Surge in cash demand after national polls

Special Correspondent: Elections typically trigger a rise in cash demand due to campaign activities and a general sense of uncertainty that prompts people to withdraw bank deposits. Ordinarily, this demand subsides post-election. However, following the recent national election, the demand for cash has not only persisted but has intensified. The pressure on the country’s banks to meet withdrawal demands has significantly increased.
According to reports from Bangladesh Bank, the volume of banknotes issued has steadily risen since the beginning of this year.
In just three and a half months, an additional Tk 24,562 crores were printed. Currently, more than Tk 270,000 crores are circulating outside the banks. Economists and industry experts attribute this trend to escalating corruption and poor governance within the banking sector. Transparency International’s Corruption Perceptions Index 2023 ranks Bangladesh 10th in corruption, up from 12th the previous year, marking the highest level of corruption in recent times. This surge in corruption correlates with a rise in criminal activities and black money, further fueling cash demand.
Influential figures, including government employees, politicians, and businesspeople, prefer cash transactions to avoid traceability, exacerbating the cash flow issue. Additionally, instability in the banking sector-evidenced by debt defaults, liquidity crises, and bank mergers-has eroded public trust, prompting more people to withdraw their savings. High inflation, which has remained above 9% for 23 consecutive months according to the Bangladesh Bureau of Statistics (BBS), further compounds the problem. Economists suggest that actual inflation rates are even higher, increasing consumer expenditure and decreasing the propensity to save, thereby driving more withdrawals from banks.
In response to inflation, Bangladesh Bank announced a contractionary monetary policy aimed at controlling money flow by raising interest rates on both deposits and loans. Despite these measures, cash outflows from banks have continued to rise, undermining the effectiveness of the policy. Reducing cash flow is crucial for managing inflation, which necessitates curbing black money and restoring public confidence through improved governance in the banking sector.
Globally, digital transactions are becoming the norm. In contrast, Bangladesh’s reliance on cash remains high, partly due to VAT and taxes on digital transactions, which deter people from using electronic payment methods. Furthermore, shopkeepers prefer cash transactions, and every mobile banking transaction incurs a duty. This situation encourages cash withdrawals and transactions, particularly among unscrupulous traders and smugglers, thus expanding the informal economy.
The availability of high-denomination notes, such as Tk 500 and Tk 1,000, facilitates large cash holdings at home. Bangladesh Bank’s data reveals that over 92% of newly printed notes are of high denomination. In the fiscal year 2021-22 alone, more than Tk 193.9 million Tk 1,000 notes were printed. As of last June, Tk 500 and Tk 1,000 notes constituted 38% and 54% of the total money issued, respectively. Experts argue that the prevalence of high-value notes promotes cash hoarding and illegal transactions.
More than half of Bangladesh’s economy operates outside the formal banking sector, complicating efforts to reduce cash flow through monetary policies alone. The post-election period has seen a rise in corruption and extortion, exacerbating the issue. To mitigate this, proactive measures from both the government and Bangladesh Bank are essential, including maintaining a balanced ratio of issued notes.
Historically, the ratio of issued notes to broad money in Bangladesh was around 12% pre-2020, increasing slightly during the COVID-19 pandemic. By June 2021, it peaked at 13.42%, and by June of the following year, it surged to 16.52%, before slightly declining to 15% by December. Despite technological advancements, this ratio remains higher than expected.
To build a smart, cashless society in Bangladesh, developing a framework for digital transactions is crucial. This shift will not only streamline transactions but also help reduce money laundering and corruption. Strengthening governance in the banking sector and eradicating corruption will be pivotal in restoring public trust and achieving economic stability.