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.

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.

MPS And The New Tariff

Challenges are there amid low tariff, MPS targets depend on but and if.

Bangladesh Bank formally published the Monetary Policy Statement (MPS) for the second half of 2025. Inflation declined to [8.48%] in June,yet it has not touched the desired level of 7% ,below which policy rate may witness a drop. MPS aims to achieve 5.5% GDP growth rate in FY 2026. Key developments in the first half of this year set some positive indications on that direction. Free floating of exchange rate did not witness sharp fall of Taka rather Taka appreciated and the central bank had to intervene to depreciate Taka in order to give exporters and remitters incentives. Forex reserves start to grow and stopped the continuous decline.

However, private sector credit growth was low compared to what it had been projected. Only 6.4% growth achieved against the target of 9.8%. For this reason, the target is set to be 7.2%. Election uncertainties, poor law & order condition and drop in deposit growth might have contributed to the poor private sector credit growth.

Broad money growth also witnessed decline. Its impact may be seen in the next 2 months. As demand for major commodities will be lower, anticipated in the MPS, in the international market and dollar may be further weakened impact of import-induced inflation may be lower. So deflationary pressure may prevail provided that govt's grain procurement is satisfactory and no deterioration or fresh eruption of regional conflicts in multiple regions.

MPS highlighted govt's formation of three task forces to reform the banks,stricter policies to classify loan, review of risk guidelines, introduction of new laws to get rid of troubled banks and managing the Non Performing Loans (NPL). But the NPL turned worst and keeps growing. So it is highly unlikely that NPL situation will improve dramatically when domestic private sector investment is stagnant and govt is heading towards election preparations.

Lowering of US tariff to 20% from 35% came as a relief to the cash strapped economy. But there is little room for complacency. China faces 30% tariff, India 25%, Vietnam 20%,Indonesia 32% and Pakistan 19% tariff. Most of these countries have huge investment in backward linkage industry. Their value addition to readymade garments,particular in woven, is relatively higher than Bangladesh. But Bangladesh has the largest number of US and EU compliant green factories and Bangladeshi workers are more productive than workers of those countries. But both China and Vietnam have sustained policies to weaken their currencies. India has to depreciate its currency by 5% to be on per with the other competitors. So this tariff rate is only delusional, it is the macroeconomic policy, productivity, investment in value addition that will be the deciding factors in capturing the US market share. Though for the moment depreciation pressure on Taka is low, keeping a close tab on how Yuan, Rupee and Dong behave against USD in the next 2/3 months will chart the course for our exchange rate policy.

Despite favorable context in the international commodities market and export market, there are challenges in achieving the 5.5% GDP growth rate. Govt itself apprehends domestic turbulence ahead of election. In addition, low private sector credit growth shows no sign of optimism. If govt bars the undocumented money into real estate and allows it to banks,then law and order situation may dramatically improve and liquidity situation in the banks may improve as well.

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.

Who Is Running The Narrative Mill?

As tools to change economy's fate, Under scanner are real policy and exchange rate.

Recently, a strong argument was put forward against pursuing high policy rate and depreciation of Taka against USD in the past. The two key policy decisions have been termed as a result of specific narrative. The argument came from a gentleman who is executive director of a local think tank. I am a bit surprised by reading the opinion piece and expected more economic reasoning behind such argument. (See "Shud Har,Mudra Binimoy Har Ebong Mullo Sphitir Boyaner Punorbhabna(Rethinking The Narrative Of Interest Rate, Exchange Rate and Inflation)", Sajjad Zohir,February 16,2025,Daily Bonikbarta )

The gentleman belongs to the same school of thought who believe raising the policy rate is not the solution to tame the inflation and transitory effect of depreciation worsens the inflation.

In the past,we heard argument that higher tariffs on commodities barred bringing down the price levels. For edible oil and sugar, the NBR should not have lifted off the tariffs since the two are major sources of revenue. And the decision cost the govt at least Tk 3156.5 crore (See "Where Is The Change?" published here on January 18,2025).Now govt is facing a revenue shortage(27% of the first half of current fiscal year) amid high inflation and chronic soybean oil shortage. For five long years, we have not raised the interest rate enough to beat the inflation. Rather, sticking to 9% and 6% rates for all these years led to massive money laundering. To meet the liquidity crisis of the banks, the central bank literally printed and injected money into the trouble ridden banks.

