Stop Policy Duality

Practising policy duality Does not create same reality.

Govt backed dual system may be present in many areas. But exchange system is the area where it is present conspicuously and does much harm than benefit. Last week the central bank verbally notified all the banks not to trade US dollar above Tk 123.82 after the greenback witnessed increase in demand (for more read"BB imposes informal cap on dollar rates amid rising pressure",ASM Saad,The Business Standard, July 29,2026,https://www.tbsnews.net/economy/banking/bb-imposes-informal-cap-dollar-rates-amid-rising-pressure-1500561). Sudden rise in import bills caused the demand for USD to soar. In the foreign currency market, the USD is being traded at more than Tk 124 on some occasions. Govt is still following the crawling peg system, allowing the exchange rate varies between lower limit and higher limit with the difference with the market rate no more than a Taka. Yet setting another exchange rate is not unprecedented.

During the Awami League govt,we saw multiple exchange systems. Importers paid for dollars one exchange rate while exporters paid other exchange rate and remittance earners faced another exchange rate plus the incentive.The incentive was 5% initially and later reduced to 2.5%. Exchange system for the remittance was the highest offered by the govt including the incentive. Mr Ahsan H Mansur,the central bank governor during the interim govt,in an interview revealed that govt annually spent Tk 7000 crore to support the remittance incentive.

Having too many systems have downsides. Those who have access to subsidized official rate of USD could easily sell part part of the USD holdings in the unofficial market where the rate was high and made windfall gains. Credit was cheap back then as the central bank was pursuing a flawed 9% lending rate and 6% deposit rate. Money laundering soared. Part of the laundered money brought back under the cover of remittance,reaping benefits like incentive. So people with easy access to USD laundered it abroad and brought them home later to take the incentive money plus the extra money the exchange system offered for remittance. Police even arrested a chairman who turned out to be highest remittance earner in a given year and thereby highest recipient of the incentive. Even news reports showed parents of a student studying abroad stashed USD under floor. USD hoarding became a booming business back then.

Venezuela is perhaps the perfect example that shows the consequences multiple exchange system brings. Back in 2016 and 2017, the country introduced multiple exchange systems for foreign currency market. Politically connected rich people took full advantage of it. They availed the cheap subsidized dollar from the govt. Some importers also got hold of this cheap subsidized USD. Then they resold the USD in the black market where the exchange rate was staggeringly high. Importers found the arbitrage opportunity increasingly profitable. So they used a big part of the USD meant for importing essential goods to trade in the black market. Venezuela, which imports almost everything from abroad, witnessed shortage of essential goods as less goods imported. Bolivar was losing its value against other currencies. At one point, 1 Euro fetched 35000 Bolivars. This hyperinflation impoverished ordinary Venezuelans but enriched the elite of the society(for more read "Venezuela’s hyperinflation fuels misery for poor but enriches elite through currency exchanges",Jay Weaver and Antonio Maria Delgado,September 13,2018,Miami Herald, https://www.miamiherald.com/news/local/article217868465.html#storylink=cpy https://www.miamiherald.com/news/local/article217868465.html).

This is why multiple exchange and pegging currency at fixed value ignoring the market value is bad. And ultimately people pay the price for belated adjustment and correction. Foreign currency market often sees upward or downward pressure on major currencies, resulting from sudden import surge or record remittance inflow ahead of major festivals. In a bid to control currency exchange rate , any unconventional intervention like capping the rate through verbal notice is not desirable. By doing this kind of act govt is introducing some sort of dual policy into the system. It will ultimately benefit few but hurt a great lot of people. Apart from currency exchange, we see central bank plays a dual role in the credit market too. Central bank's policy rate was 10% and now it becomes 9.5%. Central bank in a latest move offered Tk 2000 crore at 7% interest rate to the people involved in leather industry. Earlier it had made subsidized interest rate offer to other sectors as part of the stimulus package, bizarrely managed by the central bank. Remember it is the central bank,not commercial banks, that offered this subsidized interest rate much below the inflation rate, which is still hovering around 9%. By offering such move, the central bank is undermining its policy rate and its inflation containing effort. And it is doubtful whether central bank can achieve the stated objectives from subsidized interest rate when high interest bearing assets like treasury bills may easily draw this money. While ordinary citizens and SMEs are paying higher rate of interest , policy duality creates opportunity for some people to make money through arbitrage.

Policy duality should be avoided. As it is seen,less accountable society has policy duality that ultimately hurts the ordinary citizens. If we are a democracy , then any kind of duality in policy should be discarded.

Foreign Currency Bond: A Cart Before The Horse

Foreign currency bond will set a new course, Without true reform,this is just a cart before the horse.

