Summarize the article given below using your concepts from chapter 5 The Cost of Money(Interest Rates).Essentials of Managerial Finance 14th - Besley, Brigham. Article link - Coronavirus paving the way for higher inflation in Bangladesh? | The Daily Star.

Article -

Summarize the article given below using Inflation rate during the time of pandemic Covid-19 in Bangladesh.

Coronavirus paving the way for higher

inflation in Bangladesh

The novel coronavirus has significantly affected and altered the economic courses of countries around the world, be it developing or developed. It is fair to say that even advanced economies such as the US are grappling with economic challenges that coronavirus has

posed. Therefore, it is not unexpected that developing nations such as Bangladesh, India, and Pakistan will also bear the brunt of the

pandemic in terms of some form of economic crisis. While it is too early to predict exactly how the economy of Bangladesh is going to

react to the challenges, it is important that the policymakers remain cognisant of the key issues so that they can take necessary steps to

pre-empt any steep nosedive of the economy.

On July 24, 2020, I came across a news article published in the Bangla daily Prothom Alo, which mentioned that recently there has been

an increase in the premature withdrawal of National Savings Schemes (NSS). It can easily be surmised that many savers, faced with

declines in their incomes due to the pandemic, have felt pressured to withdraw their savings with the NSS forgoing the promised higher

interest rate. According to the news article, between July 2019 and May 2020 the Directorate of National Savings Bangladesh (DNSB) had issued national savings certificates (NSC) worth Tk 57,805 crore. During the same period, NSC holders sold off NSCs worth Tk 46,794 crore. This basically means that the net value of NSCs sold in the eleven-month period was Tk 11,011 crore. According to the same news article, the trend in NSC transactions in the past three months has been even more worrisome. For instance, in April 2020, the net value of NSCs sold was Tk (-) 354 crore. In other words, more NSCs were withdrawn than were issued by the DNSB in April. This speaks volumes about the adverse impact of the current pandemic on the economy of Bangladesh and indicates a further decline in the net value of NSCs sold at least in the short run.

Given the above scenario, the first question that we should ask is, is there a reason to worry? If yes, why? Naturally, the next question is what can be done to minimise the worry. To answer the first question, we first need to understand how the government finances its expenditures. The two main sources of government finances are taxes (mostly income taxes and VAT in context of Bangladesh) and debt. One of the major sources of non-bank borrowing for the Bangladesh government is NSS. In the originally proposed budget for the FY 2019-2020, the target net borrowing from the NSS was set at Tk 27,000 crore. However, later it was revised downward to Tk 11,924.

Interestingly, in the latest budget proposed for the FY 2020-2021, the target net borrowing from the NSS has been set at Tk 20,000 crore.

However, as mentioned previously, between July 2019 and May 2020 the DNSB sold NSCs of net value Tk 11,011 crore. There is a clear

gap of around Tk 9,000 crore between the target amount and the actual amount available. Given the recent trend in the NSC market, it

will be overly optimistic to assume that the premature withdrawals of NSCs will lose pace anytime soon. On the other hand, businesses,

in general, are experiencing slowdowns due to the pandemic which implies that tax revenues that can be raised will not be able to meet

the expectation of the proposed budget. The situation will exacerbate if the government finds it necessary to implement a stronger

stimulus package to revitalise the economy. It is not a lack of intent on the part of the government to help the economy come out of a

downturn or pre-empt an imminent crisis, rather limited sources of finance that has the potential to lead the government to

unchartered waters.