High interest rate worked as a screen to discourage potential money launderers from taking further loan. It also helped the govt to check its spending on interests of National Savings Certificate(NSC). High deposit rates and restrictions diverted money from non-bank savings to other sources(see the MPS, page-10).

Govt's heavy borrowing from banks is another reason for not having enough money at the banks. Public sector credit growth (18.1%) is higher than the projection(14.2%). So there is not enough of the pie left for the private sector. This is happening when foreign budget support is drying up.

Governance crisis in the banks is the main reason many clients feel shy to go to the banks. However, the governor claims many clients resumed depositing money into trouble-ridden specialized banks. Bangladesh Bank claims tight liquidity situation is due to continuous support of the subsidized Taka against USD, poor recovery of credit,cash holding, size of NPL and dismal state of deposit growth( see the MPS, page-10).

Real interest rate has only become positive in January 2025 if our inflation reading is correct. It is true that large depreciation causes inflation through transitory effect in the short run. But look at the timing of our depreciation: once it was done when crude oil price was falling. Now prices of rice and other commodities are falling. This somehow offset the pass-through effect of depreciation in the long run. I somehow find the statement depreciation causes domino effect of inflation a bit banal. When nominal interest rate is below inflation rate,the central bank intervenes and raises the policy rate,causing the local currency to appreciate against major currencies. It holds back the currency to depreciate further. Meanwhile, the new exchange rate of Taka attracts export order and remitter. This is indeed the case. Last year, despite the political turbulence, our RMG export registered 7.23% growth and remittances registered 22% growth. Riding on this achievement, our overall Balance of Payment deficit declined to $384 million in FY 2025 from $3.5 billion in FY 2024(see The MPS,page-14). This further stabilizes the local currency and thwarts the depreciation pressure ( more USD coming in then going out).

If the central bank were stuck at the old exchange rate, then it might have to sell more USD from reserve (which is now more than $20 billion),print and inject more Taka into the system (worsening the inflation), to increase the size of NPL,leading to a macroeconomic disaster.

Another good thing about large depreciation is that it works as incentives both for the exporters and the remitters. The extra Taka the remitter/exporter get will help him/ her to mitigate the loss from inflation and higher policy rate. Govt also saves the money given as incentives to these two groups. Previously govt gave 5% incentives to remitters. It has now become 2.5% and this costs the govt Tk 70 billion every year,as claimed by the governor himself. We can still save this Tk 70 billion, by discontinuing this 2.5% incentive and without disrupting the remittances inflow.

Despite high interest rate, undocumented money or money at hand is not coming to the banking system due to governance or political reason. Some of the areas where undocumented money may find the safe sanctuary are real estate, IT and the stock market. Scam ruined the IT sector. Political uncertainty and misaligned interest rate bar developers to undertake new project in the real estate. In addition, govt doubled the registration and reregistration fees in a bid to boost revenue earning amid revenue shortfall,discouraging owners/buyers to sell/buy property. Again undocumented money not coming to the system is mainly due to political uncertainty and governance situation, which caused the macroeconomic instability.

I still do not find any logical explanation why he thinks real policy rate or real exchange rate concepts are mere "narrative". If real interest rate is negative, then investing the pension money into interest- bearing assets of local institution and govt will ruin millions of employees including those from public and private think tanks.This is what the IMF laid bare in their discussion with the Pension Fund Authority , which intended to invest pension fund into NSC when inflation rate surpassed nominal interest rate.

Yes it is true that inflation is sometimes wielded as argument to raise the salary. But it is true for those affluent countries where collective bargaining is strong and government is no short of resources. Neither of the two presents here. So the argument inflation is put forward as a reason to salary hike is not true for Bangladesh.

