Is monetary policy echoing its context?

The ensuing economic slowdown from the pandemic vitalises the role of fiscal and monetary policies. A lack thereof is to lead to a further downturn in the economy while the second wave of the pandemic has already aggravated and engraved the socio-economic fallouts from the first wave more deeply into the lives and livelihoods of people.

The new poor population emerged in the last fiscal year, and the second prolonged economic shutdown has drained resources, savings and income for these low-income households, sapping their resilience.

The government announced stimulus packages of liquidity support worth 4.9% of the GDP in 2020. Given the allocation, disbursement and intended beneficiaries of these packages, it leads to the question of whether the monetary policy reflects the intricacies of the context in Bangladesh. 

The context and its facets

The context in Bangladesh is made up of, at least, a four-tier milieu. First, the pandemic has initiated unprecedented circumstances in the economy, leading to an economic slowdown on both the demand and supply sides. The macroeconomic and household indicators show a slump, including a sharp decline in consumption and investment, with the former affected more severely.

The country saw an economic squeeze, a decline in consumption-led GDP growth by 3.9%, according to government statistics and 61.57% of the employed population lost their jobs during the lockdown, while the median wages for salaried and daily workers declined by about 37% compared to usual earnings. Consequently, consumption declined significantly due to income erosion of the median citizens. 

Second, an increase in government expenditure could stave off the imminent economic slowdown. Besides private investment, the public investment including social sectors such as education, healthcare and social security have also decelerated. Restrictive revenue and public spending have further choked domestic consumption, circling back to further decline in revenue collected from VAT. 

Third, despite the provision of the stimulus package, monetary expansion in the economy was stifled. The growth of domestic credit has been sluggish, particularly as both public and private investment opportunities looked bleak in the rising uncertainty of the pandemic. The growth rate stood at 8%, significantly below the targeted 14.8% declared by Bangladesh Bank. Private investment was stalled as business confidence was weak, despite lending rates being at a record low.

In addition, complexities in investment conditions for small depositors, investors, low and middle-income groups have largely hindered the flow of credit. As a result, the channelling of domestic credit into the eventual monetary expansion in the economy was deterred. Hence, money did not reach the intended firms and households at a required scale rather was left in the banks, leading to an excess liquidity situation.

Fourth, the Covid-19 pandemic has severely impacted the lives and livelihoods of the marginalised section of the society - particularly the low-income people, women, children, the elderly, the unemployed, the informal sector workers, lower-middle-class and middle-class.

The absence of universal social security leaves the vulnerable population with scarce coping mechanisms. The existing social safety nets, in the absence of a household database too, are fraught with certain degrees of inclusion and exclusion errors that meddle with the cohort of intended beneficiaries. Exclusion error in social protection is as high as 71% and inclusion error is more than 45%. Moreover, lack of transparency, legitimacy, and supervision further dampens the effectiveness of the social safety nets in Bangladesh. 

Lessons learned

Large industries received the greatest share of allocation, and also experienced the highest rate of disbursement in the stimulus package. Of the total Tk 1,240 billion allocation, Tk 577 billion was allocated for the large industries which is almost 50% of the total allocation. Despite being a significantly large employer in the economy, CMSMEs only received Tk 252 billion in total and also saw a lower disbursement rate. The central bank statement promised more support for the enterprises, although the allocation and utilisation of funds from stimulus packages show a widening disparity between smaller and larger enterprises. 

The economic impact of the pandemic was experienced more adversely by low-income households. With little social protection mechanisms and higher costs of living in the urban areas, a significant size of the urban poor migrated to the rural areas before each lockdown. When the majority of the population experienced income erosion, it required a strong action in the form of direct cash transfers, the likes of which was implemented in the United States. However, due to the lack of proper channels or national poverty registry, direct cash transfers could not be reached to the population in need. 

Wide scale income erosion resulting from the losses in real sectors, decline in median wages and loss of employment from the economic slowdown created a new poor population in the country. In addition, the rural-centred policies of poverty reduction overlook the rising urban poverty resulting from the pandemic-induced economic shutdown. The worsening urban poverty is owed to a large cohort of urban informal sector workers, comprising 21.4% of the population who have suffered income erosion and loss of employment, pushing them back into poverty. 

Juxtaposing the context and the lessons learned from the economic contraction indicate a lapse in truly matching policy efforts to the problem at hand. Because of discrepancies in response to Covid-19, the emergence of a K-shaped recovery is likely in Bangladesh - where middle classes are fragmenting - leading to a diverging, discriminatory recovery path. 

Way forward 

Money should reach the people who need it the most. Doing so requires a national household database, an expansion in fiscal measures such as public spending that address the new poor, providing private sector wage subsidies to increase median wage, and creating formal banking channels that reach the last mile citizens. The need for a fully-fledged universal social security has skyrocketed during the pandemic, as a new poor population emerged, along with low and lower-middle income groups facing substantial income erosion and decline in consumption. 

Credit guarantee schemes should be provided to CMSMEs, particularly to those who are unable to avail debt finance. Differentiated interest rates can also be offered to CMSMEs, incentivising banks to lend more to small businesses. A simplification of the terms and conditions on these preferential loans will encourage CMSMEs to opt for the liquidity support. The existing excess liquidity in the banks needs not mopping up but a smoother and swifter transmission channel to private investment is required, starting with targeting the needs of CMSMEs. Thus, the growth and inflation trade-off is of little relevance here, and can instead be regarded as a temporary adjustment. 

It is true, however, that the demand for credit and private investment will not pick up unless business confidence is restored. This can only be achieved by a nationwide drive for fully vaccinating every citizen. Meanwhile, coordinated efforts and effective management strategy will be required to flatten the daily acceleration of Covid-19 cases. Preventive measures will help contain demand over limited healthcare resources, and release pressure over curative measures. 

Altogether, a harmonisation of the fiscal and monetary policy, instead of a lopsided expansionary drive in the money market, will catalyse the process of equitable recovery and reconstruction in the economy. 

Rashed Al Mahmud Titumir

Dr Rashed Al Mahmud Titumir, Professor and Chairman of the Department of Development Studies at the University of Dhaka, is Chairperson of the think-tank, the Unnayan Onneshan. rt@du.ac.bd