Whenever we think about 2020, the first thing that comes to our mind is the Covid-19 pandemic. The pandemic had disastrous ramifications for the economy as well as, health care and the financial system, which eventually boiled down to an economic recession.
To revive the economy, different countries have introduced different programs. One of the initiatives the government of Bangladesh can take is increase the supply of money so that the flow of money is maintained.
From March 2020, the government declared a general holiday i.e., unofficial lockdown, and asked people to stay at home. Then all economic activities came to a standstill. Also, many businesses closed down. As a result, the government announced some financial incentives to businesses as well as for the lower and middle-class people.
First, the GOB provided 21 incentive packages worth 1 lakh 20 thousand crores Taka, which is 4.30% of GDP. In the last week of January 2021, the government announced two more financial incentives amounting to Tk 2700 crores. As a result, the total amount of incentive is about 1 lakh 23 thousand crores, which is 4.44% of the total GDP.
In economic terms, the main purpose of any incentive is to increase or endure the supply of money in the hands of people and to encourage them to spend so that the aggregate demand increases. Eventually, it will contribute to the production and supply of goods and services.
The aggregate demand of an economy can be increased through tax exemptions, revenue incentives, increases in government expenditure as well as revenue transfer packages. On the other hand, the central bank can reduce interest rates, simplifies various policies, and increases refinancing to increase the flow of credit to the market through currency initiative.
About 70% of the total incentives provided by the GOB are currency incentives. Small, medium-large businesses and industries have been given more significance in this regard so that millions of people working in these organisations can endure this disaster. The agricultural sector also came under this initiative.
Attempts are also being made to increase the supply of cash to businesses, industries, and agriculture through low-interest bank loans. On the other hand, under the social security program, Tk 2,500 per capita was allocated to 5 million extremely poor families. Although there were some irregularities, most of the cash stimulus have been fairly distributed.
However, the full allocation of incentives has not been distributed yet. Only after the full distribution, can we assess the efficacy of these incentive packages. That is, we can understand whether these packages have been beneficial to the economy and the marginalized factions of our society.
But the fact remains that the recession has not subsided yet and that has also been reflected in the announcement of two new incentives. The money will be provided to cottage industries, small and medium industries, and in 150 Upazilas as allowances for poor, elderly, and widowed women.
As incentives provide cash, directly and indirectly, the supply of money in the market has increased and will only increase further. Excess liquidity in the banks bears testament to this statement. According to the data from Bangladesh Bank, at the end of December last year, the excess cash in the banks stood at Tk 204,700 crore.
It has multiple meanings. First of all, banks have sufficient funds to lend, so, getting a low-interest loan should not be a problem. Second, people are trying to keep money in the bank as much as possible in case of an emergency even if the interest rate goes down. Third, various businesses and industries are not taking loans due to a lack of new investment opportunities. Therefore, the deposit status in the bank has increased by about 95% compared to December last year.
The increase in cash supply may create pressure on inflation in the coming days. The report says that due to supply shortages the food inflation has risen in recent times. Food inflation in October was 7.3% and overall inflation was around 6.50%. Since then, it has begun to decline. From then on it continued to decrease. Food inflation also eased to 5.3% in December. According to the Bureau of Statistics, the overall inflation rate has come down to 5.50%.
Bangladesh Bank has expressed its concern in its monetary policy review report. The concern is that the government announced the incentives to relax the credit policy of Bangladesh Bank and refinance the loans at low cost, which has created a huge amount of liquidity in the economy, it has created the risk of raising overall inflation shortly. It will not be wrong to say the concern regarding the inflation of Bangladesh Bank is not completely unreasonable. When money supply increases and demand continues to rise, the prices of various products and services may also rise.
Low-income people will face more problems even if they increase slightly. Because their income has decreased. Although the government wants to keep the average inflation rate at 5.40% in FY 2020-21. But in reality, it is not unusual for it to be slightly higher. But Inflation dropped to 5.02% in January from 5.29% in the previous month of December. By this statement, we can say that there is no risk of big inflation if incentive money slowly enters the market. Apart from that, this incentive is being given at a time of recession. Therefore, it is more important to protect low-income people, industrial workers, and ordinary working-class people. For now, they have no choice but to continue the cash flow.
MA Saif Shahariar is a student at the Department of Business Administration, East-West University
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.