Misaligned policy rate ,pegged exchange rate and high inflation are some of the reasons international credit rating agencies in unison downgraded our credit ratings. Singapore and UAE based banks charge more conditions and interest rate to lend us credit. Most importantly, I have deep faith in standard text books which never include mere "narrative".

The New MPS: Acknowledging Past Policy Blunder

BB keeps policy rate same in the MPS For ending early the economic mess.

Bangladesh Bank published the Monetary Policy Statement (MPS)for the second half of the current fiscal year. Contrary to the anticipation, the central bank did not raise the policy rate. As inflation hovers around 9.94% , previous policy rate of 10% is still in play. The central bank is optimistic that inflation will be brought down to 8% by June.

Even in the MPS ,the central bank displays the world commodity price indices,which registered decline in recent years. Energy and food grain prices,which matter to us a lot, register decline in recent months. So the context for easing the inflation has been set.

Unlike the pessimism of the central bank about the tariff war, I think it will further accelerates the fall in prices of major commodities. In earlier pieces, I had already touched it.

This MPS for the first time acknowledged the policy blunder of not raising the policy rate when inflation was soaring. The 5-year-long policy rate ceiling cost the economy a lot. In January this year, for the first time we witness a positive real interest rate,heralding the new dawn for curbing the exorbitant price levels.

The MPS also elaborated central bank's plan to deal with bank reform and to tackle Non Performing Loan(NPL) ,which is likely to reach 30% of total loan by June this year as apprehended by the governor himself. Since the government is going for early election in December this year, I do not think there will be drastic improvement in the endeavor to recover NPL. Rather ,after election, NPL situation may turn worst: there is lack of commitment of foreign assistance so new govt may indulge in doling out soft credit/ cash that may ultimately meet the fate of NPL.

The good thing about the new elected govt is that it will have mandate for four years,giving the investors the confidence to invest here. Unfortunately, private sector credit growth declined significantly. On the other hand,public sector credit growth surpassed the anticipation in the wake of lack of foreign budget assistance. The MPS revealed by December 2024, public sector credit growth reached 18.1% against the projected 14.2% growth. Meanwhile, private sector credit growth shrinked to 7.3% against the projected 9.8% growth. Clearly, private sector deserves more credit in order to bring pace to the economy. Hopefully, at the start of 2026, foreign banks will give Bangladeshi banks more credit in spite of poor credit ratings of Bangladesh. Apart from that govt requires to mobilize resources to private sector by adjusting the fiscal policy,which is less likely to happen when a new elected govt will take charge of the country.

In the monetary policy resolution, as well as in the press conference, the central bank jibed at the Dubai-based exchange houses that were found in speculative activity in the local currency market in December 2024. Earlier in 2023, another Saudi-basee exchange house took part in currency manipulation. I elaborated the issue here in a piece titled "Exchange Rate Volatility: Policy Debacle Should Be Blamed" in November 2023. It is not clear whether we are getting the rich Middle Eastern countries' IMF currency holdings as credit ,but it is certain that some big exchange houses of these countries taking advantage of the situation by engaging in currency manipulation (Read "Bangladesh Bailout: Repeat Of Pakistani Incident", published here in December 2023). Governor brought the matter to the attention of the IMF and the respective country. Let us see what action they take in this regard.

In brief, the latest MPS acknowledged past policy mistakes and set an optimistic tone for economic recovery. But the sheer size of NPL and political commitment of the upcoming government will be the deciding factor behind early economic recovery. Till the next MPS sees the light,the current MPS chalks out a path to contain the inflation, a priority for the interim govt. If the central bank can implement it,that will be a tremendous help to ordinary people and the private sector.

Consensus For Early Recovery

Consensus in economic reform policy Makes the recovery early and easy.

While the winter vegetable market witnesses a decline in prices of vegetables, govt embarks on importing rice from abroad. Govt has a plan to import 800000 tonnes of rice from abroad to check the prices of rice. There is a commitment to bring down the food inflation at any cost. Meanwhile, in the first two quarters of this fiscal year, foreign direct investment registered 22.33% decline. Taka against USD remains stable after a brief spell of volatility in the month of December. If it remains stable for another six months, it will give confidence to foreign investors. They will not come amid anarchy,elevated inflation and when the currency remains volatile.

