Bangladesh Bank, finance minister and emergency relief measures  

The global economy is struggling with an infectious disease driven demolition of life and living never seen before - a unique episode in which people get debilitatingly ill, die and the economy gets shutdown. Monetary and fiscal authorities across the globe are struggling untiringly to save jobs and rescue distressed businesses. Therefore, policy makers should always stand ready with sustainable emergency measures as warranted. However, finance minister Mustafa Kamal told the Financial Express (FE Report, April 23) that the government has no plan to package any new stimulus measures. He suggested, "I think the investors, enterprises, and businesses have different options at this moment for securing capital support to continue their operations and industrial production. The private sector now has many avenues to secure funds. In addition to the commercial banks, they can go to the capital market or the bond market to meet their financing needs."

The finance minister's advice prima facie appears surefire and instinctive but once one examines the autopsy of what happened to the businesses, the advice appears as passing remarks -- not predicated on reality on the ground. Why so?

The advice could have lots of merits had the stock market been vibrant prior to the eruption of Covid-19 and thereafter now. Only about six months ago, I remember the  finance minister saying, "I do not understand why our economy is not related to the stock market?" He was referencing to economic growth of 8.0 per cent while the stock market was having a pastime in slumber -- unresponsive to the vivacity of the economy. With the eruption of the apocalyptic coronavirus, the economy is now at a near comatose state while Bangladesh stock market (BSM) is left nearly unscathed to its prior inert state. Obviously, the finance minister's assertion about lack of co-movements of the economy and stock market is not utterly speculative or a wisecrack.  

Over the last decade and a half or may be since its debut, the country's stock market has rarely been a stable and dependable source of raising capital for entry of new firms in production industries or expansion of the existing ones unlike stock markets in advanced economies. That is not to say that the future will be replays of the past foul plays - history repeats itself notwithstanding.  There were recurrent stock market mischiefs in the past from which the market had to be rescued and steered each time by taxpayer's funds while the mischievous few walked away scot-free -- never smeared by shame and shackles. To this day many retail investors of yesteryears, including myself still feel vanquished and vandalised by unworthy stock market manipulators. Therefore, until people's confidence in the stock market is restored and well-grounded and the state of current predicament of the economy is fully mitigated, I do not see how businesses can raise capital through the windows of Bangladesh stock market.

In all advanced economies, stock market acts as a forward-looking indicator of the directions of movements of many key economic variables such as output, employment, inflation and so on. For example, when stock prices rise, they do not rise in thin air -- price increases are driven by investors' confidence in the products and performance of the company, which are formed from favourable news and analysts' estimates about the profitability and growth of the company.

As business output expands, economy's output and employment also expand, which in turn causes stock prices grow, setting a symbiotic nexus. With rising stock prices (perceived wealth effect) and rising employment and income, consumer demand for goods and services get a boost.  As aggregate demand increases, firms rush to produce more goods through acquiring new physical capital (machines and equipment, building etc.) and hiring workers. That requires raising financial capital through issuing secondary offerings (not IPO: Initial Price Offering) or bonds or a combination of both. The market is then set to absorb the IPOs for entry of new firms and secondary offerings from existing ones.

This kind of economic and financial market conditions are indispensable prerequisites for businesses to raise funds in the stock market - not the prevailing coronavirus driven recessed economy and the stock market. Declining or depressed stock prices reflect investors loss of confidence in the company's ability to operate profitably in the near future. Therefore, why would people invest in shares of these firms and hence raising capital is unrealistic.

Acquiring bond financed capital, another alternative in the finance minister's menu is even more absurd given the bond market in Bangladesh is still crawling in its infancy.  However, his calling on businesses to seek loan from banks is quite thoughtful. Since Banks are liquidity affluent, and the economy needs banking activities to remain strong, cash starved businesses should seek bank loans and thus be a partner to the economic welfare of the country.

Not only GDP growth appears unrelated to stock price movements in Bangladesh, other economic variables such as unemployment, inflation, inflation expectations, interest rate and so on also lack a stable relationship. Markets elsewhere in advanced economies generally operate in the way students in Bangladesh and elsewhere learn economics from Western economics textbooks. Unfortunately, most of these learnings become futile in the operations of the real economy of Bangladesh because of overriding distortions and intrusions by government machineries and non-market forces. 

The emergency relief measures being implemented by the government appear well conceived and timely. Monetary policy makers in Bangladesh Bank have also adopted some measures to help banking system's liquidity afloat. In addition to some important refinance lines of credit, Bangladesh Bank (BB) decreased its policy rate (repo rate) from 6.0 per cent to 5.25 per cent along with relaxing advance deposit ratio (ADR) and more importantly, the cash reserve ratio (CRR) from 5.5 per cent to 4.0 per cent. Obviously, these policy activisms will release substantial reserve money from policy mandated required reserves, allowing banks to expand loans and become more profitable.  

One policy measure, splitting the interest cost on bank loans between borrowers and the government is quite innovative. This allows banks' lending at 9.0 per cent of which 4.5 per cent the government will pay banks on behalf of the borrowers. Since half of bank interest on loans is guaranteed by the government, they may consider lowering the interest cost to borrowers to 3.0 per cent or below - if feasible - to help the businesses and the economy at its worst time.

Some of the relief measures BB has acted on are coordinated with the government's stimulus package and some are funded from BB's own funds. The total amount to be expended is about Tk400 billion. The sectors which received favourable attention for  receiving funds include: (1) industry and service sector, (2) export oriented industries, (3) CMSMEs, (4) agriculture, (5) pre-shipment credit refinance, (6) working capital for large industry and service sector, and (7) low income earners (farmers, micro/marginal business. BB is somewhat restrained in its interest rate cut and money expansion because of the fear of potential flare-up of inflation above its prevailing rate of 5.5 per cent. That is certainly prudent - because if the recessed economy is flared-up with higher inflation - the result will be stagflation - another nightmare for policy makers to confront.  

Policy makers across all nations recognise that devising measures to protect employees and employers is the panacea to save the economy. With over 26 million Americans claiming unemployment checks, the U.S. Congress on April 23 approved a supplemental $484 billion (to replenish the initial $349 billion package which are already exhausted) of which $310 in new funds is targeted for paycheck protection programme (PPP),  which gives small firms loans that could be forgiven if they use them on wages, benefits, rent and utilities. A block of $60 billion is earmarked for loans and grants to small businesses which were left out of the initial $349 billion relief programme. The Congress and the Federal Reserve are assuring the nation that there is no stopping of all-encompassing support to protect employees, and employers to salvage the economy from further ruin. 

The global citizens are looking up to the U.S. and other advanced countries in general for a medical therapy to cure COVID infections and a vaccine to deter escalation of infections. On one side there are pessimism peddlers who draw a doomsday picture while anecdotal optimism by others trigger hopes of reliving in a refreshed COVID free world.

Dr. Abdullah A Dewan, formerly a physicist and a nuclear engineer at Bangladesh Atomic Energy Commission (BAEC), is professor of Economics at Eastern Michigan University, USA. [email protected]