Stimulus package geared towards the long street to normalcy
The Tk 72,750 crore package announced by the prime minister promises to supply support to small and large businesses in industry and services to tide over the disruptive stage of the pandemic.
There is Tk 30,000 crores presumably for large enterprises in industry and services and Tk 20,000 crore for micro, small and medium enterprises (MSMEs).
The amount of money will be channelled through banks in the type of working capital loans at 9 % interest rate.
There is an additional Tk 12,750 crore infusion in to the Export Development Fund (EDF) and Tk 5,000 crore for pre-shipment credit finance to facilitate the production of exports ahead of shipment and hopefully to market backward linkages to benefit the deemed exporters.
This complements the Tk 5,000 crore assist for the directly export-oriented industries announced earlier.
What exactly are the fiscal, financial, equilibrium of obligations and monetary implications of introducing such a good support package to hold businesses afloat and protect labour incomes when the market is on a good shutdown mode?
The direct fiscal cost of the package is actually not as large since it appears on the surface.
The government will be paying a 4.5 % subsidy on interest on the Tk 30,000 crore for large scale industries and 5 % on the Tk 20,000 crore for MSMEs. This alongside one another constitutes Tk 2,350 crore.
In addition, the federal government can pay Tk 310 crore subsidy on credit rating from the EDF.
The finance division officials have already been quoted in the press as saying that the original Tk 5,000 crore announced for the directly export-oriented industries may also be provided from the finances.
These collectively constitute Tk 7,660 crore additional burden on the spending budget, which is the same as 16.5 % of the original budgetary provisions for subsidies, incentives and cash transfers and 0.3 per cent of GDP.
There can be an implicit contingent liability equal to a maximum 2.5 % of GDP if there are large scale defaults that banks may spread to the budget.
Offsetting this by least partly is the upsurge in gains of the strength sector state-owned enterprises because of decline in the expense of importing oil and related goods.
The burden of financing is on the banks. They happen to be facing liquidity crunch as indicated by the rise in borrowing from the repo industry prior to the partial shutdown of the overall economy. This is more likely to have worsened.
The Bangladesh Bank (BB) should provide satisfactory liquidity to the banks. The banks can borrow from the BB at the 5.75 % repo rate.
Even so, the tenor of BB refinancing of banks should match the tenor of banks' loans to the enterprises to avoid aggravating a maturity mismatch problem that previously exists.
Constitution of a particular refinancing screen addressing these issues will be needed sooner than later.
The default risk is on banks. They have to elevate the skill and prudence of their risk control to ensure that the wilful defaulters and the ones enjoying rescheduling facilities usually do not access these funds.
The require for loans from these innovative facilities will likely exceed supply following the dust settles on the modality of implementation.
To incentivise make use of the cash for payroll, the banks might use matching fund guidelines requiring the borrowers to talk about the main payroll burden, particularly in cases of large and established enterprises.
Even so, the loan size must be adequate to keep carefully the borrowing corporations afloat through the crisis. This is particularly authentic for MSMEs, many of whom might need financing to pay for rent and electricity bills as well.
Given the aggregate financing constraints facing each individual bank, they will have to make choices like the choices the doctors in Italy are producing on which COVID-19 patient to put up the scarce ventilators.
You cannot spread the amount of money too thin. What makes the bankers' decision to choose the borrowers and the mortgage size different from that of the doctors is normally that their action has no immediate cost in conditions of human lives.
They can, in fact, screen out enterprises that cannot survive by themselves under normal circumstances.
Technically sound risk assessment, insulated from cronyism and corruption, might help minimise the work losses because of bankruptcy of the rationed out non-viable enterprises.
Some analysts have qualms about the integrity of the complete process being so reliant on banks. What's the alternative? Surly not really the bureaucratic machinery.
One solution is going to be to channel the amount of money only through those rated among the most notable ten in corporate governance by the BB or intercontinental rating agencies including the Moody's.
They are unlikely to risk their corporate goodwill by deliberately mishandling the funds.
