The government, it seems, wants to mobilise as much money as it can to increase its annual revenue income. This is evident from its ever-increasing effort to levy taxes almost everywhere. There was no tax or excise duty on people's bank balances until a few years back. It is there now. In the budget proposal this year, excise duty on bank accounts has been proposed to be raised up to 60 per cent. It is quite natural for many people to feel that such a levy is only imposed to discourage consumption of something which is harmful for health like cigarettes or addictive drugs or gambling which is deemed to be physically and socially harmful. But no one ever heard that such a tax could be levied on savers' balances with banks. How much money will the government receive through this window? Hardly a few billion taka, but the harm it may cause to the economy could be huge.
The finance minister tries to explain time and again that the levy was there before; this time he has only marginally increased it. We remember, it's true such a levy was there but that was there without any announcement. The government, through an unpublicised statutory regulatory order (SRO), directed the banks to deduct a certain amount of money as excise from the savers' bank balances. The savers or the customers of the banks were found to be embroiled in hot verbal exchanges with bank managers protesting such deductions. But they could hardly do anything more than expressing discontent. This time the issue was made wide open through budgetary proposal, and people, by and large, were found to be unhappy with the proposed measure.
In the economy, it matters what the finance ministry says but it matters more what the people think about the issue concerned. If most people think that the measure is bad, it would be bad no matter how much bad it is in terms of money. People are asking one question again and again: where they should go with their money! The government has reduced interest or profit on savings schemes it had been offering so long. The banks are offering rates that barely cover inflation rate in the economy. The stock market is not functioning as well as it should. Then where should the investing public go with their money?
Economics science says when earning from savings is less than inflation, then it is better to consume all the income. Because, in that case keeping money with banks wherefrom most of the savers get their earnings will give them a negative income from savings or will have a negative real balance with the banks. But can or should everyone spend all the income on consumption leaving nothing for the future? The persons on jobs or doing some sort of business can do this, but the persons of fixed income group or retirees cannot do this because their future cash flows from jobs or business have already ceased. These people prefer to keep their life-long savings either with banks or with the government-sponsored savings certificates for a definite income earning.
But ironically, those two options are now being squeezed; one, by imposing an enhanced levy on bank balances and two, by reducing interest or profit rates on savings certificates. In this situation, old and retired persons have no other alternative but to consume less. Does the government want that its senior citizens go with less consumption or in a desperate situation, go hungry? When the government was levying an excise duty on bank balances, it did not think seriously on the implication of such a levy on the economy.
Some people might think that their money will go down in value if they keep it with banks. From such thinking, they may take certain portion of money out of the banking system. This will drastically harm the economy because the banking system will not get all the money the Bangladesh Bank supplied it with for doing business. The enhanced cash holding by the people will certainly affect economic activities. That is why, all over the world the financial policy aims at making people pro-banking, not otherwise. When people see that keeping money with banks is a loss, they may turn themselves way from banks. At least, small savers and fixed income earners may behave that way. If they do so, the Bangladesh Bank's monetary policy will be in jeopardy.
The monetary policy may not work to achieve the desired results. In case of more cash holding by the people, the Bangladesh Bank will not be in a position to know how much money is actually working or available in the system. More cash holding by the people will simply widen system loss in the financial system because more money supply by the Bangladesh Bank will end up in withdrawals by the people. It may also affect the value of money multiplier in the economy because it depends also on total money use for transaction purpose. When money remains in the banking system, it will have its full use, but money out of the banking system, whether in vault or pillow covers, will not have its full use.
The writer is Professor of Economics University of Dhaka.
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