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.

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.

Rating Agencies Downgrade Bangladesh

Dull economic condition & poor reform initiative Turn Fitch Ratings outlook negative.

Fitch Ratings keeps Bangladesh's rating same,B+,but downgrades outlook from stable to negative (see "Fitch revises down Bangladesh outlook to negative ",The Business Standard, May 14,2026,https://www.tbsnews.net/bangladesh/fitch-revises-bangladesh-outlook-negative-affirms-b-rating-1438136). It underscores challenges macroeconomic stability faces in the wake of rising external pressures like escalation of tensions in the Middle East,rise in fuel prices etc.

Such downgrading will make foreign credit more costly. Despite continuous swelling of forex reserve, Fitch notes that forex reserve condition may sharply deteriorate if the war in the Middle East turns worst.

This downgrading comes at a moment when BBS divulged that general inflation rose to 9.04% in April from 8.71% in March(see "Bangladesh Inflation Snapshot:2026",The Business Standard, May 11,2026,https://www.tbsnews.net/infograph/numbers/bangladesh-inflation-snapshot-april-2026-1436091). It is the non-food inflation that contributed greatly to the rise of inflation in April.

Recent fuel price hike is likely to raise non-food inflation further. Since there is an upward pressure on inflation, any slash in policy rate is highly unlikely in near future.

Inflation rate remains higher than central bank's desired 6% or 7% rate,Fitch report highlights.

Bangladesh's growing Non-Performing Loans (NPL),which is now 30% of total loan, is causing mayhem in the banking system,Fitch observes.

The IMF set a target to reduce NPL to 8%(see "IMF's Second Review on Credit Program",published here on June 27,2024,https://hoquestake.blogspot.com/2024/06/imfs-second-review-on-credit-program.html?m=0).There is no sign of NPL reduction; instead it grows day by day. The 8% target seems an uphill task right now.

We missed both the inflation and NPL reduction targets set by the IMF. In addition, abrupt dismissal of the past governor and allowing wrongdoers to regain control of the bank in the bank resolution act sent a wrong signal abroad about our commitment to genuine reforms.

Splitting NBR into policy and implementation departments is another IMF benchmark that remains unfulfilled. When there is suggestion for subsidy cut,govt plans to borrow heavily from domestic and foreign sources to finance the budget. Despite fuel price hike ,govt plans to borrow $2 billion for fuel import.

Govt also misses revenue target. To raise revenue, govt doubles source tax for key kitchen items including rice,edible oil,onion and pulses. It will fetch Tk 5 billion ,govt hopes. Not only that govt is mulling to tax motorbikes and e-rickshaws. Taxing the motorbikes will net another Tk 10 billion. Taxing the e-rickshaw is a good move to regulate their number.

There is no visible policy on how to tackle the NPL. No policy on how to fill the void created by NPL. And ordinary citizens are paying the price in the kitchen market and in the public transport.

Inflation, NPL,banking reform and revenue reform so far remain disappointing. And it is reflected in ratings made by agencies. Earlier, Moody's set the credit rating for Bangladesh at B2 with negative outlook. Standard & Poor's credit rating for Bangladesh set at B+ with stable outlook (see "Bangladesh-credit rating", Trading Economics,https://tradingeconomics.com/bangladesh/rating). I won't be surprised if Standard & Poor's outlook becomes negative following Fitch's outlook. In short, dilapidated economic conditions make foreign credit costlier.

Cushioning Fall Of Taka

Allow businesses to transfer money abroad To keep the incentive spending short.

The uncertain situation about Non Performing Loans casts serious doubt about Taka's stability next year. Exchange rate of Taka against US dollar in this week is Tk 122.46/USD ,which was Tk 121.75/USD a month ago. Though this depreciation is within the tolerable limit and the expected range of Bangladesh Bank,a big fall may cause serious trouble. As I have mentioned several times in this space, Bangladesh can afford depreciation of Taka between 5%(Tk127/USD) and 10%(Tk 133.1) in a year. Transitory effect of depreciation will be manageable and less severe given more forex making entry into the country. Otherwise, it will make lives miserable by pushing up the prices of essential goods and services and accelerating capital flight from the country. A macroeconomic nightmare for any govt.

