Question

Would the COVID-19 stimulus be expanding the money supply?

Answer 1

Covid-19 Impact on money supply in the economy:

The Covid-19 virus originated from China and spread all over the world. As of now around 7.6 Mln population is tested positive of this virus. This has created a lot of problem in addition to normal health issue. All the developed and developing countries went for lockdown, resulting into lower consumption, lower production, increase in unemployment and resultant to upcoming recession. As per various estimation the world economy is going to shrink by at least 5% in this fiscal year.

To re-run the economic wheel, every government is talking a lot of steps. In each country their Central bank and federal governments are taking big steps to increase the supply of money in the economy. Few major steps are as below:

1) Government and central bank has started purchasing securities from the bank and financial institutions to increase the money supply in the hands of the banks.

2) All the central banks around the world has cut the Benchmark interest rate, so that the banks can borrow cheaper funds from the central banks that would be attractive to the customer and ultimately money demand and supply will increase.

3) Central banks have eased the regulations regarding the capital adequacy norms and cash reserve ratios norms. Banks have to keep a certain % of their deposit accepted from the public with the central bank. This is being done to avoid any immediate liquidity issue or default issue that a banks can face. To increase the money supply in the economy, the central banks have come with the steps of reducing the cash reserve ratios norms.

4) In few countries, banks have been directed to give moratorium to the borrower on the loan instalments. It will stop shrinking of money supply that may happen if the ultimate borrower pays to the banks and banks don’t lent to new customer, considering high default risk.

5) The federal governments are amending their policy related to social security. For example, in India, government has permitted the withdrawal of ‘Provident fund amount’ (a type of annuity plan run by government to ensure retirement benefits to employees) to fight against this covid-19 war. This will increase real money supply in the economy.

6) The federal/central governments are announcing relief packages to boost of the public expenditure that will lead to increase in employment and supply of money from the government pocket to the public pocket.

7) Even the international organizations such IMF (International monetary fund) has come forward and given special loan package to devolving countries to boost up the medical infrastructure and economy, resulting into expansion of money supply in the economy.

In conclusion, we can say that the COVID-19 is resulting into increase in money supply in the market.