The Financial Express

Maintaining strategic balance in complex crisis environment

Evaly and Fianancial Express Evaly and Fianancial Express
Maintaining strategic balance in complex crisis environment

We are passing through a complex crisis situation when global economies and financial sectors are in trouble, and policy initiatives are hindered by a set of complex barriers alongside health concerns. The situation is unique in terms of the extent of devastation and pace of destruction. Projections are hardly working, and there is substantial uncertainty about its impact on people's lives and livelihoods in an environment of recession. Global economies are engaged in responding to various fiscal and monetary measures. It is obvious that 'saving lives of common people and handling contamination risk' has been the top priority since the initial days/months of the Covid-19 regime. However, saving the economy has always been the critical focus to save livelihoods, and cannot receive less priority and resource allocation. Over time, policymakers started allocating greater priorities for reviving the economy. The reality is, the Covid-19 has never allowed policymakers to come out from the scepticism of identifying their right stands to save economies and business situations. It is getting proven again and again, how tough it is to maintain the strategic policy and operational balance in the complex crisis environment of Covid-19!

For fixing the crisis, injecting money into the economy has been the most widely recognised policy intervention. It is simple and sometimes very blunt-- throwing money in the economy causes liquidity, and plenty of it. People may be hesitant to spend money, may have higher tendency to save in an environment of greater uncertainty, when policy initiatives come up to fill up the gap. Loan and tax incentives, subsidies, and handing over cash have been the popular means to inject money to increase spending and creating demand for goods and services. Industry bailouts have been used to save economies in the earlier crises. Compared to industry bailouts and tax incentives, direct payments are a relatively recent phenomenon and is sometimes considered the most effective means of providing fiscal stimulus. However, it is not only about fixing the demand-supply conditions of an economy. A lot of disruptions happened with the common people and their level of confidences. A big section lost their life-time savings. People lost jobs and are not in a position to cope with the requirements of the new skill sets of the new normal. Generic public spending financed by debt and/or money printing would not be enough and, in fact, may not be appropriate for a longer period. First stimulus packages have mostly been spent, and now we are talking about the second packages!! For how long? Efficient and targeted use of stimulus funds with the right kind of allocation is the most critical challenge to the policymakers.

It is the fiscal policy interventions that work immediately to handle a crisis and economic recession. Obviously, monetary policy authorities are required to ensure adequate liquidity to support the fiscal policy authorities and businesses. We are observing similar leadership and collective approach to handling the recession in this corona situation. Businesses and enterprises are being encouraged to draw money to invest in their businesses at reduced interest rate. The rate is attractive to businesses. In many global economies, the interest is already zero or close to zero. Is it always possible to support adequate economic growth to revamp the global economy at zero or very low interest rate! Consumers might find the situation discouraging in an environment when high liquidity flows might create inflationary pressure with increased aggregate demand. Consumers having deposits and cash might turn to buy fixed assets like housing and lands. How to maintain the difficult balance of incentivising both investors and savers with not excessive but adequate fund injections in the economy!

Till now, inflation has not been a problem to the global economy. However, unemployment situation has been a matter of great concern. Businesses and investors are particularly encouraged to invest and to transform by adopting technology and skill-intensive approach to avail competitive advantage and to sustain. Most of the ongoing transformation is technology and skill-driven, and capital intensive. Are these very supportive to address the unemployment challenges of the globe! It cannot be denied that greater reliance on technology and skills would help to revive the economy and businesses in a much faster way. Shouldn't we think of certain labour-intensive investments alongside promoting the essential technology-driven skill incentive approach!

Policymakers around the world are using banking channels to help distribute various stimulus packages to companies in need of cash injection where fraud and credit risk might be critical challenges. It is tough for the commercial banks to maintain a balance between offering essential support to the policymakers and to maintain lending sanctity and credit risk. In this Covid-19 situation, borrowers may be exploiting moral hazard to privatise the reward and socialise the risk. Moral hazard problems are also relevant for bankers and may contribute to inviting credit risk. In the changing circumstance, companies are facing cash crunch and sometimes are not in a position to pay back bank loans. In the process of the cash injection process, a minority of unscrupulous business owners may be tempted to capitalise on the support available and default on payments. It is not easy for banking institutions to distinguish between those that are actually in need of assistance with a propensity to recover and those that are trying to abuse the situation or simply fabricate information to get access to funds. Moreover, with stimulus packages rolling out in most countries, corporate behaviours cannot come under comprehensive check; and there is a possibility that large businesses would be favoured over small businesses, and thus it would not be possible to draw true benefits out of lending operations using stimulus packages.

Criminals do take advantage of the crisis environment. Covid-19 is no exception. For handling financial crime, regulatory and policy approach may not be very stringent in this complex situation. In the wake of the Covid-19 situation, on the one side, there are growing concerns of misusing digital platforms and trade transactions that demand tough and stringent measures, on the other side, certain transactions and activities need smoothness and relaxation to address health, financial and economic challenges. Thus, despite symptoms of growing financial crimes and warnings on the part of the national authorities, there is an escalation in crimes. International organisations have asked to undertake utmost care in financial facilitation and sought to unify the global approach against financial crimes and also address sanctions, money laundering, and terrorist financing during the pandemic. Simultaneously, there is guidance on digital onboarding and simplification of due-diligence procedures. In several instances, the financial intelligence authority issued instructions for easy and smooth delivery of stimulus packages for the much needed quick economic recovery, while on the other hand, it issued warning to the banks to be alert on the potential risks of financial crime..


Shah Md Ahsan Habib, PhD, is Professor, Bangladesh Institute of Bank Management (BIBM). [email protected]

Share if you like