Money amassed outside Bangladesh's banking system, ballooning over Tk 2.63 trillion by now, fuels inflation and people pay through the nose when global consumer-price indices tumble, experts say.
The volume of currency outside the bank vaults rose again in April 2023 after three months of downturn, officials and bankers said.
People familiar with the developments on the financial market told the FE that this rise is due to the uncertainty both in local and global markets as they believe people hold cash at a time when uncertainty arises.
The uncertainty among people mounts further because of the upward trend in the rate of inflation, which, in fact, forced depositors to drive away the money from the banking system to meet growing living costs, according to them.
In economic jargons, currency outside the banking system is defined as legal tender in the hands of members of the public, which has ballooned in volume in Bangladesh in recent months, as figured out from the currencies in circulation.
According to latest statistics of Bangladesh Bank (BB), the volume of money stashed outside the banking system rose by over 11 per cent year on year in April 2023 to reach Tk 2.63 trillion.
The reported April volume is up by Tk 87.05 billion from the previous month's Tk 2.54 trillion, the data showed.
Seeking anonymity, a BB official said the volume of currency outside the banks had gone up significantly in December last year driven by media reports on loan-related irregularities. It went on a downturn after the central bank's immediate policy intervention to allay the money-market tantrums.
"But, the amount of the money going outside the banks increased again in April last when the country observed Ramadan and Eid-ul-fitr and people's consumption and expenses normally surge up significantly on these occasions. This is probably a reason behind the surge in money flowing out of the banks," the central banker said.
According to official statistics, the amount of such money had soared to Tk 2.70 trillion in December 2022. Since then, it had declined to Tk 2.63 trillion, Tk 2.57 trillion and Tk 2.54 trillion in following months of January, February and March respectively.
Contacted for an interpretation of the conundrum, Managing Director and Chief Executive Officer of Mutual Trust Bank (MTB) Limited Syed Mahbubur Rahman said inflationary pressure pushed up the cache of what is termed 'mattress money'.
People might feel that they were not getting the right returns because of the inflation and they might drive out their deposits into other areas to get higher returns, he said, as economists say interest on bank deposits turns out to be negative when adjusted against inflation-currently little below a double-digit rate.
"What is needed now is to withdraw the existing ceiling on lending and leave it to the market that will enable the banks to offer higher rates for depositors," says Mr. Rahman.
The bank's top executive appreciates a central bank plan to lift the lending-interest cap from the upcoming fiscal (FY'24) by introducing a new benchmark-reference rate.
"It's a good thing to start with. Let's see how it functions."
Talking to The Financial Express, founder-chairman of Policy Exchange of Bangladesh Dr M Masrur Reaz said the increase in money circulation outside bank deposits could be attributed to three major factors. In the first place, the rise in out-of-pocket expenditure because of the inflation might force people to take away deposits from the banking system.
On the other hand, the country observed Ramadan and Eid when traders and consumers cash out a large chunk of funds from the banks for business and consumption purposes.
And the third factor is the local currency has depreciated more than 25 per cent over the last one year. It probably prompts many to invest in US dollar to get a better return.
"These are probably the reasons behind the rise in the volume of currency outside the banks," he says in fine.
The economist thinks the growth in the volume of such money continues further as the rate of inflation soared to 9.94 per cent in May from April's 9.24 per cent.
Currently, the inflation in Bangladesh is billed one of the highest in the world as the developed countries mostly tamed the high rates with global consumer-price index subsiding. In the USA it is reported down to around 4.0 per cent from a double digit-level, in Japan to around 3.0 per cent and in China cooled to 1.8 per cent only.
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