Money and Liquidity during COVID-19 Pandemic: The Role of Bangladesh Bank

Abstract

The world economy is hugely disrupted by the outbreak of coronavirus in 2019. Countries across the global are facing a risk of an outright disintegration as global supply chain is almost dismantled. Labor mobility is impeded as people are locked down at their homes. Business enterprises, small and large, are either shutdown or closed for an indefinite period. Households and businesses are facing mounting liquidity crisis. As COVID-19 crisis is deepening in Bangladesh, businesses faced with falling demand and broken supply chain will find no option but to lay off workers. That will, however, be destabilizing and chaotic. Government of Bangladesh must avoid this end by several mechanisms. Given that government borrowings from banks have surged in recent years and liquidity crisis is prohibitive in our financial system, we expect no big room for budgetary supports like the United States and other developed countries are now doing. The best course of action is that Bangladesh Bank orchestrates a substantial monetary expansion targeting repo rate of 4 percent and lending rate in the range of 5-8 percent.