Coming to the first question: is there a reason to worry? The short answer is yes. If the government sticks to the expenditures proposed

in the budget while facing budget financing challenges as described above, it may resort to borrowing money from Bangladesh Bank. In

order to meet the borrowing demand of the government, Bangladesh Bank may then consider "printing" more money. This is the main

reason for worry. As it is an already established fact, printing more money to finance government expenditures is a highly risky

business as it can lead to an increase in inflation which can quickly go out of hand and result in hyperinflation. Zimbabwe in late 2000

is a case in point. Moreover, reportedly, Bangladesh Bank has recently announced a policy to increase money supply in the market. To this end, Bangladesh Bank has cut down both repo and reverse repo rates. As a result, commercial banks can borrow money from

Bangladesh Bank at a rate lower than before. This is expected to increase commercial banks' liquidity which in turn can lead to an

increase in the inflation rate. It should be noted here that the inflation rate in Bangladesh as of June, 2020, according to Bangladesh Bureau of Statistics is 5.65 percent which has increased by 17 percentage points in the last one year.

A natural question that can come to the reader's mind is, what is the inflation risk like in the developed countries which have been implementing mammoth stimulus packages? The example of the US will probably suffice here to answer this question. The US has been

enjoying exceptionally low inflation rates for several decades now, thanks to the Volcker Disinflation Policies in late 1970s and early in

1980s. Therefore, increasing money supply has not had a big impact on the inflation rate in the US. However, a word of caution should

be added here. The US will find itself in dire straits if the inflation rate shoots up for unforeseen reasons as the target fed rate is already too low (between 0-0.25 percent) to be manipulated to affect the money market. This, however, is a different topic and deserves a

separate discussion. Now that we have an answer to the first question, an avid reader will be disappointed if I wrap up without answering the second question. Unfortunately, the answer to the second question is much more difficult and depends on many factors and information on the latest dynamics of the economy. But one thing should be clear, there is no single policy that can be implemented to minimise the worry.

Rather, there has to be a combination of carefully designed policies. As a starting point, the government may consider revising the

areas of its expenditures and prioritise some areas where more resources should be directed to have the most beneficial impact on

people's lives. Another method which has proven to be a very effective anti-inflationary tool is bolstering the credibility of the central

bank. If Bangladesh Bank can credibly show its anti-inflationary commitment, inflation can be kept within reasonable bounds through keeping in check people's inflationary expectations. After all, most if not all economic agents are rational human beings who do foresee the future more or less correctly.

 