News broke out that Bangladesh govt formed committee to issue bonds in foreign currencies across different international markets. Funds raised through such foreign currency bonds will be used to finance development projects(see "High Level Panel Formed To Assess Feasibility of Issuing Panda,other Foreign Currency Sovereign Bonds", Abul Kashem & Rafiqul Islam,Daily Business Standard, July 28,2026,https://www.tbsnews.net/economy/high-level-panel-formed-assess-feasibility-issuing-panda-other-foreign-currency-sovereign). This is the first time govt is exploring foreign capital markets to finance domestic initiatives.The news also says govt is mulling regulatory changes to allow purchase of such bonds by Bangladeshi nationals who under current regulatory set up cannot purchase such bonds.

Question is whether there is a drastic change in governance and macroeconomic indicators that [calls] for contemplating launch of such foreign currency bonds. The very same day this news came out another report says S&P Global Ratings revised Bangladesh's outlook on long-term sovereign credit rating from stable to negative. The agency attributed reasons for the revision to weak banking sector,poor revenue collection, external factors and high likelihood of delayed recovery (see "S&P Revises Bangladesh Outlook To Negative On Banking Sector,Fiscal Risks",The Business Standard, July 18,2026,https://www.tbsnews.net/economy/sp-revises-bangladesh-outlook-negative-banking-sector-fiscal-risks-1499791). The agency observed that non performing loan in the banking sector reached about 40% of total loans, govt revenue collection accounts for 8%-9% of GDP and interest payments represent 30% of govt revenue. That means revenue collection is still inadequate and more than a quarter of that revenue goes for paying up the the interest of govt debt.

In this backdrop, govt is pondering to draw money from foreign debt market. Govt is not increasing the pace of domestic revenue collection to meet the existing debt servicing obligation but embarking on issuing bonds that will require more revenue money to pay the interest/ coupon.

Proper use of the raised fund is another issue otherwise whole initiative will be jeopardized. Indonesia is an example. Foreign investors account for 14% of Indonesian govt debt and 40% [of] traded stocks(see "Patriot Bonds,An Indonesian Shakedown?", Philip Bowring,Asia Sentinel,October 06,2025,https://www.asiasentinel.com/p/patriot-bonds-indonesia-shakedown). Money raised through foreign bonds often goes to spending on public projects with inefficient outcomes and leakages. Free school meal program is marred with corruption as vendors ,contractors embezzled funds by submitting swollen bills and delivering poor quality food items that caused illness to the students. This kind of politically motivated projects plus subsidy already pushed up budget deficits beyond legal threshold of 3% of GDP,worrying foreign investors about sustainability of govt programs. They pulled out $3.9 billion from Indonesian market this year. Plus $46.1 billion of govt debt comes to fruition this year. This puts tremendous pressure on Indonesian Rupiah,which already witnessed [8%] depreciation against USD("Why Indonesia's Economy Is Under Pressure", Nik Martin, Deutsche Welle,July 15,2026,https://www.dw.com/en/indonesia-economy-prabowo-emerging-market-status/a-77847180).

Point is unaccountable public spending programs coupled with lack of regulatory checks may hurt the very spirit of the funding objective. In addition, when foreign currency bond will mature, it will put pressure on local currency Taka if macroeconomic situation is not in favor. Any rapid depreciation of Taka may result in worsening the inflation.

Foreign investors seek detail and clear information on bond issuer economy. They will certainly not bank on info like Bangladesh never fails to pay back its debt and its low debt-to-GDP ratio(38.9% according to CEIC data). They will certainly inquire about why the country fails to provide gas to the new factories. They will seek information about banking sector reform,distress asset management.Vital reforms should be carried out to draw attention of foreign investors to foreign currency bonds.

Indonesia's Patriot Bond allows undisclosed wealth to enter the economy. The govt even passed a law that says investors are not obliged to provide any info on investment on the bond that can be used to prosecute them later. Such provision is a boon for money laundering activity and poses risks for the financial sector(see "The Hidden Amnesty In Indonesia's Cut-Rate Patriot Bond",Ronny P Sasmita,Asia Times,June 24,2026,https://asiatimes.com/2026/06/the-hidden-amnesty-in-indonesias-cut-rate-patriot-bonds/). Bangladesh should avoid such provision in issuing foreign bonds. And greater transparency in issuing will thwart money laundering activity.

Without serious commitment to implement reform in financial sector, revenue collection and governance, the initiative of issuing foreign currency bond seems like cart-before-the-horse case. In this era of free-flow-of-information govt backed assurance will not convince the foreign investors to rest their trust on Bangladeshi foreign currency bonds. Deeper reform,fiscal prudence and accountable public spending may set the context for any such future initiative.

Weakening Of Taka: When Desirable

Competitiveness through depreciation, Desirable when there is less inflation.

