Demand for cash surges after national election

Bangladesh Bank supplied printed notes worth Tk 245 billion since January

Hasan Adnan

Bonik Barta graph

Following the national election, the political situation of the country is by and large stable. The uncertainty in relation to getting loan from the International Monetary Fund (IMF) has subsided. The digital payment system of the country is better than before. Yet, the pressure of withdrawing cash money from the banks has further increased. In order to minimize the pressure, Bangladesh Bank continues to rise the issuance of notes. This is happening on the heels of declaring a contractionary fiscal policy at the beginning of the year with a view to controlling high inflation. The main objective of the declared fiscal policy was to control the money flow in the market.       

According to information available from Bangladesh Bank, the central bank is gradually issuing notes from the beginning of the year. In January, the volume of issued notes was Tk 2.8064 trillion. It went up to Tk 3.052 billion on April 17. This shows an increase of printed money worth Tk 245.62 billion in just three months and a half. Of the issued notes, more than Tk 2.7 trillion is out of banks.

In order to reduce the flow of money in the market, Bangladesh Bank hiked the repo rate several times. Currently, it stands at 8.5 percent. At the same time, the bank interest rates went up to nearly 15 percent from 9 percent. The flow of loans in the private sector is fairly stagnant. Import has been brought down by 15.5 percent. Demand of products went down alongside reduction of industrial production. Under such circumstance, economists believe that swelling of issued notes is worrying. They are of the opinion that it is indicative of people’s continued lack of confidence in the country’s banking sector.                

Officials of the central bank acknowledge that some customers are withdrawing their deposit due to lack of confidence. But, there are many other reasons behind the increase of volume of issued notes. Officials of the departments concerned say that Eid-ul-Fitr was celebrated on April 11. There is always a greater need for cash money in the marked during Ramadan and Eid. And, owing to the devaluation of taka against dollar and high inflation, the demand of cash has surged.

Economist Dr Ahsan H Mansur said, “The necessity of cash in the country increases in line with corruption. The rule of black money is rampant everywhere. So, the demand of cash is not diminishing. Influential people, including government employees, politicians and businesspersons are piling cash in their homes. They making transactions worth millions through cash.”

“In the whole world, demand of cash goes away with the financial inclusion. But, it is not happening in our country despite that fact that financial inclusion and radius of banking sector are quite large. People are making cashless transactions across the world. Even in neighboring India, people are using Paytm to make small transactions. But, we do not have it here. All the transactions in large wholesale markets take place in cash,” he said.

The 12th national election was held on January 7, this year. In the lead up to the election, demand for cash money started going up from October, last year. Of course, lack of confidence among customers in some of the banks played a role in this regard. People concerned expected that cash flow would decline after the election. But, that did not happen. Rather, it has gone up.

With a view to controlling inflation, Bangladesh Bank announced a contractionary monetary policy in the beginning of the current fiscal year (July, 2023 to June, 2024). Repo rates were increased to reduce the market cash flow. The maximum celling of the lone interest rates, 9 percent, was removed. Since then, interest rates have kept going up. The maximum interest rates were at 13.55 percent in April. In the current month, interest rates on loans were totally left on the market. The interest rates on government treasury bills are now over 12 percent. Repo rates were increased few times to take them to 8 percent. All these initiatives of the central bank could check the flow of cash and inflation did not come under control.  

According to information from Bangladesh Bureau of Statistics, the inflation was at 9.74 percent in April. It has been over 9 percent for past 23 months in a row albeit economists believe that the actual inflation rate is way higher than the Bureau of Statistics proclaims.         

Former Bangladesh Bank Governor Dr Salehuddin Ahmed believes that it will not be possible to bring inflation under control with so much cash outside of the banks. “The contractionary monetary policy Bangladesh Bank is talking about has failed because a group of money is there sitting on large cash. More than half of country’s economy is beyond the control of the banking sector. In such a situation, inflation cannot be controlled by increasing interest rates and announcing contractionary monetary policy,” he told Bonik Barta.           

“The reign of black money in the country’s economy is on the rise. Bribery, corruption and extortion have gone up after the national election. So, it is natural that the necessity of cash will increase,” he added.

There is an ideal proportion regarding the presence of issued notes in a country’s economy. The amount of cash issued by Bangladesh Bank before 2020 was at best 12 percent of the broad money. The rate slightly increased due to the Covid-19 pandemic. Despite that 13.42 percent of the broad money was outside of the banks in June, 2021. The rate was limited to 13 percent in 2022. But, in June, last year, the percentage went up to 16.52. Though it got down a bit in December, 2023, the rate currently stands at nearly 15 percent.  Economists are of the opinion that the maximum rate can be 10 percent given the technological development.

However, Bangladesh Bank Executive Director and Spokesperson Mezbaul Haque claimed that the amount of issued notes was increased to support the country’s GDP growth. “Economic growth must continue even if a contractionary monetary policy is followed. Therefore, money is being issued as per the necessity. The deposit growth is quite good now. With the increased repo rates, the interest rates on deposits are also going up. Therefore, people are now getting interested to keep their money in banks. The issue is under control albeit the amount of notes is on the rise.”       

An overwhelming 92 percent of the notes printed by Bangladesh Bank are of denominations of Tk 500 and Tk 1,000. In June, last year, the central bank had nearly 2.36 billion notes of Tk 500 denomination valued at approximately Tk 1.18 trillion. This was 38 percent of the issued money. There were 1.68 billion notes of Tk 1,000 denomination with a value of Tk 1.68 trillion, which represented over 54 percent of total notes in the market. In total, the amount of money printed by the central bank in June, last year stood at over Tk 3.1 trillion.

Bank executives are of the view that people tend to keep the money at home due to the easy availability of the larger notes. And, the money received from bribery and corruption goes to vault as black money. Notes of Tk 1,000 denominations are mostly used in illegal transactions, including hundi. Bangladesh Bank is also issuing larger notes owing to increased demand. The situation is leading the country to a position where the shadow economy is bigger than the main economy.       

Former Association of Bankers Bangladesh Chairman and Mutual Trust Bank Managing Director Syed Mahmubur Rahman said that larger notes are in very high demand nowadays. “Preservation and carrying of high-value notes are easy. As a result, people ask for notes of Tk 1,000 as they take little space to keep them. The country has more cash than liquidity in the banking sector. It needs to be looked at if the larger notes are playing any role in this regard.”

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