The Financial Express

Virus revives 'mattress' economy

| Updated: August 04, 2020 14:04:44

Evaly and Fianancial Express Evaly and Fianancial Express
Virus revives 'mattress' economy

Money multiplier decreased in the last fiscal year as people are holding cash after the coronavirus pandemic, according to statistics prepared by the central bank.

The data show that the key indicator of the money markets lightly dropped to 4.84 in June last from 5.17 in December last.

Money multiplier refers to how an initial deposit can lead to a bigger increase in the total money supply.

For example, if a commercial bank gains a deposit of Tk 1.0 million and it accumulates to Tk 10 million, the multiplier will be 10.

This tells how fast money supply from the bank lending will grow.

Economists say that commercial banks were unable to maximise the money during the second half of the fiscal year leading to the decrease in the indicator.

They said the coronavirus has caused slump in economic activities, which in turn reduced lending activities in almost every economy.

Dr Ahsan H Mansur, executive director at the think tank Policy Research Institute, attributed the decrease to the poor economic activities since March last.

He said lending was poor and this will continue for more months in the future.

"I think such low multiplier will prevail in the banking system at least until December next," he told the FE.

The Bangladesh Bank predicts that the multiplier will remain the same at 4.84 in December next and increase to 4.93 in June 2021.

Dr Zahid Hussain, an economist, told the FE that the trend is that people even have reduced frequency of visiting banks to maintain social distance.

"In my view, fewer customers are going to the banks to withdraw or deposit cash and such development has caused a drop in the money multiplier," said Dr Hussain, who had served the World Bank as lead economist based in Dhaka.

He said people now prefer to withdraw money in one go to avoid going to banks or ATM booths frequently.

Dr Hussain said the culture of keeping money under the mattress is getting revived as a result of Covid-19. Hoarding of cash by people has surged over the past few months, he said.

The economist, however, said this is a temporary phenomenon in the financial market and it will come to an end when economic activities return to normal.

"People want to hold cash to meet emergencies. So how will the money increase to its maximum level?" he questioned.

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