Velocity of money in monetary policy efficacy

Currency management in an economy is a challenging task. The central bank takes the responsibility of managing the money supply. Through the monetary policy, the decision of money supply is taken in view of the economic scenario in an economy. The monetary policy is adopted for a fiscal year aiming to encourage steady economic growth with a moderate rate of inflation. To keep the unemployment rate at a lower level is one of the key targets. The monetary policy and fiscal policy must be acceptable to the nation in the present perspective, no doubt. These two policies bring the economic prosperity, if the right policy is taken in the right time. But, in the absence of velocity of money, Bangladesh's economy is set to face difficulty with moving ahead. An expansionary monetary policy for FY2020-21 in the country comes aiming to bring cashless people under the net of currency.
Recently the Bangladesh Bank (BB), the central bank of the country, announced its monetary policy for the fiscal year 2020-21. The expansionary monetary policy comes for the current fiscal year against the backdrop of the Covid-19 situation that hurt our economic activity much. The expansionary monetary policy aims to recover the corona-ravaged economy through injecting cheaper money into it. The monetary policy would also help generate employment and narrow the current account deficit. To bring the world economy back in a situation seen previously would be a challenge until the coronavirus disappears permanently. Bangladesh is still experiencing deaths with a high infection rate like other countries in the world.
After a long gap of 17 years, the bank rate was reduced from 5.0 per cent to 4.0 per cent in the monetary policy announced recently. Besides, the repo rate came down from 5.25 per cent to 4.75 per cent and the reverse repo rate from 4.75 per cent to 4.0 per cent. The decision was taken in the policy for making less costly funds available for banks. Though banks did not fall under liquidity pressure amid the coronavirus spread, the central bank has taken precautionary measures for the days ahead. Upon the funds available to the banks, the lenders would feel comfortable to mobilise funds for productive sectors. Nevertheless, the banks must move fast with monetary policy supports in order to revamp our economy, hit hard by Covid-19. Only, lenders have come forward for economic progression. So, a lot of policy supports in the monetary policy were given to the lenders.
It is important to note that there is no possibility of circulating money like before amid the coronavirus. The velocity of money from March this year was rarely noticed. The velocity of money is how fast money changes hands in the economy during the year. The faster that money changes hands in an economy, the greater the economic output is expected. Briefly speaking, when the velocity of money is high, the money changes hands quickly, and therefore, the changes in money supply will have a greater impact on nominal GDP. For example, one dollar changing hands ten times indicates the velocity of money is 10. The think-tanks have already been frustrated regarding the expansionary monetary policy because new entrepreneurs are not coming to the lenders. Basically, money would be circulated among newer business people first. But, their presence in the banks since March this year is seldom noticed due to Covid-19.
In response to the ongoing flood situation along with Covid-19, the Bangladesh Bank focuses on quality and inclusive growth, job creation and environmental sustainability of the economy in the monetary programme. Bangladesh's GDP was expected to decrease by 1.6 per cent in the last fiscal year, the World Bank (WB) said, adding that Bangladesh's economy is likely to experience more 1.0 per cent GDP decrease in FY 2020-21 due to Covid-19. The USA, better known as one of leading economies in the world, already saw around 32.9 per cent GDP decrease in last three months.
In the monetary programme for FY 2020-21, domestic credit growth was projected to stay at 19.3 per cent. 44.4 per cent credit growth for the public sector and 14.8 per cent credit growth for the private sector were projected. The growth rate of broad money (M2) is 15.6 per cent, reserve money 13.5 per cent, net foreign asset 5.8 per cent, net domestic asset 18.3 per cent as fixed for FY21. Considering the current situation, the private sector credit growth is a must. The broad money refers to notes, coins and treasury bills with deposits in bank accounts that are converted into money very fast. In FY20, only 8.6 per cent credit growth was registered in the private sector. Besides, broad money (M2) growth was recorded at 12.7 per cent in the last fiscal year. To my view, money circulation depends on the private sector credit growth.
Truly Bangladesh is ahead of some Asian countries in terms of private sector credit growth. According to their respective central banks' websites, private sector credit growth in Vietnam is 9.6 per cent, 8.6 per cent in Bangladesh, 6.3 per cent in India, 5.9 per cent in Sri Lanka and Pakistan, 2.7 per cent in Indonesia. Bangladesh started its move fast to reach its goal shortly. In the recent time, Vietnam became one of competitors of Bangladesh in respect of readymade garment sector. Despite limitations, Bangladesh's economy had emerged within a brief time. But, coronavirus shattered all dreams. Without finding no alternative ways, the expansionary monetary policy program has been announced to revive our economy that saw over an 8.0 per cent GDP growth rate a year ago.
Some figures wonder me whether demand for money rises or not in Bangladesh in the present context of Covid. Bangladesh lags far behind in respect of the real lending rate compared to other Asian nations. The real lending rate in Vietnam is 1.3 per cent, 1.9 per cent in Bangladesh, 2.6 per cent in Pakistan, 3.6 per cent in India, 4.0 per cent in Sri Lanka, 7.8 per cent in Indonesia, according to the central banks' sources. In the wake of novel coronavirus, the people prefer to hold cash money instead of investing in productive sectors. The expansionary monetary policy programme came for creating demand for money. An increase in public spending would surely increase consumption in the economy, stimulating an increase in production, according to Keynesian theory based on the ideas of economist John Maynard Keynes (1883-1946) presented in his book "A General Theory of Employment, Interest and Money" published in 1936. Keynesian theory, which fell into disuse during the decades of strong world economic growth, came back into vogue with world economic crisis of 2008.
Truly speaking, if the current real lending rate persists for a longer period, the expected private sector credit growth might not be achieved. Small and Medium Enterprises (SMEs) might not get enormous facilities from lenders. The banks would be unwilling to deal with the small scale traders and entrepreneurs for security reasons. Besides, the expansionary monetary policy slightly brings an inflationary pressure in the days ahead that would further impact the real lending rate. So, the dream of enhancing the private sector credit growth in such a situation might not be fulfilled. Money circulation might not happen like before, because the time now is not normal at all. Particularly, in this Covid situation, the velocity of money is badly needed somehow. If people amid the Covid-19 do not deal with money for daily affairs, the projected 8.20 per cent GDP growth rate might not be achieved. Only a wide range of economic activity coupled with hand-to-hand money flow can make sure the targeted GDP growth rate is attained shortly.

The writer is an economic analyst and
currently serving at Social Islami Bank Ltd.
Email: [email protected]