Banks specialising on MSME funding should be preferred for channelling the cash for the MSMEs.
Can the financial bundle aggravate balance of payment pressures?
To the extent the program facilitates the development of existing orders that the purchasers will take or exporting personal shielding equipment (PPEs), the package will actually alleviate plenty of BoP pressures by cushioning the decline in exports.
It really is unlikely to create significant pressure on imports if the support runs mostly to funding payroll expenditures.
Remember that the pressure on import repayments could get some rest from the collapse found in international essential oil and related product prices.
These could be significant if our strength state-owned enterprises take good thing about the situation with time.
The worry on the external front is the likely decline in remittance inflow because of turn off in Bangladesh's key international labour markets, the lagged ramifications of the oil price decline on remittance and the upsurge in health-related imports.
The other resources of non-official finance in the financial account could also dry out.
Preserving the adequacy of reserves and mobilising concessional exterior finance for the assist package will be the best insurance options.
A flexible exchange rate could buffer deeper than anticipated strain on the external balance.
The impact of the package on the amount of money supply may very well be tolerable.
Possibly assuming the BB totally refinances the loans supplied by the banks, including the initial one for direct exporters, and taking into consideration the additional infusion into the EDF, the excess credit constitutes 6.9 per cent of the outstanding stock of credit to the private sector by the end of January.
With the year-on-year individual credit growth down to 9.2 % found in January and dim potential customers for credit demand from usual business expansion related borrowings, the bundle is unlikely to breach the BB's 14.8 % personal credit growth target for fiscal 2019-20.
Actually, there is space for even more, particularly to finance livelihood support to the indegent and the vulnerable.
A relief program of the same magnitude as the loans for business, financed by government borrowing from the BB will constitute slightly over 29 per cent of the stock of reserve money, 37.6 % of public sector debts to the monetary program and 5.6 % of the share of broad money at the end of January.
Broad money growth could reach 18.3 % if both business and livelihood plans are actually fully monetised and there is absolutely no other source of upsurge in money supply between the months of February and June.
These are significant but not alarming figures, given the relatively modest 48 per cent broad cash to GDP ratio at the end of fiscal 2018-19.
However, they perform underline the criticality of exercising fiscal austerity, as envisaged by the prime minister, as a way to preserve the monetary and fiscal space for fighting the impact of the pandemic going forward. And Costs de Blasio, the mayor of NEW YORK, warned, "This is not a sprint, it's a marathon."
Could such a monetary and fiscal growth fuel inflation?
Assume almost all of the monetary and fiscal support goes to comprise labour income losses as apparently intended. The resulting fillip in usage demand can be only what could have prevailed in the lack of the coronavirus pandemic.
Maybe, it would have been even less, as a result of some upsurge in precautionary demand for savings.
The composition of demand created by the support package is likely to be tilted towards essential goods and services.
The inflationary effect thus is determined by the state of play on the supply side of the essentials.
Disruption in source chains caused by the mitigation methods could create some inflationary pressure.
If the policymakers want to reduce sleep fretting about inflation, they better be anxious about managing the mitigation methods to minimise disruptions to the way to obtain essentials, particularly guaranteeing full harvesting of the boro crop, without raising the chance of virus spread.
The assumption that the support reaches only the working labour could be a little heroic.
The larger the leakage, the bigger the probabilities that poverty increase.
Even when there is some inflation, the indegent will benefit if the support reaches them straight.
If the bulk of the assistance is captured by the linked elite, anything can occur, including capital flight.
In that case, we risk facing equally increased poverty in addition to macroeconomic instability.
Note also a support package for the poor and the vulnerable equivalent to the kinds for businesses and workers in those businesses can barely cover 242,500 individuals at Tk 3,000 cash transfer monthly per capita and 485,000 individuals in Tk 1,500 monthly per capita. Just one single month!
That is sobering, underlining the importance of community resource mobilisation and donor financing to complement the government's effort.
