COUNTERACTING ECONOMIC FALLOUT IN BANGLADESH

COVID 19 has swept throughout the world and has created an extensive financial crisis.
Bangladesh, being one of the most promising emerging economies, has also fallen into the shock
of this pandemic.

Policymakers have come up with several stimulus packages and regulatory changes to keep the
economy afloat. Apart from that, there are some extreme economic tools that can be used in
times of crisis like this.

Monetization of fiscal deficit: the process involves printing money by the central bank of
Bangladesh and distributing the money to other banks to drive them to lend money more. In our
case, monetization of fiscal deficit is done instead of creating money out of thin air. The money
is distributed by central bank buying government bond. It issues a credit to its member banks that
hold the treasuries by adding funds to reserve deposits. The debt then transfers from the member
bank to its own balance sheet. The credit is treated just like money, even though the Fed doesn't
print actual cash. This will increase the central bank money and the deposit in other banks, which
will only be lent in the real economy.
But the concern lies in the question: will it cause inflation?

Whether a monetary expansion will result in inflation, depends not just on the money supply but
also on the demand for money. The demand for cash has increased but deposit is still the same
which results in an increment of cash-deposit ratio. This has essentially reduced the money
multiplier. The demand for credit is low because of reduced investment, also BDT has not been
allowed to depreciate which has significantly reduced liquidity. Furthermore, commodity prices
have declined in the international market, so the inflationary pressure cannot continue if the
liquidity growth is low.

Easing regulatory requirements: Bangladesh Bank has already taken initiative of reducing
Cash Reserve Ratio (CRR) of banks by 1.5 percentage point and REPO rate by 0.5 which has
already generated BDT 18,000 crore. ADR has also been increased by 2% that will help increase
the loanable fund of the commercial bank by almost BDT 20,000 crore.
Relaxing the ceiling of savings certificate: During the end of 2019, government had put a
ceiling on the buying of saving certificate to curb the impact of liquidity crunch that resulted in
the decline of sales of saving certificates by 10%. For the time being, it can be relaxed so that
government can get liquidity to help the poor and the vulnerable.

Sovereign money creation: Sovereign Money Creation (SMC) offers a way to make

the recovery sustainable. In a similar way to Quantitative Easing, SMC relies on the state
creating money and putting this money into the economy. But whereas QE relied on flooding
financial markets and hoping that some of this money would ‘trickle down’ to the real economy,
SMC works by injecting new money directly into the real economy, via government spending,
tax cuts or rebates.