For the major part of the FY 2026,Taka remained stable against the USD. There is an overall balance in the Balance of Payment. And foreign exchange reserve is continuously increasing. Till June 2026, forex reserve stood at $31.74 billion. According to MPS, reference exchange rate was Tk 123.18/USD in June 2026,registering 0.39 % depreciation in FY 2026.

The depreciation rate is decent. But further weakening of Taka could be good for economy. Inflation is the obstacle in the path of major depreciation. Inflation in June was 9.14%, a slight decrease from 9.42% in May 2026. A larger depreciation may aggravate the inflation.

Export and remittance are the two sectors that enjoy greater benefit of depreciation. But the two jointly account for around 16% of GDP. Meanwhile, dollars earned and received go for paying up the import bills and foreign debt repayments. Our import was $61 billion in 2025 and external debt was around $112 billion (source: Wikipedia). They jointly account for 33.92% of GDP. Crux of the matter is sectors benefitted from large depreciation of Taka account lesser percentage of GDP than sectors affected by such depreciation. Large depreciation may spike the imported inflation and increase our debt service payment in Taka amount.

But depreciation is related to export competitiveness. So when competitiveness is top priority depreciation is the way. Vietnam, where export accounts for 90% of GDP, witnessed around 0.11% depreciation of its Dong in the first six months in 2026. Since a communist regime is in charge of running the country and export accounts for a huge percentage of GDP, Vietnam is in a comfortable position to use its currency to increase its export competitiveness.

Even India witnessed 10% depreciation of Rupee in one year and large part of it happened in the first six months of 2026. In India, export and remittance jointly account for 23.97% of GDP while import and external debt jointly account for 41.95% of GDP.

I think slow and gradual depreciation is ok for our economy. 1% or 2% depreciation will not aggravate the inflation that much. Regular intervention of the central bank,therefore, in the forex market is necessary. According to MPS,in FY 26,central bank spent $6.43 billion in forex market intervention.

Steady flow of remittance and BB's intervention translated into 0.39% depreciation of Taka. This is why central needs to hold lots of Taka. That is why it is not right to use central bank's money in other purposes, particularly in meeting political pledges. Central bank plans to spend Tk 19000 crore of its money as part of stimulus package. Central bank needs money to emergency intervention and that is why its money should be untouched.

Use of local currency to boost export competitiveness is indeed good for the economy. Timing and priority are the two factors that influence the decision regarding the depreciation. Since fuel price is rising amid high inflation at the local market, this is not high time for big depreciation. However, central bank's intervention ,which requires huge amount of money at its disposal, in the forex market at right time can thwart any appreciation pressure on Taka and ensure export competitiveness.

MPS Highlights Opposing Goals

Opposing tasks are being done by the central bank, Missing the targets is the assessment frank.

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.

Fiscal Discipline For Monetary Targets

Keeping budget deficit below threshold value Saves from danger coming out of the blue.

Govt has presented Tk 7.38 trillion budget before the parliament for FY 2026-27. The size of annual development program is Tk 3 trillion while the budget deficit is Tk 2.43 trillion, 3.47% of GDP.

As govt does not signal any change to policy rate, the sheer size of budget indicating larger govt spending is likely to complicate its monetary goals. Govt aims to contain the inflation at 7.5%,which is higher than 9% at this moment. Earlier govt announced a stimulus package of Tk 600 billion,committing at least Tk 30 billion annual support,which is a monetary expansion amid tighter monetary policy.

Tighter monetary policy requires similar fiscal fine-tuning in order to attain the inflation target. In this light how this budget plus the stimulus package,surprisingly organized by the central bank, will help bringing down the inflation calls for serious explanation.

Luckily, for the govt,ease of tensions in the Middle East means saving the subsidy for extra oil price. But the bad news is NPL is piling up. In three months of this year,NPL increased to 32% and became Tk 5.88 trillion or $48 billion ($1 USD= Tk 122)(See "Defaulted Loans Climb To Tk 588,704cr By March", The Daily Star,June 02,2026,https://www.thedailystar.net/business/news/defaulted-loans-climb-tk-588704cr-march-4188866). When the govt assumed office NPL was $34 billion. First two years for the govt are the right time for reforms if govt is comitted. So far govt stance oscillated between reform commitments and political goals. There is no sign of monetary and fiscal discipline. Sometimes regulatory body is committing blunder. Appointment of a chairman to a trouble-ridden bank and later revoking that decision and dissolution of the board of that bank cost the central bank liquidity support of Tk 25 billion. Govt has to deal with trouble-ridden banks and the NPL. How this can be done depends a lot on regulatory discipline.

