pay the salaries of their employees. Their loans have turned into bad loans. The income of raw material suppliers, backward linkage industry, building owners, transporters and the service sector has dried up. These entities, which have bank loans too, are looking for further loans for survival. A large section of society lives hand to mouth and their sources of income are squeezed.

Whether banks have liquidity or not, common people need money. Market won’t supply money – what it was supposed as per the policy of market economy; rather, market demands money from the government. Government now intervenes in the market and declares a package of Tk100,000 crore.  

Many apprehend shortage of banknotes has been created as government initiates to implement the package and social safety programmes. By hook or by crook, government is in need of supplying money to the market. The insiders say that monetary policy and budgeting can help government increase supply of money into the market. And the government can supply money into the market by distributing loans through national commercial banks or it can hike the expenditure directly.

Now, the question arises whether banks can mobilise funds or recover the loans under such circumstances. The answer is straightaway ‘no’. Then, how will the commercial banks give loans?

As economic activities decrease in the pandemic situation, the National Board of Revenue will fail to collect revenue. As a result, government won’t have surplus money – very logical indeed.

Against this backdrop, compromising with its own policy Bangladesh Bank can enable banks to disburse loans from existing deposit. Printing paper currency is another alternative for the government. Some economists bat for printing banknotes, while some others, conversely, are advocating for other options on supplying money which are yet to be utilised.

About 18 per cent of the money that commercial banks collect from the people has to be deposited with the central bank in the form of Cash Reserve Requirement (CRR) and Statutory Liquidity Ratio (SLR). Besides, if the banks collect a deposit of Tk100, they will not be able to disburse the entire amount in loan. In this regard, the Advance-Deposit Ratio (ADR) limit has to be complied with. Bangladesh Bank has a market capitalisation of Tk12,97,540 crore. Out of this total, Tk1,59,000 crore is at the hands of people and rest of the money is deposited with the central bank and the commercial banks.

According to a Bangladesh Bank report, Tk3,13,770 crore of the commercial banks remains deposited with the central bank against the conditional ceiling of Tk2,10,412 crore. Without any sort of change to monetary policy, the national commercial banks can inject the additional money – Tk103,000 crore – into the market.

But most of the banks have liquidity crisis with some in excessive fund crunch. To overcome the crisis, BB has already given some concession. Banks have got ability to give fresh loans of Tk19,000 crore, as CRR is slashed down to 4 percent in two phases. On the other hand, ADR ceiling has been raised by 2 percent to 87 percent for conventional banks and 92 percent for Islamic banks. Thus, the banks can disburse Tk20,000 crore more.

Besides, repo (repurchase agreement) rates are cut by 5 percent to 5.25 percent so that banks can take loan from BB at a lower rate. Repo rate can be further reduced to supply more money into the cash-starved market.

Apart from all these measures, Bangladesh Bank has instituted some funds which will enable it to give Tk22,000 crore to banks. There is an ample opportunity to enhance this scope further.

Moreover, bank directors have started pocketing profits which can be stopped if central bank can dissuade them immediately, thus mobilising Tk5000-6000 crore more for the commercial banks.

If government can inject Tk100,000 crore into market, it will be multiplied – it is called ‘money multiplier’. If the amount changes six hands, the amount will be considered Tk600,000 crore in the economy.  

Developed countries like Australia, the United Kingdom, Canada and the United States have decided to print money during the coronavirus pandemic. However, developing countries like Bangladesh, India and Sri Lanka have not yet made that decision. This is because central banks’ interest rates for banks in developed countries are either close to zero or zero. They are forced to print money as there is no opportunity to pursue such policy like those of ours. But in countries like Bangladesh and India, it is possible to supply huge amount of money to the market with some policy concessions.

Executive Director of the Bangladesh Bank Habibur Rahman said, “Developed countries do not have the opportunity to support the policy. So they are printing money directly. But there are many opportunities to support the policy of Bangladesh Bank. After exploiting all these opportunities, the question of printing money will come up.”

Some insiders opine that the experience of printing money in developing countries is highly bitter. In 2000, Zimbabwe printed paper money and ended up hiking the inflation rate to 23 crore percent. Printing of paper currency in cash-starved market in Venezuela backfired and ended up spiking the inflation rate to 10,000 percent. Bangladesh is most likely to brace for high inflation if it prints paper money, which is the last resort of salvaging an economy.

Executive Director of the Center for Policy Dialogue Dr Fahmida Khatun said, “The decision to print money in Bangladesh will not only be stupid but also suicidal.”

“To channel funds for the market, government can pursue some alternative options, including slashing of perks and wages for the ministers and the members of parliament by 20 to 50 percent. India has toed the line.”

Government can stop foreign tours and trainings for its officers and employees for now. Scrapping of the unnecessary projects can be a great help. In pursuing all these policies, the government can inject Tk 1.5-2.0 lakh crore into the market; it can distribute the money among poor people following the ‘helicopter money’ policy, thus strengthening the local and village markets.  

Prof Mustafizur Rahman, a Distinguished Fellow at the Centre for Policy Dialogue (CPD), said that the government is trying to increase liquidity in the market. It has announced around Tk100,000 crore packages and the central bank has given policy support too to implement the programmes.

There are lots of ways to address the fund crunch but printing money, he said.

Curtailment of unnecessary development projects can be a good alternative to printing banknotes or minting coins, he added.