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Changing currency holding patterns during the pandemic  

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Currency in circulation (CIC) issued by Bangladesh Bank (BB) increased sharply by 22.13 per cent in FY20 compared to 9.97 per cent growth in FY19. Currency outside of Bank (COB) holding by the household or broadly, currency demand also rose by 24.52 per cent in FY20 from 9.49 per cent growth in FY19. This higher growth in COB and CIC stemmed mainly from unexpected behaviour by the household sector and sluggish economic activities in the face of the Covid-19 pandemic. Generally, currency holding or cash demand depends on many factors viz. level of overall economic activities, the trend of inflation, movements of interest rate on the asset, payment system innovation, precautionary motive, and seasonal factors.  During the Covid-19 pandemic, the cash holding pattern changed abnormally owing to panic or uncertainty that surpassed all other important drivers of currency demand.

The ongoing pandemic that started at the beginning of 2020 has left many upsetting instances around the globe and it affected almost all sectors of the economy of Bangladesh (real estate sector, financial sector, health sector etc). Among different sectors of the economy, the banking sector witnessed sluggishness in terms of regular banking activities and interruption of deposit and lending actions were disturbed. Both the print media and the electronic media argued that people were holding more cash than its usual trend since the beginning of nationwide lockdown triggered by the Covoid-19 pandemic. Against this backdrop, the main objective of this write up is to analyse the factors which influence currency holding behaviour of the household in Bangladesh during the Covid-19 pandemic. 

CASH DEMAND BEHAVIOUR AND COVID-19: Nominal gross domestic product (GDP) growth, inflation, the interest rate on deposits plays an important role for currency holding or cash demand for transaction purpose. During FY10-FY19, nominal GDP grew on average by 13.69 per cent, CoB 16.06 per cent, CIC 16.10 per cent,   inflation 7.0 per cent, and deposit interest rate 6.61 per cent. The movements of these variables over time were quite consistent, but changed abnormally in FY20. Despite falling nominal GDP in FY20, currency holding increased substantially although inflation inched up and deposit interest rate declined slightly (Table-1). This is quite an unusual and very short-run phenomenon induced by household uncertainty and perception in face of the pandemic.

The short-run dynamics of household behaviours regarding cash holding are given in Table-2. Currency holdings and currency circulation growth started to rise in March 2020 when a nationwide lockdown was imposed to check the spread of virus infection. During the nationwide lockdown businesses, shopping centres, hotels and restaurants and many others institutions were shut down and many employees temporarily lost their jobs. Consequently, industrial production dipped to (-) 24.75 per cent (y/y) in May 2020. Deposit growth started to decline slowly since January 2020 and continued its downward trend up to July 2020. Afterward, deposit growth started to rise with recovering economic activities and declining household's perception of uncertainty. 

If we examine the currency outside banks data for the whole calendar year of 2020, we may notice that at the end of February 2020, COB was TK 1618 billion and suddenly kept edging up to reach as high as TK 2110 billion at the end of July 2020 (COB grew 30.4 per cent). Nevertheless, COB was going down since August 2020 and reached BDT 1874 billion at the end of December 2020 (chart 1).

Was this cash holding phenomenon in 2020 significantly different from those of other calendar years? In order to answer that question we examined data on currency holding by the household for the last five years. The payment habits of the household can be determined by currency-deposit ratio. The CDR reflects how much currency is held by households relative to the total demand and time liabilities [CDR or the currency-deposit ratio = currency outside bank / total demand and time liabilities]. Chart-2 presents currency-deposit ratio (in per cent) over the period of 2016-2020. The time series data on currency deposit ratio shows that there are seasonalities in currency holding during the biggest Muslim festivals, Eid-ul-Fitr and Eid-ul-Azha. During these two festivals, CDR shoots up as people's need to meet up festival expenditures (exception for the year 2020) grows. In 2020, Eid-ul Fitre was celebrated on May 25, 2020 when the country was under a lockdown with very few shopping centres opened in a limited manner.

Moreover, CDR for the year 2020 is much higher compared to other years. The currency outside bank as a per cent of total demand and time liabilities was 15.4 per cent in 2020, higher than 14.1 per cent in 2019 (table-3).

The higher increase in currency holding was mainly driven by transaction and precautionary motives. Due to the Covid-19 pandemic and nationwide lockdown, people got puzzled and considering future uncertainty related to the Covid-19 situation, preferred to hold cash in hand to make payment for daily necessities and medical emergency. Moreover, banking service was limited, which also made people to hold currencies in liquid form. Table-3 also highlighted currency-deposit ratio in India in the face of Covid-19. Time series data on currency-deposit ratio in India shows that currency holding was 15.4 per cent in 2020, much higher than last five year average of 14.1 per cent.

COB plays an important role in the money supply process. The ratio of COB -Narrow money (M1) and COB-Broad money (M2)-- indicates that demand for cash holding of a household maintained a steady trend during FY10-FY19 except for FY20 (Table-4). A general notion is that households always hold minimum cash for the transaction and precautionary purpose and they deposited their excess cash to the bank to earn interest income which is reflected in the CDR ratio. The movements of CDR influence money creation through money multipliers.

On the other hand, digital payments increased rapidly during the last five years. The main mode of the digital platform is card transaction (debit and credit) and mobile banking under the digital payments system. Monthly data indicate that on average about Tk 621.93 billion transactions were made monthly during the year 2020 through digital payments platform dominated by mobile financial service (MFS). Data shows that more than 70 per cent transaction is done by MFS. Despite the increasing use of digital payments, a large section of rural households and poor household in urban areas preferred cash to digital payment mode. 

CONCLUSION:   The main findings of this analysis are that currency demand or cash holding increased abnormally during the middle of 2020 which is reflected in the growth of CIC, COB and CDR. Although the cash holding pattern is influenced by economic fundamentals and seasonal factors, household's perception of panic and uncertainty during the Covid-19  also played a major role.  Cash holding measured by CDR fell to a pre-covid-19 pandemic level in December 2020 because at that time household perception changed and uncertainty started to disappear as the economy began to resume and mass vaccination was rolled out throughout the country. 

Dr Md. Ezazul Islam, General Manager and Md. Rashel Hasan, Joint Director, Chief Economist's Unit, Bangladesh Bank. [email protected]

[This is a slightly abridged version of a BB policy note ]

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