The central bank may unveil the much awaited Monetary Policy Statement (MPS) in the first week of February. Unlike the previous MPS, this one may raise the policy rate further after reading the January inflation data. I personally think the govt should remain unpredictable about its monetary policy moves in a bid to thwart speculative move at home and abroad. In the wake of protest, govt is making 180 degree turn in its stance on indirect taxes, which accounts large part of revenue earning. But this time budget support from abroad will be less as the Trump administration halted foreign assistance for 90 days. In this backdrop, it has to curtail the spending significantly, backtracking the move to give inflation allowance to govt employees. As I mentioned in one of my earlier pieces, govt is reluctant to start bold economic reforms , which is vital for the economy.

This interim government is apolitical and lacks the vigour to initiate bold economic reforms, which it can do at anytime. The main reason is it is concerned about how the major political parties will see the move. Unlikel the west where opposition parties have their own shadow cabinet and alternative policies to call into question the prevailing policy, our political parties have not shown interest in forming such shadow cabinet and share their thoughts and opinions with the interim govt. If they would do that, the interim govt could confidently take into account those policies and align them with the ongoing reform policies as prescribed by the IMF. This govt still has more or less 1 year,enough time to start vital structural economic reforms. Early economic reforms (i.e. fiscal restructuring, tightening monetary policy, policy sovereignty of the central bank, true reporting of economic data, closure of troubled banks, separation of tax policy and revenue collection etc) will put less strain on people a year later. Otherwise, if it is shelved for the new elected govt,which is highly likely to happen for most of the anticipated reforms except for few, then true economic recovery will be delayed and ordeal of ordinary people will be prolonged. For the sake of the economy, major parties should coordinate their economic policies with the one of interim govt,making its economic reforms task much easier.

Be Unpredictable

Be unpredictable in making monetary decision To get rid of forex market speculation.

The central bank and some key banks decided not to trade USD beyond Tk 123/USD. The decision came in the wake of USD being sold at Tk127/USD. Though some local exchange houses are blamed for unusual hike,there may be other reasons. Corruption allegations against some groups which are supposed to be major importers are brought to surface. Some owners of these groups become foreign resident and threat the government to face legal consequences if government continues to freeze their assets at home. In this melee, fate of the loan they took from banks become uncertain. So govt has either to pump money into the trouble ridden banks, which already drew criticism even from the IMF, or to shut down few banks,which never happened in Bangladesh. When the Trump administration will assume power ,it will definitely take tough stance on foreign aid. In addition, FDI has yet to come in big numbers. Govt even signalled the market that it will not release USD from forex reserve. These factors to some extent contribute to the depreciation of Taka.

However, there is argument that some exchange houses unreasonably put the USD rate high. The move even irked the governor. During the previous regime, rumor has it that former governor's relative got involved in exchange rate manipulation. Even if speculation has some role to play in the rate, I think the greatest danger may come from the foreign remittance houses. I wrote a piece about it last year.(Read "Exchange Rate Volatility: Policy Debacle Should Be Blamed")

The best way to get rid of this kind of speculation is to become unpredictable about the policy move.Well, it is certain that the central bank is going to raise policy rate under contractionary monetary policy. But when it will do that should remain unpredictable. For instance, it is sure that the next MPS ,likely to be published in January, will have the announcement of policy rate hike. Immediately after the raise,Taka will have a tendency to appreciate depending on the degree of the hike. If the market senses that the raise in the days to come will not contain the inflation then there will be speculative move.

From July to December, if the central bank raised the policy rate couple of times by 25 basis points at regular intervals , then we would not have seen this speculation in the forex market. Govt should be more unpredictable in its monetary policy decisions.

Charity Begins At Home

Sweeping changes bring new hope, Past mistake, lawlessness may slide the country into slippery slope.

Bangladesh's "cultural revolution" shows no sign to abate. Meanwhile, new interim govt has started sweeping changes. Heads of key public institutions have been changed including the central bank. Few hints of the reform programs are also provided: initiation of UN-led probe to investigate the mass killing of the students as part of the 9-point demand, proposal to introduce political party act, reevaluation of draconian laws, publication of true economic data. In addition, strong demand for publishing white paper on the corruption of key institutions is also raised.