Containing the inflation to the desired [level], monetary and fiscal discipline and a low budget deficit can lead to a stable economy. Govt revenue target is Tk 6.95 trillion while revenue deficit widens each year. In this backdrop larger budget deficit means we have to borrow more from abroad and banks. Keeping the budget deficit low should be another major policy criteria. In 2021, budget deficit was 6.2% of GDP. It became 4.6% in 2024. Last year it was 3.6% of GDP. For 2027, it is projected to be 3.7%(Source:Wikipedia, Trading economics, CPD).

Budget Deficit

Year	Deficit (% of GDP)
2021-22	6.2
2022-23	5.5
2023-24	5.2
2024-25	4.6
2025-26	3.6
2026-27	3.7(projected)

Fiscal discipline helps attaining the monetary goals quicker and guarantees macroeconomic stability. Following the 1998 financial disaster, Indonesia literally copied the Maastricht Treaty on budget deficit and made a law to keep the budget deficit below 3%. It enjoys the benefits over the years. The Maastricht Treaty or the Treaty On European Union obliges member countries to keep inflation rate no more than 1.5% higher than the average of three member countries with lowest inflation, to keep budget deficit below 3% of GDP, to keep govt debt below 60% of GDP,to keep the exchange rate of national currency within the margins set by the European Monetary System for 2 years and to keep nominal interest rate no more than 2% higher than in three member countries with lowest inflation(see Maastricht Treaty, Wikipedia,https://en.wikipedia.org/wiki/Maastricht_Treaty).

This kind of fiscal discipline keeps govt spending in check,makes currency stable and helps monetary regulation easier. We need to make similar law in the parliament to keep the budget deficit below 3% of GDP and make sure no govt can change it.

It is interesting that govt embarks on big spending programs while the pace of revenue collection is sluggish and central bank unveils a monetary expansion program while a tighter monetary policy is in action. It is interesting to see how the central bank address the issue in its upcoming Monetary Policy Statement. Point is govt has yet to establish monetary and fiscal discipline. But it is unveiling political programs that have the potentials to prolong the recovery.

Leave The Central Bank Alone

Use of central bank to meet electoral pledges Erodes gradually the safety hedges.

Bangladesh Bank in a surprise move announced Tk 60000 crore [stimulus package] 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 [to] monetary expansion,contrary to its ongoing policy!

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.

Need For Quarterly MPS

Unfulfilled remain the MPS objectives, Quarterly MPS for timely directives.

The Monetary Policy Statement (MPS) for January-June 2026 is about to expire in June. Most of its goals remain unfulfilled. First take a look at its key objectives. The objectives are "to anchor inflation expectations, guide inflation toward BB's target, address the unacceptably elevated NPLs, and restore public confidence in the banking system through improved governance and close coordination with fiscal and other relevant authorities" (see Monetary Policy, Bangladesh Bank,https://www.bb.org.bd/en/index.php/monetaryactivity/monetarypolicy).

Restoring public confidence in banking system hit a dead end when govt passed mutilated Bank Resolution Act 2025,allowing wrongdoers to regain control of the bank. The Deposit Protection Ordinance 2025 further signals that govt will be obliged to pay each depositor a maximum of Tk 2 lac in case of any bank goes bankrupt,further thickening suspicion of closure of troubled banks.

The abrupt dismissal of previous governor is no sign "improved governance" and further makes hole into public confidence in the banking system.

War in the Middle East came as unforeseen shock. Amid shortfall of revenue and rising oil prices in the international market, govt raised fuel prices at home. It will have an upward pressure on kitchen commodity prices. Inflation already rose to 9.04% in April from 8.71% in March. High oil prices in international market also provoked higher inflation in major economies ,including our key export and import markets. Uncertainties stemming from war and rising inflation make a dent in consumer activity in our export destinations. In addition, imported goods will be costlier because of rising price levels in importing countries. Notwithstanding inflation easing expectations in the MPS, inflation as well as general inflation expectation is set to rise.

Contrary to MPS optimism about policy rate cuts across the globe, many central banks shelved their plans of policy rate cuts in the wake of war,fearing inflationary pressure. Delay in policy rate cut delays investment projects and business expansion ,further shrinking consumer activity. Against this backdrop, foreign financing gets costlier. So govt depends more on banks for financing the budget ,leaving little to the private sector. The MPS keeps the policy rate (10%) same but it has lowered Standing Deposit Facility (SDF) from 8% to 7.5% in a bid to generate more credit to private sector. But Bangladesh Bank's own finding reveals that private sector credit growth rate in January and in February was 6.05% ,lowest in 23 years( see "Rin e 23 Bochhorer Moddhey Sorbo Nimno Probriddhi(Lowest private sector credit growth in 23 years)", Daily Prothom Alo,May 21,2026).