The chance is high that after the election when many restrictions will be relaxed a fresh round of capital flight may be observed. The volatility of local currency in short span of time increases the risk for fund management of the companies as it shrinks their assets if those are denominated in Taka. Unfortunately, Bangladesh Bank has stricter policy to transfer money abroad through official channels. For this reason, many opt for clandestine means to launder money abroad. If these companies have means to invest their money into foreign resources through legal channel , I think incidence of money laundering could be [curbed] to a great extent. One way is to set a ceiling on investment abroad and provide some quota on foreign investment by a Bangladeshi company. Another approach is to allow investment on commodities, foreign bonds through Bangladesh. Soon commodity exchange market will be operational in Bangladesh. If local companies can invest part of the assets in gold,silver,platinum, copper ,then part of the money they launder abroad will stay at home. Similarly, if we allow them to invest in foreign bonds through local stock exchange or by any other means then that will add great value to their investment. At the same time, purchase of foreign real estate should be legalized inside Bangladesh. The central bank can have a clear tab on investment on such property and repatriation of capital gain from resale of such property. At the moment,Bangladesh Bank remains in the dark about [laundered] money caused by political uncertainty and currency volatility. The measures suggested here will give the central bank some idea how much money will go abroad and how much proceed/ return on investment will come back to home. Most importantly, it will hold back to some extent the capital flight.

Nonchalance stance to take money abroad legally puts pressure on government incentives. When these companies will fall into trouble due to currency volatility ,they usually seek public incentives. In most of the cases govt complies to their demand, costing tax payer's money. Allowing businesses to transfer money abroad for investment purposes legally discards the need for such incentives.

The $800 million Chinese investment pledges,which is likely to happen in next 12/24 months in the textile and RMG sector, is mostly influenced by global tariff debate, China's shrinking opportunity to invest in Occidental countries and not by uncertainty about Taka's value. China has excess capital of more than three trillion dollar. They have a controlled money market and problem-stricken property market, denting in their returns. The Chinese does not spare opportunity to invest this money abroad. This is why they aggressively invest in the RMG sector in this country. The volatility of Taka has little impact [on] their business decision because in any such case they will simply convert it into Yuan and repatriate the money back to China. And the Chinese central bank is willing to lend Bangladesh more Yuan when the Chinese investments will be in trouble in Bangladesh. The point is instability of Taka poses serious threat to future FDI and local investment given Chinese investment is an exception.

To protect domestic companies from currency volatility risks, the central bank should allow them to invest abroad. Or let them purchase foreign assets from Bangladesh. The move is aligned to check public spending and keep the private business balance sheet healthy without the need for govt intervention.

Will 2026 Bring Optimism?

Ghost of past habits still prevails at large, Weak passport, falling revenue may make reform a farce.

The IMF has downgraded growth forecast of Bangladesh to 4.9% from 5.4% for 2025-26 fiscal year in its "World Economic Outlook Report". The global lender anticipates an inflation around 8.7%,which is higher from earlier projection, for next year. Even this projection tells the exorbitant prices of consumer goods people are dealing with in Bangladesh,which endures higher inflation than other neighbors in the subcontinent.

What is worrying contesting parties of the February general election have not come up with specific plan on how they tackle the $34.71 billion Non Performing Loan(NPL), missing from the banks and risking the stability of Taka. As I have mentioned in one of my [pieces], the new government will have exactly 24 months to roll out a detail plan and fix the economy even if they are deeply committed to reforms(See "NPL Endangers Exchange Rate"). The rest of the tenure will be used to win the next election, witnessing expansionary fiscal policy and compromising the contractionary policy.

Adding salt to injuries is Henley's downgrading of Bangladeshi passport by three notches. Bangladeshi passport is ranked 100th among 106 countries in Henley's latest passport index. East Timur's ease of visa and Pakistan-Bangladesh treaty on visa waiver on [govt official] passport holders have little reflections on latest passport index. Rather, UAE continues visa restrictions on Bangladesh following street agitation by Bangladeshis in July last year in that country. Sri Lanka has recently hardened on arrival visa by making compulsory e-appointment. Indonesia and Thailand walked in the same direction. Malaysia has yet to resume recruitment of Bangladeshi workers following corruption in the process involving Malaysian officials and visa officers. Several EU countries limited visa activities in Bangladesh, curbing cost and securing their borders. Sweden stopped processing Dutch visa in Dhaka ,outsourcing the job to Delhi-based third party. France is also doing the same. UK reviewing its caregiver visa policy following unprecedented abuse of the policy. Moreover, free trade agreement with India has allowed Indian RMG,workers and investment to enter UK easily. This means weak passport and visa restrictions limit Bangladeshis' overseas employment, farther casting shadow on a stable remittance inflow. Interim govt has given an aura of regime change that is why remittances coming in abundance. We do not know how the new government will behave. If it is business as usual like before,then a dip in remittance inflow is anticipated.

