Monetary policy targeted at post-pandemic financial stability

Image collected
Within a period of significantly less than four months of the outbreak of Covid-19 pandemic in Bangladesh, the economy has seriously been influenced by a sharp decline in external demand, shocks in supply due to disruptions in global and domestic value chains, impact of lockdown and large scale job losses on domestic demand, stress on consumer and business environments, and deepening inequality and high incidence of financial and social uncertainties. Up to now, the influence has been all-encompassing and unprecedented, but its degree continues to be uncertain since the strength of the pandemic is normally yet to be totally felt in the country.

The impact of the Covid-19 pandemic is felt not just by the nationwide economy, but by family members economy of an incredible number of Bangladeshis, especially the reduced income ones. Daily wage earners and informal staff have been badly hit; various have nothing to go on now and are unable to buy adequate meals for their families. Hunger, malnutrition, and other complications that have definitely plagued Bangladesh during the past happen to be poised to intensify because of this of the pandemic.

The economic impact has mainly been felt through three major channels: (i) sharp decline in domestic financial activity following the shutdown announced on March 26, 2020 which is currently slowly but surely being lifted; (ii) unprecedented decline in exports of RMGs, which represent a lot more than 80.0 per cent of Bangladesh's exports; and (iii) quick fall (from US$ 1.64 billion in January 2020 to USD 1.09 billion in April2020) in remittances from Bangladeshis working mostly in the Middle East who are damaged not by the pandemic alone but also by the decline in oil prices. 
 
Within a couple weeks of the outbreak of Covid-19, Bangladesh instituted stringent steps to limit its spread through imposing a national lockdown in which air, bus, and train travel was suspended. As a result of these steps and Covid-19 related impacts, supply chains especially of essential commodities had been disrupted and access to food staples became limited. Meanwhile, Bangladesh is still under limited lockdown and has got launched the major social welfare work in its history.

The government reacted promptly and allocated about US$29.0 million to the Ministry of Health insurance and Family Welfare to fund the Covid-19 preparedness and response package. To begin with, a stimulus bundle of $588.0 million for export-oriented industries was announced. Up to now, the federal government has announced a complete of 19 stimulus plans amounting to Tk 1,031.17 billion (3.70 per cent of GDP) to aid the country's monetary recovery.

It would appear that if recovery is fast (the so-called V-shaped recovery), economic activities may start to rebound by the finish of 2020. Even so, the critical factor may be the recovery of the domestic overall economy in every its dimensions which continues to be shrouded in lots of uncertainties in regards to to both timing and the accuracy of the recovery's quickness or the extent.

From this background, the country's monetary policy needs to target the recovery of the economy from the disaster of Covid-19 and rehabilitation of the production potential of the overall economy as its key goals along with restoration of the livelihoods of the persons specifically of the vulnerable groupings who will be the most severely influenced by the pandemic. 

We must likewise recognise that empirical evidence shows that the relationship between your monetary insurance policy aggregates (e.g. money supply) and inflation (price level) is becoming significantly ineffective in Bangladesh in order that price stableness as the dominant strategic target of Bangladesh Bank's financial policy is burning off its credibility and instruction. The impact of funds source on inflation is becoming increasingly non-linear and asymmetric with prolonged and adjustable lags; while globalisation, technical change and frequent source shocks cause structural improvements in the behaviour of inflation. This will probably be more so during Covid-19 pandemic and its own aftermath in Bangladesh. As such, Bangladesh must explicitly consider these alterations and formulate the financial policy accordingly.

KEY ASPECTS OF TWO-PHASED MONETARY POLICY: The key thought for the country's monetary plan is always to adopt a medium to long-term anti-Covid-19 strategy that goes beyond the currently adopted one-shot policy measures by the Bangladesh Lender (e.g. adjustments in CRR; improvements in interest on loans provided by Bangladesh Lender to scheduled banks and finance institutions under REPO service; improvements in ADR and IDR; new refinancing facilities with low interest levels to facilitate the implementation of incentive deals and support significant sectors  like agriculture, export-oriented sectors and CMSMEs; etc.) to overcome the adverse effects of Covid-19 on the Bangladesh economy. 

The strategy, moreover, should observe past lessons, avoid past flaws, minimise risks to financial instability, and facilitate the rapid motion to a 'new normalcy' through fixing the Covid-19 damages. Definitely, the focus ought to be on Covid-19 crisis management.

The above monetary plan strategy could be applied within a phased approach. For the original period (e.g. subsequent half a year), efforts could be devoted more towards further strengthening and consolidating (and adopting new measures as essential for deeply affected sectors/enterprises)the quick actions taken by Bangladesh Lender for appointment the Covid-19 shock; while needs to implement the medium to permanent measures of the next phase adopting best sequencing.

In both phases, the anti-COVID-19 monetary policies should take into account the main reasons behind adopting the monetary ways of address the challenges.  The reason why could possibly be multiple, but preparing a thorough list may help prioritise the plans and recognize their short and medium term implications and synergies. One key aspect is always to introduce something of regular monitoring to conduct strategic evaluations and redesign the plan framework predicated on changing realities.

The primary task of the monetary policy, especially through the next six weeks, will be to ensure adequate liquidity throughout the market; which has been affected by a sudden and unexpected supply shock - large-level disruption in every production sectors caused by health safety measures and lockdown. It has as well triggered a severe demand shock which includes interrupted income flows and the obligations system. To be able to revive the enterprises and restore job, Bangladesh Bank should additional push the commercial banking institutions to specifically lend to the enterprises where in fact the cash-flow process is definitely more disrupted.