The lowering of SDF did not help much. Rather banks find it safe and lucrative to lend money to govt and to buy govt securities. Let us see how the private sector credit behaves in the remaining four months.

The MPS acknowledges that the NPL reached 36% of total loans in September 2025. Given the dull economic situation and less commitment to financial reform, the NPL is likely to rise. However , govt reiterates its commitment to true auditing of businesses.

Despite pressure for lowering the policy rate, the central bank cannot slash it as inflation rate is still hovering above 9%. In the last quarter(April-June) of this fiscal year, there is little chance that inflation will reach the BB's desired 7% level. Now it is interesting to see how the govt reviews its reform commitment and addresses the pending issues in its future policies.

If the MPS were published quarterly,then it would review the policy objectives and fine tune the goals in light of emerging realities. Six months is a long time for such adjustment. Four MPSs in a given year will be more appropriate in this fast changing world.

Formalizing Festival Economy

Formalizing our festival economy Boost sales and lower revenue agony.

Eids have always been great drivers of augmenting domestic sales. This Eid is no different. Despite slow improvement in law & order, Eid economy is doing well according to some news reports. There has been no formal study of the size of Eid economy. Platform of shop owners claims it would be around Tk 3 trillion. It maybe an exaggerated figure. Unfortunately we do not have any market research institution that could corroborate the claim. Such institution could initiate a study and come up with the [approximate] size of Eid economy.

This kind of study helps policy intervention. So that govt incentives fall into the right hands. Policy makers will also have an idea about flow of money and links between key sectors. Now only news reports are key sources of this information. Govt can help float this kind of market research institution through public private partnership.

Undocumented transaction in many shops is an obstacle estimating true figure of festival economy. Currently there are 2.6 million shops across the country according to the platform of shop owners. But many do not have business identification number (BIN), which is required for paying VAT(see "Subdued Festival Economy" published here on March 23,2025.https://hoquestake.blogspot.com/2025/03/subdued-festival-economy.html?m=1). So govt does not get enough revenue from transactions take place during the festivals. Till March, revenue shortfall reached Tk 714 billion. If the shops were BIN registered , govt would get enough revenue just from the shop owners.

Moreover, revenue shortfall indicates govt may further borrow from the banks ,lowering the share of private credit. Squeezed private credit stalls expansion/growth of businesses ahead of major festivals. If funds like Equity And Entrepreneurship Fund (EEF),which remains unused throughout the year, of the central bank becomes available for shop owners during key festivals, then it will have major impact on the growth of these shops.

Another thing I notice is that govt provides bonuses to public servants during festivals of Eid and Bengali new year. This policy also influences private sector to give bonuses during the two major events. Altogether the policy boosts sales in the festival seasons. Similar kind of incentives given six months later may also increase sales later period of the year,which usually see dull period in sales revenue. Celebrating Autumn, Winter may be the occasions to choose for.

Informal nature of our festivals fails the govt to tap the potentials from them. They are great drivers of generating sales demand and growth of SME businesses. Bringing them into a formal structure will help govt to keep a close tab on the flow of money and augment the tax revenue.

Will Taka Remain Stable?

War leads to further rise in inflation, Policy rate cut may cause depreciation.

Last week exchange rate of Taka reached 123.30 against US dollar. Now the rate settled at Tk 122.75 per USD. The ongoing war in the Middle East cast a shadow over remittance inflow and supply of energy through the [Strait] of Hormuz. Moreover, govt changed Bangladesh Bank governor abruptly and the new governor hinted to lower the policy rate while inflation rate increased further and hovering around 9.13% in February. In January ,it was 8.58%. In this backdrop, serious question raised over continuity of regulatory discipline.

Throughout the fasting month of Ramzan ,key kitchen items registered higher prices. A new war in the Middle East risks worsening the inflation by causing supply problems [for] energy and spiking the fuel price. Despite govt assurance of no fuel crisis at home, the long queue of motorbikes and cars in front of petrol pumps is a testament to panic prevailing at the ground. Central banks of major economies already shelve their plans to lower policy rate while ours one walks on a different direction. Furthermore, abrupt dismissal of governor sent a wrong signal abroad about commitment to reforms. It may delay improvement of our credit ratings, causing troubles to get foreign credit for private sector.

Taking a look at major macroeconomic indicators tells that time is indeed not right for a policy rate slash. During July-January period of 2025-26, export declined to $26.09 billion from $26.36 billion in 2024-25. Trade deficit increased to $13.79 billion in 2025-26(July-January) from $11.74 billion in 2024-25(July-January). Current account deficit declined to $381 million in 2025-26(July-January) million from $1.31 billion in in 2024-25(July-January),riding on growth of remittance. Remittance rose to $19.43 billion in 2025-26(July-January) from $15.96 billion in 2025-26(July-January)(See https://www.bb.org.bd/en/index.php/econdata/bop). Despite improvement in current account deficit, situation is not right for discarding the tight momentary policy. [Particularly] when the war may derail the growth of remittance. At one hand trade deficit is growing ,on the other rising import and uncertainty over remittance put overall macroeconomic situation at a precarious position. In this situation, lowering the policy rate will increase the depreciation pressure on Taka against other currencies. Any wild fall of Taka worsens inflationary situation through pass-through effect of the new exchange rate.