Risk about Taka's rapid fall against major currencies may prompt capital flight. Already many rich businessmen are queuing up for leaving the country. When Taka plummets, it downsizes wealth of [the] rich if the assets are denominated in Taka. That is why the rich have a tendency to transfer wealth abroad when local currency falls sharply against major currencies. If they cannot do it legally, they will do it through other means. This prospect is very real when the new elected govt will assume power next year. There may be a greater urgency to transfer wealth abroad if retribution and fall of Taka gathers pace.

In 25 months/ little more than 2 years ,we see 3 elections: 1 held in January 2024 boycotted by the opposition, another will be held in February in 2026,which may also see absence of a major party, and a referendum in the same time or a bit earlier. The regime change alone cost $1.7 billion to the economy. Following the 2024 election govt doled out Tk 300 billion to partisan businesses. These are costing govt huge public money without giving any assurance to political stability. Moreover, in the name of "Mujib Shotoborsho" (Mujib's birth centenary) govt spent huge money across Bangladesh. Following regime change, most of the structures built in commemoration of Mujib witnessed demolition. Now public money is being used to implement "July Movement" projects. Despite regime change, past habits remain intact.Point is we are spending billions of public money in political projects without any assurance of political stability,which is vital to economic stability. All this unfolding during the time of austerity.

The tariff debate unveils that in initial years we may [lose] tariff, as import duty is relaxed on crucial import items like cooking oil and LNG, unless some contingency plan (like taxing remittance and export) is chalked out. At one hand we are [losing] revenue, on the other we keep spending on political projects with no guarantee on stability. Failure to a clear roadmap on how to deal with the NPL puts stress on Taka and prompts capital flight. Weakening of passport casts shadow over remittances. Still we hope there will be a better tomorrow.

Could Taka Remain Stable Next Year?

Grim credit and NPL situation Questions Taka's valuation.

Despite Standard & Poor's projection of a decline in oil prices next year, India's decision to impose restrictions on rice export [has] cast shadow over the general inflation. The country supplies 40% rice to the global market and the decision has potential to hike rice prices. Govt has to concentrate more on procuring rice from other sources. Now which one outweighs the other is what we need to see. Since the govt is continuing the contractionary policy,we will see some impact on the inflation.

Meanwhile, [the] IMF limits Bangladesh's foreign credit intake to $8.44 billion for 2026 as the country's risk rating is slided from low to moderate. Moody's already noted that unrecovered loan reached 24% of total loans from 11.1% in 2024. And the credit rating agency observed that central bank's latest loan rescheduling measure, 2% payment for [rescheduling the] loan, will only increase the tally of NPL ,further worsening the financial stability.

In this backdrop, opportunity of private sector credit from foreign source is shrinking and getting tougher. One positive impact is more and more banks are coming to stock market for raising funds. Eastern, Pubali,NCC and Jamuna announced to issue separate bonds in a bid to raise a total of Tk 26 billion from the market. I argued here several times to raise funds from the stock market, where undocumented money has easy flow and accountability is ensured. This step reduces pressure [on] public banks and central [bank] and helps a lot inflation-taming measures. Now it is time to see what response they will get from the market.Moreover, as debt service obligation is rising ,the central bank is creating a database to collect and store information about foreign credit taken by private sector.

The revenue generation will be a challenge for next year. As I highlighted in the piece "Need For More FTAs", if govt does not chalk out a plan on how to compensate the loss of tariff revenue stemming from reciprocal tariff then budget deficit will grow. Similarly, in "Altering Policy To Rejuvenate The Economy" I highlighted there is no clear roadmap on how to tackle the $34.71 billion NPL. The IMF foreign credit ceiling of $8.44 billion for 2026,part of which is already disbursed, and negative credit rating of the various agencies has already put severe constraint in getting private credit from abroad. There is also uncertainty about the kind of inflation we will have next year. The central bank is in OK mood to the merger of 6 troubled [banks],costing govt Tk 200 billion. So contractionary policy will likely to prolong. In this backdrop, how much money lying outside banking system comes to bank through stock exchange and remittances may become a deciding factor. Though [the] size will be much smaller compared to the void created by the NPL. Clearly ,it puts huge pressure on the value of Taka against major currencies. Despite the current appreciation pressure, govt is intervening into forex market. Could taka remain stable next year? That is a crucial question whose [answer] will be searched by everyone in coming months.

