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Opposing tasks are being done by the central bank, |
Bangladesh Bank(BB) has unveiled the Monetary Policy Statement (MPS) for the first half of FY 2027.Amid high inflation, BB keeps the policy rate same at 10%. Meanwhile, Standing Lending Facility (SLF) stays at 11.5% and Standing Deposit Facility (SDF) remains at 7.5%.
One of the key aspects of this MPS is outlining medium and long term ways to deal with the Non Performing Loans(NPLs). BB is planning to write-off bad debts with poor prospects of recovery and thereby improving the absolute figure of the NPLs. Another strategy is to introduce Expected Credit Loss(ECL) ,which takes into account probability of default, expected recovery rates and future macroeconomic conditions in forecasting potential loan default. MPS also says BB will fortify Risk-Based Supervision (RBS) and implement bank specific Asset Quality Reviews (AQRs) as part of long term goals to tackle the NPL.Moreover, it is speeding up Money Loan Court proceedings. BB is also preparing the Distressed Asset Management Act so that banks can easily get rid of non performing assets.
These are desperate measures to improve the NPL situation before Bangladesh enters talk with the IMF for a fresh credit package.
BB projects the headline inflation will be 8.9% by December 2026 and 8.6% by June 2027. BB's inflation expectation survey projects the inflation rate will be between 8% and 10% by June 2027. The projected inflation rate is much higher than the desired 7.5% rate.
This projected high inflation set the context for keeping the policy rate high.
MPS projects private sector credit growth of 6.8% and public sector credit growth of 21.8% by December 2026. Declining credit growth for the private sector is attributed to low demand for credit amid high interest rate. Meanwhile, higher public sector credit growth means govt borrowing will be more than before. Any shortfall in revenue collection and/or failure to secure foreign credit will push the govt to borrow more from the banks.
Moreover, govt securities are also becoming safe haven for investors. Outstanding stock of treasury bills and bonds has increased from Tk 7.44 trillion in 2025 to Tk 8.37 trillion in 2026. It is indeed a good news that bond market is expanding. Bad news is govt's interest spending is also rising. Furthermore, too much govt borrowing from banks leaves little for the private sector, which is subject to receive a stimulus package strangely managed by BB.
Despite BB's claim that the stimulus package will not lead to monetary expansion, the designed interest subsidy of Tk 30 billion per year,a total of Tk 90 billion in three years,will inject extra cash into the economy. Most of the big stimulus package came as tax break or huge public spending. This kind of central bank-led stimulus package is unheard of. As it will be highly relevant, sharing again part of my analysis on stimulus package, spelled out in the piece titled "Leave The Central Bank Alone" on May 27,2026:
Finance ministry would be the [just] 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-tuning] 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 [cut] 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 [package] 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 [will] manage such a large pool of fund.
Charging multiple interest rates to different entities has its challenges. Cheap credit may end up [being invested into] treasury bills, which offer safe returns, [compromising] 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.
Chance is higher that a large part of the stimulus money may end up in govt treasury bill and bond market. It will increase the broad money growth by increasing the deposit growth and jeopardizing the goal of reopening the closed factories and creating 2.5 million jobs.
The MPS sounds more to convince the multilateral donor institutions than to spell out how to contain the inflation. Accommodating opposing tasks of monetary expansion through stimulus package and bringing the inflation down ,central bank complicated its objectives. It is unclear how the central bank will manage the multiple interest rate regimes it just introduced by taking upon its shoulders these opposing tasks.