Moreover, further worsening of war will spike fuel prices and deteriorate inflation in advanced economies, where most of our exportable items go. This will cut the purchasing power of their nationals and lower overall consumption. Declining trend of export will further cause depreciation pressure on Taka. When exchange rate and inflation rate will both rise ,real effective exchange rate will fall further given denominator part of the formula remains same(look at the formula).

REER at period t= (Exchange rate index of a country x Inflation rate of the country)x 100÷(Average of trading partners' exchange rate index x weight x Average of inflation rates in partner countries)

Exchange Rate Index at t= (Exchange rate of a county's currency at t)÷(Exchange rate of a county's currency at base period)

So far US dollar appreciated against other currencies following the start of the war. Since we do trade with other partners in USD ,a stronger USD translates into depreciation of real exchange rate of Taka given other things remain same. However, inflation is likely to rise amid escalating war . When average of inflation rates in partner countries is higher than exchange rate of Taka and inflation at home,then Taka will appreciate in real term (see the formula).

Stability of Taka depends on many things. But so far the development indicates Taka is likely to depreciate further if the war turns out to be a protracted one. We coped with 40% depreciation of Taka all these years. Similar or more depreciation will be unbearable for us. So cautious monetary policy ,which implies a tighter one, will be good for us. Does the central bank have courage and commitment to do so?

NPL Endangers Exchange Rate

NPL is a threat to economic stability, Electoral pledges should focus how to deal with this reality.

The growing Non Performing Loan(NPL) appears to be a big concern. However, no detailed plan is set out, as demonstrated in electoral pledges by the parties to tackle the issue. Since economy is secondary issue,political reforms turn out to be primary concerns of politics. Meanwhile, the NPL situation has the potential to destabilize the value of Taka and may prolong the contractionary monetary policy, which means a higher monetary policy rate for a [prolonged] period.

What is worrying the NPL has long ago [crossed] the 30% mark of total loans,making true apprehension of the central bank. The ongoing management of the economy says govt has failed to attain the targets of inflation and NPL,set out by the IMF. Yet the Bretton-Wood institution is kind enough to furnish the credit packages as forex reserve keeps growing and exchange market is liberalized.

The NPL stood at Tk 4.2 trillion by the end of January-March quarter. State Banks account for Tk 1.46 trillion and private banks account for Tk 2.64 trillion of the NPL while the foreign banks account for Tk 32.38 billion. NPL was Tk 2.11 trillion by the end of June 2024,which was 12.56% of total loans. Look at the huge increase of NPL: from 12.56% in June ,2024 to more than 30% of total loans in June ,2025! (See Non Performing Loans Surge By Tk 74570 cr In Q1 As Hidden Rot Exposed", The Business Standard,June 15,2025.)

In USD, it is equivalent to $34.71 billion(assuming 1 USD=Tk 121).Could the next elected govt downsize it dramatically within its tenure? Popular govts are reluctant to pursue tight monetary policy. Even if they have firm commitment ,they may do it for 1 or 2 years. That means even if a govt committed to discipline the economy, they will have a time between 12 months and 24 months to fix the NPL. The rest of its tenure will be used to promoting policies to win the next election.

Magnitude of the problem lies in downsizing this $34.71 billion in just two years while NPL keeps growing. Failure to do that means govt has either to pump money into economy as the term " liquidity support to troubled banks" becoming increasingly popular or to raise taxes and let die some of the banks. If money [amounting] to half the size of NPL is injected into economy, Taka is going to plunge. Because capacity of our economy is not that strong to generate so much resources (worth $17 billion ,half of the NPL) in 12 or 24 months. That is an uphill task!

In my piece "Last Year's Extra Money", I highlighted that last year Bangladeshi economy generated around $2 billion worth of extra rice,$2.59 billion worth of extra RMG export and $4.7 billion worth of extra remittances. At the same time, we also witnessed extra losses from flash flood and political change. Now if we add FDI figure into it, the extra resources in 2024 becomes $10 billion (See"Last Year's Extra Money", published here on January 10,2025).