Bangladesh Bureau of Statistics (BBS) has published the July data on inflation: 11.66 % average inflation but food inflation is 14%. Average inflation is highest in 13 years. Though contractionary monetary policy is in place, it is working slowly. Newly appointed governor Ahsan H Mansur ,a former IMF economist, hints that he will review the policy rate. Further rise in interest rate is anticipated, maybe after the appointment of 4 deputy governors. Industry insiders start to speak: an MD of a private bank claims true data of the financial sector are more shocking than what has been reported in the press. Even the new governor said it would take time to stabilize the economy.

The governor may recruit foreign economist in its monetary policy committee to give insights in preparation of monetary policy statement. Spending some dollar in this recruitment will not waste. Moreover,like India, survey may be conducted prior to publication of Monetary Policy Statement to have an understanding about the inflation expectations and the economic scenario at the ground level. Two MPS require two surveys, consisting of interviews (say 20,000) of households and businessmen across Bangladesh. With the help of economics and statistics graduates, Bangladesh Bank field offices may conduct the surveys. It will start the practice of regular publishing of MPS based on primary data. IMF advocates 4 MPS in a given year. Gradually, the central bank may tread on that path. Central bank may also look into the matter of "shadow companies/NGOs", organizations operated by some quarters to steal public money, that siphon off subsidy money. Politically motivated thrust sectors like ICT, climate fund projects are fertile ground for such "shadow companies/NGOs". I saw tv report on embazzlement of Equity and Entrepreneurship Fund(ICT), operated by central bank. It could be a good starting point.

Govt should scrutinize its decision of cabinet expansion. Inclusion of two former bureaucrats raises red flags. How could a bureaucrat who professed about continuing high interest-bearing Savings Certificate program ,eating up a large part of social security spendings as pointed out by the IMF ,make his way into the interim govt that is meant to overhaul the governance?(Source:"Ekhono Kharar Ghaer Opekhhae(Still Waiting For Insult To Injury)", Ali Imam Mojumder,Daily Prothom Alo,August 18,2021."Dhoni Goshthi Ke Pronodona, Moddhobitter Sonchoy E Haat(Incentives To Rich,Targeting Middle Class' Savings)",Ali Imam Mojumder,Daily Prothom Alo,October 02,2021) Maybe there are other cabinet members who may oppose coterie views and ideas,still it is not a good idea to accommodate all those who write opinion pieces in "a reliable source of news" paper, run by former communist party editor. Some 1/11 govt's redundant advisors grabbed plot,clinics by abusing their position. The country still rankles with that. Same mistakes should not be repeated. Include industry insiders ,change makers with clear vision who will not take govt salary in this time of austerity.

It is a good news that UN will send some fact finding mission as part of starting the probe on mass student killing.Death toll reaches 582 till August 14. Let this be an occasion to set up an UN operated forensic lab comprising of audiovisual lab to analyze footage and recordings, mortuary to redo the autopsy,a ballistic and incendiary department to probe on incendiary attacks and shooting, a narcotics bureau among other things with a pool of investigators and experts. This permanent lab will be a precursor to other labs in places where conflicts and proxy wars render useless availing such services in an impartial way. In addition, this kind of probe will stem debate that has the potential to turn into a virulent form.

It is another laudable move to introduce Political Party Act. I think the advisor intends to say ordinance. But political parties are not the only stakeholders in politics ,others will also have to be held accountable. In the last two elections, we saw how a subsidiary of govt organ placed huge bill to the govt in the name of supplying electronic voting machines. Govt should introduce another ordinance to hold such organ accountable to the press and the Parliament. At the same time, it should scuttle such subsidiary from getting public money and let them float share in the stock exchange or sell share to private companies to get their funds. Politicians have Representative of Public Order obligation to disclose information about their property. But many civil and military bureaucrats holding crucial position do not have that obligation. In China, senior police and anticorruption personnel require to provide info about their wealth in every three months. Interim govt could think of similar ordinance to address the structural flaws.

