New strategy to cut bank borrowing

The government considers amending the Bangladesh Coinage Order, 1972 with a view to transforming the notes and coins of taka-five denomination into government currency, officials said.
If amended, the Ministry of Finance (MoF) believes this will help the government cut bank borrowing gradually to Tk 8.0 billion (800 crore).
At present, the MoF issues Tk 1.0 and Tk 2.0 coins and notes. These government currency notes carry the finance secretary's signature. On the other hand, the notes of taka-five denomination and above are issued by the central bank with the governor's signature there.
Since the supply of money will remain unchanged, the ministry says the amendment to the law will leave no effect on inflation.
Out of the total currency in circulation, the finance ministry hopes, the approval will raise the ratio of the government currency from 0.83 per cent to 1.50 per cent.
Mahbub Ahmed, senior secretary of the ministry, last week submitted a proposal in this connection to the finance minister for his approval.
Presently, only Tk 1.0 and Tk 2.0 notes are in circulation as the government currency, but both are experiencing "natural" phase-out from circulation. For example, the value of Tk 2.0 has eroded significantly due to inflation, the rate of which has averaged 7.3 per cent annually since 1974-75.
In the note prepared for the finance minister, the senior secretary said if calculated on the GDP deflator, the purchasing power of Tk 1.0 of 1974-75 lost its worth and equalled to Tk 12.45 in 2014. Alternatively, the purchasing power of Tk 1.0 in 2014 was equivalent to Tk 0.08 in 1974-75.
GDP deflator is an economic metric that accounts for inflation by converting output measured at current prices into constant-dollar GDP. The GDP deflator, also known as GDP implicit price deflator, shows how much a change in the base year's GDP relies upon changes in the price level.
The fall in value prompted the government to take over notes and coins of Tk 5.0 denomination, an official said.  
Terming the lower-denomination notes 'useless', finance minister AMA Muhith in January told reporters that the government would phase out Tk 1.0 and Tk 2.0 notes from circulation. And Tk 5.0 would be the lowest denomination instead of the existing Tk 2.0.
The government issued Tk 1.0 and Tk 2.0 notes and coins as government currency after the Liberation War and in 1989 respectively, noted the proposal.
According to the proposal, the Bangladesh Coinage Order, 1972 will first need to be amended, which will require parliamentary approval. Secondly, the MoF will have to amend the existing treasury rules and subsidiary rules.
More amendments have to be made to the Bangladesh Bank Order, 1972. However, says the proposal, there will be no need to withdraw the existing Tk 5.0 notes and coins from circulation.
Gradually, old notes and coins of Tk 5.0 denomination, which were issued by the Bangladesh Bank, will be replaced by the government notes and coins.
Commenting on the move, former Director General of the Bangladesh Institute of Development Studies (BIDS) Mustafa K. Mujeri told the FE on Friday the Bangladesh Bank (BB) cannot issue notes and coins beyond the limit, but if the government takes over those of five-taka denomination, the authority can issue the whatever quantity they wish to.
He, however, said, "I think there will be no major impact on the county's money market, if the government expands its legal tender base, because Tk 5 notes and coins are of lower denomination in the context of our economy."   
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