However, our external debt service payment is also growing. In 2022, the debt repayment was $2 billion and it rose to $2.67 billion in 2023 (source: Bangladesh Bank). According to some news reports, it crossed $3 billion last year. In another piece, I highlighted except agriculture, other sectors do not add much value to the economy. So the true size [of] the extra resources our economy generated last year is much lower than $10 billion. And minus the debt repayment ,it becomes even smaller.

Say $8 billion worth of extra resources will be created next year, then $9 billion worth of money will be introduced into economy in 2026 just to tackle the NPL for 24 months. The sheer size of liquidity support through printing money will deteriorate Taka's value against major currencies. And such deterioration may cause further inflation. And we are talking about half the size of NPL here! And there is other danger too!

Even if laundered money returns in disguise of remittances or export earnings, sheer size of it [will] cause inflationary pressure as this adds no value to the economy. Just money travelled back and forth.

And any volatility in the exchange rate of Taka will not bring the FDI. For the sake of FDI, we have to stabilize the exchange rate. And to bring vibrancy to the economy ,we have to contain the inflation.

So the growing NPL casts shadow over exchange rate of Taka. There should be clear roadmap on how to tackle the NPL. Otherwise, indiscipline economy will pose serious threat to the [economic stability].

La Semaine Dernière A Mes Yeux

( 17 août --- 23 août)

Cliquez pour voir/cacher

Ma Semaine Gastronomique

Date	Petit déjeuner	Déjeuner	Dîner	Snacks,Sucreries,Boissons et Fritures
17	Riz,Soups aux lentilles,Œuf,Haricot vert	Riz,Gourde bouteille,Haricot rouge	Riz,Haricot rouge	---
18	Riz,Œuf,Gourde bouteille,Soupe aux lentilles	Riz,Soupe aux lentilles,Luffa,Ruhi	Riz,Soupe aux lentilles,Gourde bouteilles,Ruhi	---
19	Riz,Œuf,Gourde bouteille,Soupe aux lentilles	Riz,Soupe aux lentilles,Haricot very,Ruhi	Pain,Haricot vert,Ruhi	----
20	Riz,Œuf,Pomme de terre,Soupe aux lentilles	Riz gonflé(depuis marché)	Riz,Gourde bouteille,Papaye	---
21	Pain	Riz,Soupe aux lentilles,Latya,Gourde bouteille	Riz,Soups aux lentilles,Gourde bouteille, Latya,Petit Poisson	----
22	Pain	Riz,Soupe aux lentilles,Pomme de terre,Banane verte	Riz,Pomme de terre,Rita,Haricot rouge avec sec latya	----

Taka Floats Freely

Introduction of free floating Stops leakages and brings foreign financing.

Bangladesh Bank formally introduced fully floated exchange rate,removing the last obstacle getting the third and fourth installments of the IMF credit package. The decision is greeted with cautious optimism. However, many are waiting to see how the market will behave next week.

Fully floated exchange rate will reduce the incidence of illicit financial flow. From now onwards, unofficial rate will be much higher than the official rate as Taka is aligning to its true value, increasing the cost of sending money abroad clandestinely. Another reason is that it will prevent leakeges in the development projects that depend heavily on imported materials. When value of Taka drops, the cost of import rises and part of the money identified for siphoning off will get reduced. Less booty from the projects in case of frequent depreciation of Taka in a given year. Perhaps this is the reason Taka had been pegged at a certain value for a long time.

The 90-day long 30% tariff on Chines goods gives Yuan some advantages for further depreciation in this period. Instead of 145% depreciation in the worst case, this 30% depreciation seems a much more acceptable bet though inflationary pressure may spread. Given the nature of Chinese govt, they can deal with it. Meanwhile, we have to be contended with the 10% depreciation during this time provided that we have the right market conditions to do so. The spot exchange rate shows that Taka has already depreciated. Next week if dollar becomes stronger it will be depreciated even more. That is indeed a good news.

Though Bangladesh's credit rating deteriorated, foreign banks may encourage to bring more USD from abroad to widen their operations/ coverage here. Few years ago, a great part of their operating profit came from selling USD. Though the USD they bring may be small compared to remittances and export earnings ,this USD will greatly help lending credit to local investors and SMEs.

Despite the accompanying challenges, the free floating of Taka opens the possibility of thwarting the abuse of public fund. It also opens the possibility of foreign financing of local projects through operations of foreign banks.

Fear About Taka's Free Floating

Unease about motive speculative Causes the confusion and disbelief.

The short relief of tariff debate between the USA and the China reached with a reduction in tariff for 90 days. During this time, the USA will charge 30% tariff on Chinese goods [whereas] the China will levy 10% tariff on American goods. This relief will give both the countries ample time to chalkout a contingency plan. It is indeed a good news for Bangladesh since the decision has strengthened the USD against major currencies, steering a depreciation pressure on Taka. Bangladesh has mid July to ink a deal with the USA about reciprocal tariff. It has another 90 days to depreciate its currency when it has the just cause for depreciation. In the international exchange market Taka has already depreciated to 121.50/USD from 121.42/USD in past one week. Official exchange rate has not changed though.

