Pumping money in the economy: Cutting CRR and repo rate or printing money?

The COVID-19 pandemic which has been sweeping the world will turn global economic growth "sharply negative" in 2020, triggering the worst fallout since the Great Depression of the 1930s, with only a partial recovery seen in 2021, said the IMF Managing Director Kristalina Georgieva. Bangladesh, a fast-growing economy having the highest growth rate (8.15 percent last year) in the region is also in tremendous turbulence.

Prime Minister Sheikh Hasina unveils the stimulus packages of Tk72,750 crore, nearly 2.52 percent of the country's GDP to overcome the economic crisis that prompted a countrywide shutdown since March 26. Of the fresh packages, Tk30, 000 crore has been announced for big industries and the service sector will be distributed by commercial banks as working capital loan at a 9 percent interest rate with the government providing 4.5 percent in subsidy. Under the second package worth Tk20,000 crore, small and medium enterprises, including cottage industries, would also get the working capital loan at a 9 percent interest rate with the government giving 5 percent subsidy.

But the question is how the huge sum of money to be pumped in the economy. As such the government has come up with a solution to increase the money supply in the market so that the bank can go on with the financing activities. Bangladesh Bank has re-fixed the CRR (Cash Reserve Ratio) at 4.00 percent on a bi-weekly average basis with a provision of minimum 3.5 percent on a daily basis, effective from April 15, 2020. The central bank has also lowered the repo rate further to 5.25 percent from 5.75 percent to enable the banks to implement the mentioned stimulus.
 
As we know, one of the primary functions of the central bank is to control the money supply as well as the cost of credit, which means how much money is available for the industry or the economy and what is the price that the economy has to pay to borrow that money which is nothing but liquidity and interest rates. So, the central bank has a role to play to control these two things because eventually, these two have an impact on the inflation and growth in the economy. For this, the central bank has got some tools available in their hands and these tools are maintaining certain basic ratios or certain rates.
 
As we know, CRR and SLR are two ratios. CRR is a cash reserve ratio and SLR is statutory liquidity ratio. Under CRR a certain percentage of the total bank deposits has to be kept in the current account with the central bank which means banks do not have the access to that much amount for any economic activity or commercial activity. Banks cannot lend the money to corporates or individual borrowers i.e. banks cannot use that money for investment purposes.
 
And Repo rate is a rate at which commercial banks borrow from Bangladesh Bank (BB) for a short period. The BB manages this repo rate which is the cost of credit for the bank. Higher repo rate means the cost of short-term money is very high. Lower repo rate means the cost of short-term rate is low which means at higher repo rates the economic growth may slow down whereas at lower repo rate economy growth may get enhanced.
 
Now the sudden cut of CRR and repo rate will help inject a handful amount of money supply in the market enabling the banks to go for lending the clients following the stimulus of the government.
 
Under the current scenario pumping money into the system is inevitable. Cutting the CRR and repo rate has ensured the increase in the money supply. Moreover, the banking sector which was suffering from acute liquidity crisis since 2018 is now at tolerable ease with the liquidity as the growth of loan has been down keeping the investible fund available, with some of the banks. So, cutting the CRR and repo rate has an added facility of funding the clients. But since the loan (mentioned Tk30,000 plus 20,000 crore) is supposed to be disbursed from the banks upon banker customer relationships, three questions can come up: 1) How the clients to be chosen who need the support? 2) Why the banks will be interested to cover the vast clientele-base where there is a risk of default? 3) What will happen to the clients who reside in remote areas having no bank accounts but they need the support most? It is assumed that many business-people will be deprived of having the loan facility and some will happen to get the benefit of this package who actually can survive without the credit even.
 
It can be recommended if Bangladesh Bank can provide with a list of probable customers/ business people to the banks, they can guide their concerned branches to look into the businesses and forward proposal for sanction and disbursement then. Credit facility given can be duly ensured to protect the banks who will be acting as the loan providers. It is expected that Bangladesh Bank will work on it deeply and formulate policy suggestions along with prescriptions to reach the target customers and ensure to lessen their pain. The central bank should also be vigilant in overseeing the activities of the banks so that unfair means/ dishonesty cannot make it a failure as there is a chance of penetration of a vested group in the process.

Nobel laureate Abhijit Vinayak Banerjee has a simple policy prescription following the pandemic for India as its economy shrivels: Print money liberally and transfer cash directly to the sections of society that need it most. Many of the economists of our country also may be in the opinion of printing money to enhance money supply in the economy to materialise the stimulus package but at this stage that may push the economy towards hyperinflation as the production of goods and services has reached nearly zero. Hyperinflation happened in Zimbabwe and Venezuela when these countries printed more money to try to make their economies grow. When Zimbabwe was hit by hyperinflation, in 2008, prices rose as much as 231,000,000 percent in a single year. We should keep that example in mind while taking any decision regarding printing money. Hence printing money should be the last resort.

The stimulus package is certainly a very good initiative at this critical situation but the implementing authority has immense challenges to meet. Maintaining transparency and accountability is a must, a failure of which will put the initiatives at risk. Moreover, the package would be worthy if the people who live below the poverty level can get food and can be brought under the social safety net. In a survey on 2,675 low-income people in 64 districts of the country from March 31 to April 05 conducted by Brac on the impact of coronavirus, it is found that the income of the lower-income people has decreased greatly following the advice of maintaining social distance and staying at home. In this situation, 14 percent of people have no food in their homes. These are the people from the lower segment but this pandemic has severely affected the middle class also. The government needs to address them as well. If people are unfed, social anarchy and untold dissatisfaction will be there. So little cash support in addition to food would be required if this lockdown prolongs after April 2020.

Money should go there who need it most for their survival in any way otherwise the on-going lockdown will bring no good in the long run.

The author is a columnist and economic analyst, founder and CEO of Finpower Leadership International.