Sweeping changes show promising sign that the interim govt heads towards the right direction. The aura of "cultural revolution" needs to be discarded to give it a civilized look. This interim govt will glow up only when it will avoid past regime's bad habits like running parallel administration.

Monetary Policy Delays Recovery

Monetary policy keeps the policy rate same, Indulging in fiscal expansion may alter the game.

The central bank unveiled the monetary policy for July-December period. Surprisingly, it did not raise the policy rate,which remains at 8.5%. I guess it will raise the rate at later stage of this period,judging the inflationary situation. What is interesting neither Bangladesh Bureau of Statistics nor Bangladesh Bank has published the data on inflation. But inflation is still high, over 10%. Failed China trip cast shadow over budgetary assistance since China only pledged to provide 1 billion yuan during PM's visit plus another 1 billion yuan confirmed by Chinese envoy to Bangladesh,total 2 billion yuan , against Bangladesh's demand of $5 billion. Instead of narrowing the budget deficit, government faces a deep budgetary crisis. Even the PM did not appear before the local press for 48 hours until she attended prize giving ceremony of a football tournament at the Army stadium. Meanwhile, public sector job reform protest continued. By the time she arrived it reached a crescendo, claiming around 200 lives and descending the country into a curfew. Putting aside the worst political crisis during the tenure of this govt, let's confine the discussion on the monetary policy.

The government is facing now a political crisis along with an economic one. I have not managed yet the online copy of the monetary policy as the internet was first slowed and then suspended deliberately for more than a week. The primary information I got from the press is that government will increase the borrowing from the banks,shrinking the share of private credit. Some news reports also indicated that the central bank injected between taka 320 billion and 400 billion into the banks to meet the liquidity crisis. Most of this money would end up into govt coffers as loan. It will do little help to stimulate the economy. Govt will use the money to payoff its debt. So the money does not have any productive use. Meanwhile, non performing loans for the banks do not cease to accumulate. Unofficially it reached more than 20% of total loans. At one hand,government is failing to recover old loans. On the other, it injected money into the banks with no productive use. It is undermining the ongoing contractionary monetary policy. It will put severe strain on the economy.

Growing budget deficit and the decision of not raising the policy rate will increase the pressure on value of taka. Taka has to be further depreciated against US dollar. I think govt is ready for further depreciation of taka. In my earlier pieces,I highlighted how the depreciation raises the government revenue in times of its inadequate capacity and works as incentives to exporters and remitters.

Wrong fiscal policy appears to be bigger challenge than the transitory effect of depreciation to contain inflation. IMF also warned about this.As foreign financing and investment become limited ,increasing tendency of government borrowing to finance unnecessary development projects and injecting money into the banks may be observed. There will be higher pitch to dole out cash and incentives as a mean to mitigate the losses generated from the curfew. Central bank has to remain firm on turning down such requests.

Improvement of reserve during the pandemic may encourage the govt to prolong the curfew. Curfew to some extent works as a mean to curb import demand. Thereby it may improve the forex reserve temporarily. But prolonging it gives an indication of growing political impasse in the country,discouraging investment and economic activities in the long run. It will further hurt a cash-strapped govt.

This monetary policy comes at a moment when political differences deepen instead of waning. This will pose the risk of deteriorating the budget deficit and derailing the contractionary monetary policy. Overcoming the risk depends now on independent probe of the crisis. If investor's confidence is back and economy is in full swing soon, there maybe less worry. Otherwise, government may indulge in fiscal expansion. Central bank still has ample time to course correct its policy of not raising the interest rate. High inflation,depreciation of taka,misaligned fiscal policy and an engineered political crisis call for policy rate hike. Otherwise it will only delay the recovery.

Fighting Inflation Continues

Fuel Price adjustment and tight policy rate May cause inflation to attain the target.

