The global economy is experiencing a severe downturn due to the outbreak of Covid-19. The health crisis has also turned into a severe economic crisis.
A vast number of people are becoming unemployed and businesses are suffering from unavoidable losses. Governments around the world are struggling to protect their economy and Bangladesh is not an exception.
Amid this pandemic, the Bangladesh government has announced the budget for the fiscal year 2020-21. Total expenditure has been counted at Tk5,68,000cr whereas the revenue target has been set at Tk3,78,000cr. There is a budget deficit of Tk1,85,987cr, which is 5.8 percent of the GDP.
Out of this deficit, there are plans to collect Tk84,980cr from bank borrowing. However, there are two big questions in terms of funding for this budget.
Firstly, it is almost impossible to achieve a good revenue target during this pandemic year. National Board of Revenue (NBR) said they will be unable to meet this ambitious target when almost all economic activities are facing a considerable contraction.
Secondly, there is also concern regarding borrowing from banks. Over the past few years, we have observed that banks are facing a liquidity crisis because of Non-Performing Loans (NPL).
Besides, deposit holders from the middle class and lower-middle-class families have started to withdraw their savings to maintain livelihoods as their incomes have fallen. Thus, banks are not ready to finance the government's budget deficit.
In this situation, the government is likely to urge international organisations and donor agencies for approving higher volume of loans with soft conditions.
If the government fails to fill the deficit gap from all possible sources, the central bank will need to inject money into the economy.
Printing money for financing budget deficit is known as money financing. There are two opposing views concerning the effect of the expansion of money supply on inflation.
According to the Keynesian school of thought, an increase in money supply does not lift the price level substantially during economic recessions because of a decline in productive activity and idle labour. Hence, money supply aims to boost the economy.
Another group of economists say that inflation is nothing but a monetary phenomenon. Monetary easing would lead to another form of taxation which is called an inflationary tax.
Inflation emerges as tax since inflation reduces the real value of money and people would be able to buy fewer goods and services with the available money they hold. Therefore, inflation affects negatively on the public's welfare.
However, Noble laureate economist Abhijit Banerjee claimed that money must be printed to save life and livelihoods without fearing inflation in the current crisis. He argued that there is already a reduction in demand for goods and services due to a decline in income.
The number of people under the poverty line is rising considerably in developing countries such as Bangladesh and India because of the pandemic. He emphasised on protecting the bottom income groups.
The inflation target was set at 5.4 percent in the proposed budget for the new fiscal year. The 12-month average inflation was recorded at 5.48 percent in the financial year 2019-2, slightly lower than the government's 5.6 percent target.
Economists and policymakers say that it is not likely there will be an upswing in inflation in the next fiscal year because of low private consumption.
Moreover, we can utilise the benefit of lower oil price which checks upward pressure of manufacturing cost. It appears we will not witness a significant negative impact of printing money.
Nevertheless, we might expect an increase in prices of necessary products because of a supply shortage. Thus, emphasis should be on ensuring availability of essential commodities in the market so that the price hike can be controlled.
Last but not the least, it is most important to ensure that the benefit of money expansion reach the people of lower-income groups.
To do so, the government should pay more attentionto bringing more people under social safety net, particularly the people under the poverty line and those who lost their job.
Besides, a significant number of people, directly and indirectly, are involved with SMEs.
Therefore, it should be a priority to enhance support to SMEs so that they can survive.
Not only an increase in allocation, but also transparency in the distribution process of a social safety net and disbursing loan to SMEs is crucial.
Otherwise, printing money will not be effective to ease this crisis, rather it would be costly.
Tanvir Hossain is a postgraduate student of Economics at Ghent University, Belgium. He can be reached at [email protected].