The consequences of printing money to save sick banks and repay debts

The Bangladesh Bank recently printed money to offer loans to five crisis-hit Shariah-based banks, which, despite having no money in their current accounts, continue to conduct transactions by surviving solely on the central bank's life support. 

But such cash injection into the economy, despite declaring a contractionary monetary policy last month, will likely exacerbate the prevailing inflation and economic crisis. 

As of 18 January, the negative balance in the current account of First Security Islami Bank was Tk7,400 crore, Tk3,500 crore for Islami Bank Bangladesh, Tk1,900 crore for Social Islami Bank, Tk1,100 crore for Union Bank, and Tk70 crore for Global Islami Bank. 

And this is the second time these five banks have needed a bailout. 

Earlier in December 2022, the five banks borrowed a total of Tk14,790 crore, with Islami Bank alone borrowing Tk8,000 crore under the central bank's lender of the last resort system at 8.75%, which was equivalent to the special repo rate.

When a bank is near collapse and cannot manage the money to function in its day-to-day operations, it turns to the lender of last resort, the central bank. This has to be regarded as risky because, technically, the bank is already dying. 

However, these five banks are not treated that way in Bangladesh; instead, loans are made possible for them by printing more money. 

At the same time, the government is issuing bonds to address debts in the fertiliser and power sectors, and the central bank has started printing more money to pay off the debts. 

So far, about Tk5,000 crore worth of special bonds have been given to five banks, and the Bangladesh Bank has started printing money to repay these debts. 

This comes at a time when Bangladesh is already going through crippling inflation that has made daily lives harder for the people. All government and central bank policies to reduce inflation have proven inadequate so far and printing more money, for all intents and purposes, will only aggravate inflation instead of pulling it down. 

The Bangladesh Bank now restricts the government from borrowing to avoid inflationary pressure after printing a record-high amount of money in the last fiscal year. Therefore, it is contradictory to provide financial support to the collapsing banks and pay electricity and fertiliser dues, as this will only weaken their contractionary policy. 

Dr Ahsan H Mansur, the director of the Policy Research Institute (PRI),  highlighted that these five banks in Bangladesh are currently experiencing a severe liquidity crisis due to loan irregularities, a lack of corporate governance, and a decline in depositors' confidence. 

"On one hand, Bangladesh Bank has stopped printing money, and on the other hand, it is printing money for some Islamic banks to keep them afloat. While there are talks of being tough on one side, there is also an assurance that banks will not be closed. This gives the wrong message to the stakeholders," he said. 

Dr Khondaker Golam Moazzem, research director at the Centre for Policy Dialogue (CPD), believes that it is hard to justify the rationale of giving the banks money.

"Printing money to give to the collapsing banks is a bad idea at a time when the central bank has declared a contractionary monetary policy. Islami Bank was bailed out once before, and unless the challenges are resolved, just giving them money will not save them," he stated. 

One of the perplexing aspects of the collapsing banks is that there is zero accountability for the crisis from bank officials and management. With the bailout and inflation, it undermines the interests of the citizens and raises serious concerns about the integrity of the central bank. 

Dr Mansur thinks that recklessly printing money to bail the failing banks out or issuing bonds for the energy and fertiliser sectors will add fuel to the fire of inflation. 

"The government has to fix its policies. Otherwise, taking money from the central bank will only weaken their monetary policy. The government should not have issued the bonds."

Dr Moazzem remarked that instead of addressing the problems in the energy sector, such steps will only serve to continue the current crisis. 

One of the potential crises that will be aggravated by printing more money is that it will further destabilise the taka. The taka will continue to lose its value against the dollar, perpetuating the balance of payments crisis. At the same time, the falling exchange rate will motivate more and more remittances to be sent through hundi channels. It will continue the vicious cycle of the dollar shortage and balance of payments crisis. 

Dr Mansur also thinks that the dollar crisis will not be resolved at this rate. "To address this deficit in economic accounting, the dollar crisis and inflation must be resolved. But if the trend continues, the dollar rate will not be stable. Also, if the economic deficit is not resolved properly, the dollar crisis will not be alleviated." 

"The electricity price needs to be market-based. The agreements should be disclosed, especially those with companies involved in imports," he opined. "To make significant improvements in the electricity account, efforts need to be made collectively. Moreover, in all areas, tax rates need to be rationalised."