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Using central bank to meet electoral pledges
Erodes gradually the safety hedges. |
Bangladesh Bank in a surprise move announced Tk 60000 crore in a bid to revive closed factories,support the cottage, micro,small and medium enterprises, diversify export,rejuvenate rural economy and create 2.5 million jobs.
The package has two components: Tk 41000 crore refinancing fund,which will be sourced from banks with surplus liquidity; another Tk 19000 crore will be sourced from Bangladesh Bank's (BB) own resources (see "Tk 60000 crore stimulus for private sector", Md Mehedi Hassan, The Daily Star, May 24,2026,https://www.thedailystar.net/news/bangladesh/news/tk-60000cr-stimulus-private-sector-4183136).
Banks with excess liquidity will deposit the money at 10% interest rate. Targeted borrowers will borrow the money at 3% or 4% or 7% depending on the size of the enterprise and the rest 6% or 7% will be subsidized by the govt. It will cost the govt Tk 3000 crore annually.
Govt last week also expressed interest to move away from the ongoing IMF credit program and to ink a new deal with the Bretton Woods institution.
However, the central bank did not announce any change in the policy rate,suggesting contractionary monetary policy is still in action.
Meanwhile, central bank's decision is tantamount monetary expansion,contrary to its ongoing policy!
Finance ministry would be the approximate authority to declare such stimulus package, where political aspiration is more pronounced. Central bank is a regulatory authority that is tasked with overseeing the regulatory discipline and fine tune its goals to ensure macroeconomic stability. It can extend its support to political govt as long as that support is viable in light of macroeconomic reality. That is why central bank's independence is so important. And central bank's resources are not meant for supporting political goals or electoral pledges.
To accomplish political objectives and to meet electoral pledges, govt has fiscal policy. It can cur subsidy here to augment subsidy elsewhere. It can slash tax here to increase tax elsewhere. Central bank can come to aid if existing macroeconomic reality calls for such help.
Inflation is persistently above 9% and so is the inflation expectation.
Former World Bank lead economist to Bangladesh Zahid Hussain called into question relevance of this stimulus package in his article titled "Stimulus in a supply-constrained economy". He argues," The package is framed as countercyclical intervention. That logic works best when an economy is suffering from weak demand,low inflation, and temporarily idle productive capacity. Bangladesh today faces a more difficult combination: growth is slowing while inflation remains elevated and persistent.
In such conditions, additional stimulus does not automatically translate into higher output. If supply cannot respond, it may raise prices faster than production."(see "Stimulus in a supply-constrained economy", Zahid Hussain, The Daily Star, May 23,2026,https://www.thedailystar.net/business/news/stimulus-supply-constrained-economy-4182846)
Instead of going for monetary expansion, govt can opt for fiscal policies through resource reallocation. Recently, platform of steel manufacturers in a press conference urged govt not to raise electricity price. They solicited slashing the subsidy spent on capacity charge for the power plants. This is indeed a good advice that govt must pay heed. The saved subsidy then will be used to refinance closed factories and rejuvenate the rural economy.
Even the banking industry offers alternative solution. Chairman of the Association of Bankers,Bangladesh (ABB), in an interview with the Daily Star said central bank could lower the cash reserve ratio (CRR) to increase liquidity in the market(see "Tk 60000 crore stimulus for private sector"). This is a good advice in this time of inflation. Chinese central bank did similar thing to increase money flow for the private sector amid high inflation.
Banks know their clients well. If the stimulus comes into effect, then it will force good banks with ample liquidity to channel funds to problematic clients of the troubled banks. Despite central bank's guarantee, the bank pushes good banks to bet on clients whose initiatives may bear risk for the banks.
Central bank itself has poor record in managing its own Equity and Entrepreneurship Fund(EEF),which is full of scams. It will be indeed interesting to watch how transparently and efficiently BB manage such a large pool of fund.
Charging multiple interest rates to different entities has its challenges. Cheap credit may end up investing in treasury bills, which offer safe returns, comprising govt's intended goals of increasing production and creating jobs. Or the cheap money may be lent to others at higher rates,further compromising the true objectives.
In brief, central bank is a regulatory body to oversee monetary discipline. Govt can use fiscal tools to fulfill its electoral pledges and central bank can only help in that endeavor if the macroeconomic context is right. The stimulus package has the potential to turn the good banks into bad. Past record of central bank's fund management does not provide room for optimism.