Govt has cut prices of oil: price of diesel is cut by Taka 0.75/liter, price of octane is cut by Taka 4 /liter and price of petrol is cut by Taka 3/liter. The move is in line with govt's pledge to the IMF. From now onwards govt will adjust the fuel prices every month. In 2022,govt raised the fuel prices by Taka 50/liter in one fell swoop. All these years fuel prices remained high in spite of the fact that on some occasions fuel prices fell at international market. Despite huge criticism, govt did not lend ear to those shouts. Even the IMF First Review Report identified fuel prices as one of the factors influencing the inflation:

“Headline inflation reached a decade high of 9.9 percent year-on-year in August 2023,reflecting both recurrent cost-push shocks from both high and volatile food and fuel prices as well as the pass-through from Taka depreciation. “

Kitchen market volatility also stems from high fuel prices among other things. Government decided to not lower the diesel prices much fearing leakages/black market activity.High fuel price raises cost of black market activity and stops oil smuggling. This ,however, does not bar govt rationalizing the prices, bringing ease to everyone's life. For some reasons govt abstained from lowering fuel prices all these years, swelling Bangladesh Petroleum Corporation’s (BPC) profit.

Policy rate hike contained non-food inflation. But food inflation pushed the inflation high. Luckily February data shows that inflation has lowered to 9.67% from 9.86% in January. Monetary tightening measures are working but slowly and face criticism. Often causes of inflation are put forward as argument and ongoing policies are called into question. IMF First Review Report stresses on monetary tightening among others to bring back macroeconomic stability in coming months:

“…current pace of monetary tightening seems appropriate and the authorities based on the incoming macroeconomic should continue the current tightening bias until the disinflation process is firmly established. “(P-10,IMF First Review Report)

In addition to the monetary tightening, the review report also underscores neutral fiscal policy stance and flexible exchange rate to get the economy on track. We witnessed that government cut spending on export subsidies and introduced band corridor for the exchange rate of Taka against USD. Policy rate hike along with fuel price adjustment, a liberal exchange rate and low budget deficit target are likely to bring good news in coming months.

Sloppy Management May Cost The Progress

Sloppy management and resources into wrong hand May cause the progress to hit a dead end.

Current account balance became positive in July-November period of this fiscal year since Bangladesh adopted contractionary monetary policy. In 2022,Bangladesh experienced a current account deficit of $5 billion. Meanwhile, in the said period Bangladesh registered $579 million current account surplus. And the balance is improving week by week. In January this year, RMG export registered 11.45% growth compared to January 2023. This is a great news as RMG export registered negative growth for the last three months.

Gradually, govt’s reform programs become visible: central bank has already lowered cash incentives to exporters by 1%; last week, Bangladesh Energy Regulatory Commission (BERC) increased LPG prices by Taka 41,costing an LPG cylinder Taka 1474. I think more utility price hikes are on the way.

Government has not published yet the January inflation data. But egg prices marked a Taka 5 increase. Rice prices remain stable after frequent surveillance operation by the consumer rights. Liquid milk and flour/atta prices lowered. A month ago unpacked flour/atta cost more. Now in some cases unpacked flour is being sold at Taka 45 /kilo. Liquid milk registered Taka 5 decrease. Potato price has also registered Taka 10 decrease after news broke out that govt allowed import from India. However, prices of onion and winter vegetables are unreasonably high. So are the meat prices.

If pass-through effect--inflation worsened by depreciation-- reigns hard on any item, then it will be wheat followed by milk. Why? Because we import them and domestic production is not sufficient to meet the domestic need. But here we see the complete opposite: seasonal crops and perishable commodities, which are hard to store, are competing with each other in terms of increase in prices.

Amid the improvement of current account balance, Bangladesh announced to adopt “crawling peg”,an exchange rate mechanism that sets lowest and highest exchange rate of the local currency against USD before moving to fully floating exchange rate mechanism. I have come across a book written by Paul Krugman. Krugman cites example of Argentina that once adopted crawling peg and improved current account balance significantly. But it could not hold that healthy position. Capital and money came from abroad as a result of better macroeconomic situation fell into crooked management of financial institutions and groups. They misused the money and ruined the economy again. We have to capitalize the improvement from ongoing monetary policy. Letting sloppy management to reap the benefit of the better situation is equivalent to doing the same mistake again!