Monday, July 6, 2020

Stimulus Packages How Effective For Economic Recovery Amid Pandemic?

Amid the COVID-19 pandemic, Bangladesh is crossing a thorny path to keep its growth rate stable. Economists predict that growth will decline drastically and last long though the pandemic trim downs within this year. Likewise global trend, the fiscal and monetary responses have brought in Bangladesh economy by offering stimulus measures. Generally, stimulus package is offered to support the economy and check or reverse a recession by enhancing employment opportunity and spending. A monetary stimulus involves cutting interest rates and when interest rates are cut, there is more incentive for people to borrow as the cost of borrowing reduces. An increase in borrowing means there'll be more money in circulation, less incentive to save, and more incentive to spend, thereby stimulating growth.
The government has offered a stimulus package in order to uphold the growth during COVID-19 disaster. Some of these packages are Tk. 30,000 crore for large industries and service sectors, Tk 20,000 crore for small and medium enterprises, Tk 5,000 crore for agro-based small and medium businesses and Tk 3,000 crore for the marginal businesses and farmers. But borrowers are still less enthusiastic taking loans at this moment. The lenders (banks) have so far received a very bit application for loans from stimulus packages.
Banking authorities are in tremor for fear of falling into the likelihood of 'liquidity trap' as large share of money may be funneled directly into capital buffers, contributing to an increase in preventive balances. This circumstance was explained by John Maynard Keynes during the Great Depression. Government has declared Tk 5,000 crore for agro-based small and medium businesses and Tk 3,000 crore for the marginal businesses and farmers. Bankers think that these portions of money received by small businesses and farmers will perhaps sit idle in their bank accounts because of borrowers' worries of losing the future spending capacity. Therefore, banks may face the excess liquidity due to shortage of credit-worthy borrowers. Besides, stock markets are already gyrating rowdily on a regular basis, and this volatility could in turn perpetuate the environment of increased uncertainty. Therefore, big businesses have lower possibility to turn back to viable position if pandemic-stricken uncertainty continues in Bangladesh.
Apart from banking sector and big business dilemmas, there are some general presumptions not to receive the stimulus packages offered by the government in the case of small, marginal and agro-businesses. First of all, one of the main reasons is the risk of investment at this moment since the economy has just reopened from a 66 days long lockdown for COVID-19. Uncertainties from the outbreak are likely to prevail, leading to the unwillingness of receiving stimulus offer. Secondly, the pandemic infection rate is higher in urban than rural areas in Bangladesh. So, labor's reluctance to work in urban industries located even District and Thana levels during COVID-19 situation is another prime reason behind the reluctance of small investors to take loans from stimulus packages. Thirdly, most of the small businesses have faced more difficulties by the lockdown and many of them have lost their capitals during the calamity.
Consumer durable issues should be focused in the case of big investors' business. It needs huge cash payment; but it is reflected in an economy via multiplier effect. This idea is akin to "Arrow-Debreu securities" coined by Nobel laureate economists Kenneth Arrow and Gerard Debreu. This approach is useful for the utilization of income-contingent loans and mortgages in encouraging the wide range purchase of consumer durables like housing (Joseph E. Stiglitz and Hamid Rashid, Project Syndicate, 16.06.2020). Local governments of China have already introduced issuing digital coupons, which are used to purchase different goods and services within a particular timeline. The date of expiry makes them effective stimulants of consumption and aggregate demand in the short run while it needs most. There are no offer related to consumer durables in the currently declared stimulus package. But government of Bangladesh has allocated Tk 95,574 crore for social safety net program in the National Budget, which can be effective in the long run, but not in the short run and will be reflected in the economy in the form of multiplier effect to stimulate growth.  
Government's stimulus offer for small farms and farmers calls for reshuffling the packages. If these small entrepreneurs and farmers may continue their businesses, it can fulfill the region-based needs of goods and services. This business-acceleration process has the multiplier effect on the overall growth process of an economy. Many of these local businessmen and farmers are not aware enough about the stimulus packages. The role of mass media and bank sector is vital to inform the people for attracting stimulus package. Moreover, poorly designed stimulus packages are not just fruitless, but significantly risky and it can even lead to inequality, sow volatility while it requires preventing the economy from falling into a lingering slump.

(Faroque Ahmed is Research Associate, Bangladesh Institute of Governance and Management, e-mail: rony205@gmai.com and Md. Monirul Islam, Assistant Professor, Bangladesh Institute of Governance and Management. Email: monirdu1981@gmail.com)