DR SALEHUDDIN AHMED, Professor, BRAC Business School, BRAC University and Former Governor of the Bangladesh Bank

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By Mashsharat Rashid

In a conversation, Dr Salehuddin Ahmed, Professor, BRAC University and former governor of the Bangladesh Bank, explicates how the government can use monetary instruments to revive the economy and the ways it can fund the national budget 2020-21.

There is a concern that the injection of money including the new issuance may trigger inflationary pressure in our economy, how much is the possibility of such pressure going out of hand?
Inflation occurs due to numerous factors. One of the primary causes of inflation due to the excess money supply. Currently, our inflation rate is quite low; it is around 5.4%. Concurrently, the government has declared a package for recovery from the COVID-19 pandemic to boost up the economy. So a sizable amount of money will be injected through the central bank, which is called Money Creation.

In finance, it’s called reserved money, and it gets multiplied by three-four times when compared to broad money, so it’s high powered money. To be clear, I’m not talking about printing money, the central bank can also create money through the creation of reserve money.

Injection of money is required right now because there is a huge deficit in the budget. There is also a demand for credit by the private sector. So, if the newly injected money is used in productive activities, like the creation of goods and services then it will not result in inflationary pressure because if the supply of money increases, then the goods and services will also increase, therefore, the pressure is balanced off. Thus, it will be able to offset the inflationary pressure. Since inflation is sometimes defined as chasing too much money for too few goods if money supply is increased by a lot and if there are goods and services available then there is a very limited chance of inflationary pressure going out of hands.

Additionally, some of our current inflation is imported inflation as we import high-cost petroleum oil goods. Due to the falling oil prices, imported inflationary pressure is not currently present in our economy.

Overall, the new money average that is going to be coming in the economy indeed will not result in sizable inflation due to the high rate of interest, but we’ll have to be careful. Injection of money must lead to higher production of goods. However, if the injected new money goes to the unproductive sector, such as in some luxury goods, or in some kind of an investment, which doesn’t have an immediate return, then there’ll be some kind of inflationary pressure. Conversely, if that leads to an aggregate increase in production in agriculture, industry and goods and services and other essential sectors, there will be no major consequence on inflation, inflation would not increase substantially.

Due to the current situation, an overwhelming number of microfinance borrowers will default. What should be the role of the microfinance regulatory authorities and the central bank to protect the borrowers from falling into a debt trap?
Due to this pandemic, microfinance borrowers across the country have lost most of their income-generating sources which will force them to default their instalments. Generally, the microfinance repayment process is spread over 52 weeks in a year. It is expected that they will face difficulties in paying the next few instalments.

Firstly, the MRA (Microfinance Regulatory Authority) should direct the NGOs (loan providers) to extend the repayment period.

Concurrently, they must be provided with the necessary amenities to sustain their lives. The government has already decided to provide cash assistance to the poorest segment of our population.

There needs to be an association between this government initiative and the microfinance program.

MRA should also encourage microfinance institutions to undertake social welfare programs for their borrowers. Similar initiatives have been undertaken in the past. When I was working as the managing director of Palli Karma Sahayak Foundation during one of the worst floods in Bangladesh, we asked the microfinance companies to postpone immediate loan repayments. We also asked them to help the affected and help them to cope with the disaster. Therefore, the regulatory authority in consultation with the NGO(s) can provide such assistance within a short period of time. Concurrently, banking authorities should consult with the government to strategise relief efforts. This can be in the form of cash assistance or food subsidies which will allow them to survive without exhausting their savings.

Banks are not very eager to give out loans to SME(s) on the pretence of higher administrative cost. How can the central bank incentivise the banks to provide more support to the SME(s) who are fighting for their survival?
Indeed, the banks have shown a lack of interest in serving SME(s). They are more interested in big loans due to financial and logistical reasons. Banks can give about five or ten crores taka by negotiating with one party only; it requires less paperwork, they have to put limited effort for such portfolios. As big clients are more financially capable, it is easier for them to pay off big amounts in loan repayment.

On the contrary, SME clients take a long period to pay off their loan which is already minuscule compared to big clients. Consequently, banks are less keen to provide loans to the SME sector.