This might require, for the Bangladesh Lender, to supply the framework of monetary measures, including interest incentives for the banks, to further expand the credit support especially to the CMSMEs. There also needs to end up being coordination with prudential methods and fiscal insurance policy decisions. Special provision should be produced on prudential ground about the treatment of terrible loans that is in all probability inevitable (to some extent)regarding these loans. Fiscal coverage support should also be soughtfrom the government to guarantee a part of these loans. Bangladesh Lender should also anticipate to undertake buys of bonds and professional papers as necessary to ensure liquidity in the financial market needed for controlling COVID-19 implications and avoiding economical meltdown.

Moreover, Bangladesh Lender should remain aware that wrong and/or perhaps inadequate action during this time period would lengthen/deepen the short-term crisis, result in/escalate the crisis, and help to make the follow-up phase of recovery more complex and difficult. The Covid-19 shock hasn't only afflicted the already bad overall health of the financial (like the banking) sector of the united states but also all areas of the real and additional sectors of the overall economy. The chance of a disastrous final result from the combined influence of the all-encompassing crisis is therefore real; moreover, Bangladesh as well faces a far more unfavourable global market with disrupted trade and capital flows.

At the end of the first period, the expectation is that medical crisis of the pandemic will be substantially controlled; creation and trade will start to resume normal quickness; and the economic sector should come to conditions, at least partially, with the deep scars of the crisis. However, the serious wounds will continue to persist in both real and personal sector of the economy-huge uncertainties will continue to affect investments (specifically private investment); aggregate consumption will remain depressed because of loss in employment/profit; and overall economic activities and growth leads will stay below their ordinary trajectories.

The medium and long run measures will sequentially start, according to the realities in the next half of the time frame, to cure the wounds, ensure sustained recovery, and re-launch normal economical activities and growth. As expected, some measures could be permanent in nature and could have to be expanded to a longer period horizon. One key facet of these policies is to make sure a close coordination between financial and fiscal plans where fiscal plans will play the business lead role while monetary policy will need the supportive position. Bangladesh Bank will need to make sure the coordination with fiscal authorities and provide technical and personal support as possible to policy implementation. Relying on monetary expansion alone to repair the problems would much more likely to be ineffective and unsustainable. Excessive funds and credit supply along with fiscal growth and the continuing negative source shocks from Covid-19 could gasoline inflationary pressures.

The fiscal policies of the medium phase would have to cover both redistributive measures and increased public expenditures, transfers and tax reliefs for individuals/enterprises which will be debt-financed. Nevertheless, one must realise that the grade of the fiscal methods and their implementation is probably more important than their size. The resulting upsurge in public debt would partly alternative unsustainable private debts helping enterprises and households to regenerate their capital destroyed by Covid-19 and its economic impacts.

The role of the financial policy is to effectively structure the newly accumulated public debt, monitor the liquidity situation of the banks, keep carefully the interest levels low, and address any destructive speculative developments and contain interest spreads within limits. That is necessary to avoid any unwanted changes in risk superior that would limit the economical sector's efficiency in source allocation. A significant concern of the financial policy framework ought to be to ensure personal stability and its own sustainability specifically in the post-Covid-19 period when you will see rapid rises in public personal debt and widespread restructuring of personal enterprises and their monetary portfolio.

For the exterior sector, the guidelines should favour steady exchange rates. The guidelines should recognise that, although Covid-19 shocks could be similar,  their monetary consequences have been remarkably asymmetric across countries with regards to timing, mother nature of socioeconomic effect, reactions and combating technique for health and economic impacts, and, most importantly, their monetary and structural weaknesses and capacities to combat the crisis. Additionally, global spill over effects will continue for very long creating differential results on specific countries including Bangladesh. 

For Bangladesh, monetary and prudential guidelines will need to act alongside one another where the main preoccupation will be restoring normalcy throughout the market without jeopardising financial balance. The policies also needs to remain cautious to the fact that the degree of indebtedness of the market will significantly increase because of this of the plans for addressing Covid-19 difficulties. Financial fragilities may slowly but surely emerge as a dominant theme in the economical sector. Bangladesh Lender should therefore adopt a do the job approach and announce the framework very well beforehand in coordination with fiscal and different macro policies. This can help anchor goals and reassure all stakeholders on the living of a coordinating treatment to handle the Covid-19 crisis. In the post-Covid period, the Bangladesh Lender should consider widening the mandate of financial policy to cover macro-financial stability, not value stability by itself, along with financial growth.

A key concern is always to act quickly and decisively to supply liquidity to avoid financial instability from resulting in even more deterioration of the real economy. Additionally, for ensuring long-run development necessary to restore monetary well-being, Bangladesh Lender would have to adjust to innovative realities for using personal markets to ensure required liquidity, not through manipulating interest rates to finance authorities deficit and providing low cost credit to CMSMEs and different priority activities.

For the method term, Bangladesh Bank also needs to step up providing credit for green investment and occupation stimulus, as the lockdown steps are slowly but surely relaxed and withdrawn. What counts most is the enhanced role of monetary policy to create occupation and reconnect the source chains and assist in the transition to raised growth and sustainability. 
Source: https://thefinancialexpress.com.bd

Tags :

Share this news on:

Previous Story

Trending Topics

Archive