Coronavirus paving the way for higher inflation in Bangladesh?

The novel coronavirus has drastically afflicted and altered the economic courses of countries all over the world, be it developing or developed. It really is fair to state that even advanced economies like the US are grappling with economic challenges that coronavirus has posed. Therefore, it isn't unexpected that developing nations such as Bangladesh, India, and Pakistan may also bear the brunt of the pandemic with regards to some form of financial crisis. Although it is prematurily . to predict exactly the way the economy of Bangladesh will probably respond to the challenges, it is important that the policymakers remain cognisant of the key issues so that they are able to take necessary steps to pre-empt any steep nosedive of the economy.  

On July 24, 2020, I ran across a news article published in the Bangla daily Prothom Alo, which mentioned that recently there's been a rise in the premature withdrawal of National Savings Schemes (NSS). It can easily be surmised that lots of savers, confronted with declines within their incomes as a result of pandemic, have felt pressured to withdraw their savings with the NSS forgoing the promised higher interest rate. In line with the news article, between July 2019 and could 2020 the Directorate of National Savings Bangladesh (DNSB) had issued national savings certificates (NSC) worth Tk 57,805 crore. During the same period, NSC holders sold off NSCs worth Tk 46,794 crore. This basically signifies that the web value of NSCs sold in the eleven-month period was Tk 11,011 crore. According to the same news article, the trend in NSC transactions during the past 90 days has been even more worrisome. For example, in April 2020, the net value of NSCs sold was Tk (-) 354 crore. Basically, more NSCs were withdrawn than were issued by the DNSB in April. This speaks volumes about the adverse impact of the current pandemic on the economy of Bangladesh and indicates a further decline in the web value of NSCs sold at least in the short run.

Given the above scenario, the first question that people should ask is, will there be a reason to worry? If yes, why? Naturally, the next question is what can be carried out to minimise the worry. To answer the first question, we first have to understand how the federal government finances its expenditures. The two main resources of government finances are taxes (mostly income taxes and VAT in context of Bangladesh) and debt. Among the major sources of non-bank borrowing for the Bangladesh government is NSS. In the formerly proposed cover the FY 2019-2020, the mark net borrowing from the NSS was set at Tk 27,000 crore. However, later it had been revised downward to Tk 11,924. Interestingly, in the most recent budget proposed for the FY 2020-2021, the prospective net borrowing from the NSS has been set at Tk 20,000 crore. However, as stated previously, between July 2019 and could 2020 the DNSB sold NSCs of net value Tk 11,011 crore. You will find a clear gap of around Tk 9,000 crore between your target amount and using the amount available. Given the recent trend in the NSC market, it will be overly optimistic to assume that the premature withdrawals of NSCs will eventually lose pace anytime soon. However, businesses, generally, are experiencing slowdowns due to the pandemic which means that tax revenues which can be raised will never be able to meet the expectation of the proposed budget. The situation will exacerbate if the federal government finds it essential to implement a more powerful stimulus package to revitalise the economy. It isn't too little intent for the federal government to greatly help the economy emerge from a downturn or pre-empt an imminent crisis, rather limited sources of finance which has the potential to lead the government to unchartered waters. 

Arriving at the first question: is there grounds to worry? The short answer is yes. If the federal government sticks to the expenditures proposed in the budget while facing budget financing challenges as described above, it could resort to borrowing money from Bangladesh Bank. So as to meet up with the borrowing demand of the federal government, Bangladesh Bank will then consider "printing" additional money. That is the main reason behind worry. As it can be an already established fact, printing more money to finance government expenditures is a highly risky business as it could lead to a rise in inflation which can quickly go out of hand and result in hyperinflation. Zimbabwe in late 2000 is a good example. Moreover, reportedly, Bangladesh Bank has announced a policy to improve money supply available in the market. To the end, Bangladesh Bank has decrease both repo and reverse repo rates. Consequently, commercial banks can borrow funds from Bangladesh Bank for a price lower than before. That is expected to increase commercial banks' liquidity which in turn can lead to a rise in the inflation rate. It ought to be noted here that the inflation rate in Bangladesh by June, 2020, according to Bangladesh Bureau of Statistics is 5.65 percent which includes increased by 17 percentage points in the last one year.

A natural question that may come to the reader's mind is, what is the inflation risk like in the developed countries which have been implementing mammoth stimulus packages? The exemplory case of the US will most likely suffice here to answer this question. THE UNITED STATES has been enjoying exceptionally low inflation rates for several decades now, thanks to the Volcker Disinflation Policies in late 1970s and early in 1980s. Therefore, increasing money supply hasn't had a big impact on the inflation rate in america. However, a word of caution ought to be added here. THE UNITED STATES will see itself in dire straits if the inflation rate shoots up for unforeseen reasons as the prospective fed rate has already been too low (between 0-0.twenty five percent) to be manipulated to affect the amount of money market. This, however, is a different topic and deserves another discussion.

Now that we've an answer to the first question, a devoted reader will be disappointed easily wrap up without answering the second question. Unfortunately, the response to the second question is a lot more difficult and will depend on many factors and information on the most recent dynamics of the economy. But one thing ought to be clear, there is no single policy that can be implemented to minimise the worry. Rather, there should be a blend of carefully designed policies. As a starting place, the federal government may consider revising the areas of its expenditures and prioritise some areas where more resources ought to be directed to really have the most beneficial impact on people's lives. Another method which includes proven to be a very effective anti-inflationary tool is bolstering the credibility of the central bank. If Bangladesh Bank can credibly show its anti-inflationary commitment, inflation can be kept within reasonable bounds through keeping in check people's inflationary expectations. In the end, most if not absolutely all financial agents are rational humans who do foresee the near future more or less correctly.