However, I believe bankers should provide loans to SME(s) for their own benefit. According to the central bank, the rate of return on SME is around 90-95%. The economic rationale is that if you lend the small borrowers, they utilise the money in their family’s welfare since these poor people seek a better quality of life.
Banks should consider the rewards of providing SME loans against the current practice which has resulted in a massive pile-up of default loans by big entities.
Banks should understand the returns of providing loans to SME(s) through better returns and greater economic activity. Therefore, the central bank should make it obligatory for banks to provide loans to SME(s). There should also be some incentives in place for banks to provide these loans in the form of permission to open new branches and an opportunity to finance big projects. Also, the government can give a bank’s top management recognition for facilitating SME loans. These are some steps that can be taken to encourage banks to provide more loans to SME(s).

Recently, the government has allocated a specific amount for the SME sector in the stimulus package. It is an indication that the government wants these small businesses to flourish as most of them are labour intensive, they are helping in employment creation. As more and more migrant workers return home, employment creation will be a major focus for the government. SME will play a major role in this regard as they have proven to create more employment opportunities.

However, I’m not implying that banks should stop providing loans to the big enterprises, we need big estate factories, power generation companies, but at the same time the SME sector must be looked after so they can survive and thrive.
Fortunately, some banks like the BRAC bank, have a huge amount of small and medium enterprises as their clients. A few state-owned commercial banks also have a similar client base. But not many private banks are interested, that is not a good state of affairs. They should increase their financing towards small scale businesses.

Recently, the government has allocated a specific amount for the SME sector in the stimulus package. It is an indication that the government wants these small businesses to flourish as most of them are labour intensive, they are helping in employment creation.

What can be a good source of all the money we need to materialise the budget?
We needed a huge budget for public expenditure but there is a huge gap, the deficit amounts to Taka 190,000 crore. Therefore, the government needs to raise money.

One of the major sources of revenue for the government is tax, but they have to increase the tax rate by a large amount to provide the money required by the proposed budget. However, increasing the rate may not be very appropriate at this time. Conversely, they can expand the tax bracket to include a greater pool of taxpayers.

However, only one-third of the eligible population in Bangladesh pays income tax. Also, most of the small businesses do not pay any VAT, causing the government to lose a significant amount of revenues. The digitalisation of cash registers may help us ensure more accountability and revenue generation.
Foreign loans or grants can also be used to reduce the budget deficit. Currently, we require soft loans i.e loans at a low rate, the IMF has already declared a large amount of concessional loan for Bangladesh. Numerous international organisations like the Asian Development Bank, the World Bank and the Islamic Development Bank have also shown keen interest to provide financial support to cover the budget deficit. Additionally, international financial institutions like Goldman Sachs can be approached to provide loans at a concessional rate as interest rate in the international market is quite low at the moment, this can be a great option.

Most importantly, the government must halt any unnecessary expenditure. It has a tendency to spend unnecessarily and the process is not entirely transparent. Therefore, a large amount of public money is wasted which could have been used in the development process.

Another expenditure that can be reduced is the annual development plan. I’ve seen an all development plan has got about 1500 projects with a budget of TK 200,000 crore. I think this is too ambitious. During this period, you cannot afford to spend 200,000 crores. The government can cut down the small projects; some of the unnecessary projects that can be postponed right now and from there they can bring up some money to finance different necessary expenditures. Healthcare is something that is most important now, then comes social protection or social security, third is education and fourth most important is the agriculture sector.

Finally, export earnings is a crucial source of income for the government to cover budget expenditures. But I believe we shouldn’t rely on the RMG sector, although our exports are 80% garments. We have already put all our eggs in one basket. So we must diversify, we must encourage and promote other products like leather, ceramics, electronic goods, plastic goods, etc.

Concurrently, our migrant workers, most of which are unskilled workers are losing jobs and returning home. We have to produce a larger number of skilled workforce and that should be the top priority of the education sector. These are some of the sources of money that could help the government cover the budget expenditures. Lastly, the government can borrow but they should not borrow from banks. They can borrow from the central bank.

The central bank can get some low yield bonds. So, the central bank can buy them and in turn and increase their balance sheet. That is one way of money creation of course. The first question you asked is about money creation. So, if the central bank gives loans to the government, it will not create any kind of inflationary pressure, which will help in the implementation of the budget of the government.


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