The novel coronavirus has significantly affected and altered the economic courses of countries around the world, be it developing or developed. It is fair to say that even advanced economies such as the US are grappling with economic challenges that coronavirus has posed. Therefore, it is not unexpected that developing nations such as Bangladesh, India, and Pakistan will also bear the brunt of the pandemic in terms of some form of economic crisis. While it is too early to predict exactly how the economy of Bangladesh is going to react to the challenges, it is important that the policymakers remain cognisant of the key issues so that they can take necessary steps to pre-empt any steep nosedive of the economy. On July 24, 2020, I came across a news article published in the Bangla daily Prothom Alo, which mentioned that recently there has been an increase in the premature withdrawal of National Savings Schemes (NSS). It can easily be surmised that many savers, faced with declines in their incomes due to the pandemic, have felt pressured to withdraw their savings with the NSS forgoing the promised higher interest rate. According to the news article, between July 2019 and May 2020 the Directorate of National Savings Bangladesh (DNSB) had issued national savings certificates (NSC) worth Tk 57,805 crore. During the same period, NSC holders sold off NSCs worth Tk 46,794 crore. This basically means that the net value of NSCs sold in the eleven-month period was Tk 11,011 crore. According to the same news article, the trend in NSC transactions in the past three months has been even more worrisome. For instance, in April 2020, the net value https://www.thedailystar.net/opinion/news/coronavirus-paving-the-way-higher-inflation-bangladesh-1944025 10/19/2020 Coronavirus paving the way for higher inflation in Bangladesh? | The Daily Star of NSCs sold was Tk (-) 354 crore. In other words, more NSCs were withdrawn than were issued by the DNSB in April. This speaks volumes about the adverse impact of the current pandemic on the economy of Bangladesh and indicates a further decline in the net value of NSCs sold at least in the short run. Given the above scenario, the first question that we should ask is, is there a reason to worry? If yes, why? Naturally, the next question is what can be done to minimise the worry. To answer the first question, we first need to understand how the government finances its expenditures. The two main sources of government finances are taxes (mostly income taxes and VAT in context of Bangladesh) and debt. One of the major sources of non-bank borrowing for the Bangladesh government is NSS. In the originally proposed budget for the FY 2019-2020, the target net borrowing from the NSS was set at Tk 27,000 crore. However, later it was revised downward to Tk 11,924. Interestingly, in the latest budget proposed for the FY 2020-2021, the target net borrowing from the NSS has been set at Tk 20,000 crore. However, as mentioned previously, between July 2019 and May 2020 the DNSB sold NSCs of net value Tk 11,011 crore. There is a clear gap of around Tk 9,000 crore between the target amount and the actual amount available. Given the recent trend in the NSC market, it will be overly optimistic to assume that the premature withdrawals of NSCs will lose pace anytime soon. On the other hand, businesses, in general, are experiencing slowdowns due to the pandemic which implies that tax revenues that can be raised will not be able to meet the expectation of the proposed budget. The situation will exacerbate if the government finds it necessary to implement a stronger stimulus package to revitalise the economy. It is not a lack of intent on the part of the government to help the economy come out of a downturn or pre-empt an imminent crisis, rather limited sources of finance that has the potential to lead the government to unchartered waters. 1/4 Coming to the first question: is there a reason to worry? The short answer is yes. If the government sticks to the expenditures proposed in the budget while facing budget financing challenges as described above, it may resort to borrowing money from Bangladesh Bank. In order to meet the borrowing demand of the government, Bangladesh Bank may then consider "printing" more money. This is the main reason for worry. As it is an already established fact, printing more money to finance government expenditures is a highly risky business as it can lead to an increase in inflation which can quickly go out of hand and result in hyperinflation. Zimbabwe in late 2000 is a case in point. Moreover, reportedly, Bangladesh Bank has recently announced a policy to increase money supply in the market. To this end, Bangladesh Bank has cut down both repo and reverse repo rates. As a result, commercial banks can borrow money from Bangladesh Bank at a rate lower than before. This is expected to increase commercial banks' liquidity which in turn can lead to an increase in the inflation rate. It should be noted here that the inflation rate in Bangladesh as of June, 2020, according to Bangladesh Bureau of Statistics is 5.65 percent which has increased by 17 percentage points in the last one year. A natural question that can come to the reader's mind is, what is the inflation risk like in the developed countries which have been implementing mammoth stimulus packages? The example of the US will probably suffice here to answer this question. The US has been enjoying exceptionally low inflation rates for several decades now, thanks to the Volcker Disinflation Policies in late 1970s and early in 1980s. Therefore, increasing money supply has not had a big impact on the inflation rate in the US. However, a word of caution should be added here. The US will find itself in dire straits if the inflation rate shoots up for unforeseen reasons as the target fed rate is already too low (between 0-0.25 percent) to be manipulated to affect the money market. This, however, is a different topic and deserves a separate discussion. Now that we have an answer to the first question, an avid reader will be disappointed if I wrap up without answering the second question. Unfortunately, the answer to the second question is much more difficult and depends on many factors and information on the latest dynamics of the economy. But one thing should be clear, there is no single policy that can be implemented to minimise the worry. Rather, there has to be a combination of carefully designed policies. As a starting point, the government may consider revising the areas of its expenditures and prioritise some areas where more resources should be directed to have the most beneficial impact on people's lives. Another method which has proven to be a very effective anti-inflationary tool is bolstering the credibility of the central bank. If Bangladesh Bank can credibly show its anti-inflationary commitment, inflation can be kept within reasonable bounds through keeping in check people's inflationary expectations. After all, most if not all economic agents are rational human beings who do foresee the future more or less correctly.