There has been great reluctance from the side of govt to go for market based exchange rate. The fear is that speculators and international exchange houses may further depreciate Taka. Earlier Dubai and Jedda based exchange houses had been found in such malpractices. Govt even asked for another $1 billion from the IMF to implement the fully market based exchange rate instead of the prevailing crawling peg system. The market does not signal that Taka will be same as the Sri Lankan or Pakistani Rupee. Rather it says Taka is 121.50/USD. Back in December, we saw major volatility in the exchange rate of Taka due to settlement of international bills and speculators' activity at home ahead of policy rate hike in Monetary Policy Statement. Speculation concerns mostly arise from home and major trading partner countries. Speculation motives at home greatly reduced after the correct alignment between policy rate and inflation rate. For the next 90 days, it will be further reduced as US dollar will remain strong against other currencies. Property purchase in the UAE and money laundering fuelled the speculation motive in the UAE and Saudi Arabia. Bangladesh is no great trading nation whose currency will be great value to others. Speculation from abroad is also minuscule at this time as there is no reason for [speculation]. Moreover, international market rate does not say so. What would one do with stockpiling so much of Taka? Ultimately, Bangladesh Bank is the sole institution that in the end [has to] deal with it. At the end of the day[,] it is indeed a loss making project. I do not think it is a wise move not to let Taka align with the market completely. We do not have enough opportunity to depreciate Taka in the future. Because the USA wants a world where the US dollar will remain weak,leading to appreciation of other currencies. Command and control economies like China and Vietnam can depreciate their currencies through state intervention. We cannot do so easily. But I support Bangladesh's position of seeking extra $1 billion from the IMF to cushion any adverse effects from free floating of Taka.

This depreciation pressure comes at a moment when tariff debate will lower global demand,showing a downward pressure on prices of fuel. Inflationary pressure will be largely offset by this lower demand for major commodities. Moreover, such depreciation will augment revenue collection that the government is desperately seeking. 10% depreciation will make exchange rate Taka 134.2/USD ,5% will make it Taka 128.1/USD and 2% will end up in Taka 124.44/USD. Next week we may see a strong US dollar and it will be the right time to depreciate the Taka further.

$25 billion remittances in 10 months reflect earlier depreciation of Taka. Moreover, it helped bringing back export earnings in time. Since Taka is not a major trading currency, speculative tendencies should not cause a lot of concerns for not letting Taka free float. Speculative motive at home and in the countries with Bangladeshi diaspora is negligible since the market conditions dictate so. Why should government be so worry about introducing market based exchange rate?

Trapped In Contradiction

Contradiction in stated policy May make the things messy.

Some recent decisions divulged the anomalies in pursuing the ongoing economic policy. Funding crisis has become acute as new commitment for budget support has dried up. So govt indulges in monetary fiscal expansion instead of pursuing the tightening policy.

Funding crisis led the govt to slash Tk 490 billion from the development budget. It is in line with the fiscal tightening policy, which complements the contractionary monetary policy.

But the Bangladesh Bank is unable to stay strict in its stated policy. In the latest move, it decided to print and inject Tk 20 billion into two trouble-ridden banks. The money will ease the liquidity crisis of the banks during this festival month of Ramzan when the clients need cash to spend. Earlier in November last year , it had printed and provided Tk 220 billion to some troubled banks. Later it also injected another Tk 125 billion into six more banks on the eve of new year. In total, this govt printed and injected Tk 345 billion into banking system since it took power.

Another news also divulges that govt is also mulling to "revisit" the corporate tax. The decision may further relax the corporate tax amid a revenue shortfall. This is happening when revenue deficit is widening. Instead of focusing more on direct tax revenue, the stand is similar to fiscal expansion. The IMF's revised revenue target for current fiscal year is Tk 4.55 trillion, which is unlikely to be met during the rest of the fiscal year.

Meanwhile, the National Board of Revenue (NBR) is determined to separate the policy department from the implementation department by July. It is one of the IMF's goals to get the next instalment.

Moody's downgrading of Bangladesh's credit rating from B1 to B2 makes foreign credit costly for the private sector. So govt has to take the next instalment of IMF credit package, scheduled to be released in June, to meet the budget deficit and provide the liquidity support to the private sector.

Contradiction in govt's stated policy is not convincing everyone about govt's ability to contain the inflation. That is why Moody's is projecting an inflation rate over 9.52% around the year. This is indeed a bad news as fixing the economy is the main reason why the govt is here. Yet the policies worsen the situation instead of improving it.