The world economy is hugely disrupted by the outbreak of novel coronavirus (Covid-19. Countries across the global are facing a risk of an outright disintegration as global supply chain is almost dismantled. Transport network is broken. Labour mobility is impeded as people are locked down in their homes. Business enterprises, small and large, are either shut down or closed for an indefinite period. Uncertainties are mounting as households and businesses are facing liquidity crisis.
As Covid-19 infections accelerated in Bangladesh, businesses faced with falling demand and broken supply chain may find no option but to lay off workers. Employment in the non-farm and informal sector is just collapsing. That threatens to be destabilising and chaotic. The government may avoid this by several mechanisms. Given that government borrowings from banks have surged in recent years and liquidity crisis is prohibitive in our financial system, we expect no big room for budgetary supports like those of the United States and other developed countries. The best course of action appears to be that, Bangladesh Bank orchestrates a substantial monetary expansion targeting repo rate of 4.0 per cent and lending rate in the range of 5-8 per cent.
To this end, Bangladesh Bank may immediately start discounting government bonds and treasury bills held by the primary dealers and offer them overnight and term funding with maturities up to 90 days. Bangladesh Bank should remain ready to extend this facility further if condition warrants. Credit extended to primary dealers under this facility may be collateralised by a broad range of debt securities. The interest rate charged should be the primary credit rate, or discount rate, at the central bank. Bangladesh Bank should make it clear that it will continue to purchase government securities until it achieves the target primary rate. It is noteworthy that the US Fed has undertaken open market operations and is committed to maintaining the federal fund rate within a target range of 0?¼ per cent.
Other policy options include reduction in cash reserve requirements (CRR) and statutory liquidity ratios (SLRs). Bangladesh Bank may also direct cash-rich state-owned banks to increase their advance-deposit ratio (ADR) to an enhanced target level. It is advisable to target repo rate to go down from current 6.0 per cent to 4.0 per cent. The cut-off yield of Treasury Bills auctioned in the second week of March 2020 is, however, observed to be in the range of 7-9 per cent. This is apparently inconsistent with the dire condition of the economy. The central bank should flush the money market with liquidity so that interest rates subside and lending to the private sector picks up at the earliest.
The central bank should make a number of interventions targeting industries that are worst-hit by the Covid-19 pandemic. One key policy directive may be to extend bridge loans at the lowest possible interest rate to industries (or even at zero-rate for strategic and vulnerable ones) on the condition that they 'keep their workers on payroll regardless of their work' for at least three months. The assumption is that effective drugs (or vaccination programme) will roll out and normalcy will hopefully return by that time.
The United Kingdom Treasury and Bank of England (BoE) has introduced a lending facility, named the 'Covid Corporate Financing Facility (CCCF).' CCCF is designed to support liquidity among larger firms, helping them to bridge Covid-19 disruption to their cash flows through purchase of short-term debt in the form of commercial paper. The US Federal Reserve Board established Commercial Paper Funding Facility (CPFF) to support credit flow to households and businesses in the United States. The US Fed also established a Special Purpose Vehicle (SPV) to directly buy eligible corporate debts from corporate issuers. Fed also established another SPV to purchase eligible individual corporate bonds as well as eligible corporate bond portfolios in the form of exchange traded funds (ETFs) in the secondary market. Bangladesh Bank may establish similar special purpose vehicles (SPVs) in order to directly buy corporate debt securities subject to meeting certain conditions. This special purpose vehicle may also invest in corporate bonds to be listed in stock exchanges.
Bangladesh Bank may negotiate with multilateral development partners, including the World Bank, Asian Development Bank (ADB), Islamic Development Bank IDB), and International Monetary Fund (IMF), and float a special purpose vehicle of Tk 1.0 billion (100,000 crore) to this end. Banks and non-bank financial institutions that enjoy highest credit rating may access this low-cost fund and start lending directly to businesses provided that they meet a few conditions including employing a certain number of workers and retaining them on payroll.
A few credit rating agencies operate in Bangladesh. Their ratings are, however, not reliable. An alternative mechanism should be envisaged to assess borrowers' long-term solvency and profitability. The mechanism should guarantee that funds shall flow to those firms that can demonstrate they were in sound financial health prior to the Covid-19 shock. Secondly, Bangladesh Bank may issue a directive asking lenders to extend a 12-month moratorium on their loans and advances that will fall due in a year. This will provide cushion to firms and corporations to avoid bankruptcy.
The UK Treasury in its 2020 budget further announced a 'Coronavirus Business Interruption Loan Scheme (CBILS)' and designated British Business Bank to implement this programme for businesses in the UK. The UK scheme provides the lender with a government-backed guarantee against the outstanding balance, potentially enabling a 'no' credit decision from a lender to become a 'yes.' The government will also cover the first six months of interest payments, so businesses will benefit from lower interest payments. The businesses will remain liable for repayment of the capital. The maximum value of a facility provided under the UK scheme would be £5.0 million. CBILS supports a wide range of business finance projects, including term facilities, overdrafts, invoice finance facilities and asset finance facilities. The eligibility criteria include that the incumbent firm shall have a turnover of no more than £45 per annum, operate within designated industries, and unable to meet a lender's normal lending conditions. Bangladesh Bank may follow the substance of this CBILS scheme and tailor it in accordance with our domestic conditions. One particular area of consideration is that lending facility should be available for small and medium enterprises (SMEs) employing less than 200 workers or with an annual turnover of less than Tk 500 million.
Providing liquidity to households and micro, small and medium enterprises (MSMEs) is a critical challenge. To this end, Bangladesh Bank may work with microfinance institutions (MFIs). Palli Karma Sahayak Foundation (PKSF) has an outreach to about 13 million households including ultra-poor, poor, non-poor and micro-entrepreneurs across the country. BRAC, too, is an alternative. PKSF may disburse small loans without collateral through its partner organisations (i.e., MFIs) that are scattered across the country. A critical problem is to ensure that this new money goes to MSMEs and low-income and vulnerable households at a very low interest rate. MFIs are often blamed for subverting government efforts to lower borrowing costs for microloans. This has to be mitigated. The nation-wide network of state-owned and private commercial banks may also be utilised for channelling low-cost loans to households and MSMEs. BRAC Bank, for example, has credible experience of managing large portfolio of loans to MSMEs. Their experience and infrastructure may be of high relevance.
The Ministry of Finance should redefine its fiscal and budgetary policies to support public health and help households and businesses to cope with this pandemic. A rationalisation of entire portfolio of government spending is an urgent need. The government should consider discarding non-essential spending including financing development projects that are yet to take off. Capital market also requires emergency stimulus.
There is a high probability that Bangladesh will experience bloated current account deficit this year and the next year. The Ministry of Finance and Bangladesh Bank should be prepared with options for managing the threatened surging imbalance. Devaluation of taka against the US dollar should be a central element of any solution architecture.
Dr. Mizanur Rahman is Professor of Accounting & Public Policy at the University of Dhaka. Dr. Rahman is an Education USA Fellow. In January 2010, the Global Development Network (GDN) awarded him the Luxembourg Ministry of Finance First Prize for his 'Research on Development'.