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].

Price For Uncheck Spending

Amid growing concerns,NPL keeps rising. Goods pile up due to ongoing fighting. Lack of credit and weak consumer activity Hit hard a firm's profitability.

Costs of high deficits are shockingly visible. Chaos in financial institutions provoked by Non Performing Loans(NPL) could be one of those. For a long time,I have not seen commercial banks’ ad in media on consumer loans. The obvious reason is that govt borrows money heavily from these banks,leaving little for private investors to finance their projects.

These big loans,distributed often by political or evil motives and not by project's rate of return or other technical parameters, were supposed to yield good return.However, they ended up in wrong hands and yet to go back to the banks' coffers. Their failed performance earned them the name NPL.

Last week,a news report says one of the conditions set forth by IMF is that NPL,which is 28.66% of total credit, should be lowered to 10% within the next two years(Source:“Khelapi Rin Komatey Hobey DUI Bochhorey(NPL Should Be Lowered In Two Years)”,Fakhrul Islam,Daily Prothom Alo,P-1,November 22,2022).This is an uphill task and in an election year a difficult task to comply. In fact,NPL keeps rising. Nevertheless, govt is optimistic about improving the situation by June next year.So everyone is wondering how govt could lower NPL to that desired level.

Meanwhile, interest rate rise,war in Ukraine have raised uncertainty and deteriorated financial positions of many firms. In Chattogram,exporters reported delay in shipments,increase in stocklot and low workorder.Some exporters have been stocking their items for more than 3 months(Source:"Gudamey Jomchhey Ponno,Dushchintao Barchhey(Stocklot Increases In Warehouse, Worry Grows)”,Masud Milad and Shuvonkar Karmakar,Daily Prothom Alo,P-9,November 25,2022). This delay in shipments and cancellation of orders have the risk of putting them into precarious position.

Though lending rate is hovering around 9% officially,central bank last week nodded to a rate of 12% for new lending,which is a bit high amid low consumer activity.There are reports that more and more consumers bank on savings to cope with the rising cost of living.

Despite official projection of a lowering inflation,price levels at the consumer level have yet to reflect it. News of arrival of wheat ships from Turkey or rice cargo from Myanmar and Vietnam have yet to lower the prices of wheat.Rising oil price and ongoing war on Ukraine used as pretext to raise the price of wheat in short span of time.When oil price has come down to $80/barrel and grain ships keep coming,prices of essentials are not coming down at the same pace.

Slash in consumption and inadequate credit,which is hard to access,for private sectors hint that rejuvenation of economic activity will not be easier. In this context,it is not clear how the government intends to curb on NPL. It is evident that ordinary people and honest investors pay the price for unregulated spendings in the past few years.

Plunder In Disorder

New bout of corruption is seen in bank.
Malpractices reach even low rank.
Bangladesh is high on a fever.
This has become the mot of some clever:
"O wind! put everything in disorder!
Let me relish much of the plunder!"

News reports in recent weeks once again disclose that corruption and malpractices in Banking sector, which has already been reeling from earlier scams, continue unabated. No change in corporate governance and no change in business as usual. The disappointing picture is writ large on all the financial institutions of Bangladesh.

A news report, dated on November 30, says government mulls retaining political appointees in the management board of public banks. In the past this kind of appointment set the path for seeking loan for project deemed not-profitable and triggered corrupt acts abusing the power. This politically motivated projects and mismanagement of the boards in the end contributed to piling up of bad loans (NPL). Back in June 2019, I wrote an analytical piece titled " Default Loans: In Search Of Root Cause" on this blog.

In 2010, the amount of NPL was Tk 227.1 billion and rose to Tk 893.4 billion by the end of June 2018 (Source: Bangladesh Bank). A little less than 50% of those NPLs belonged to state-owned commercial banks (SCBs). Meanwhile, NPLs for private commercial banks(PCBs) and foreign commercial banks(FCBs) stood at Tk 389.8 billion and Tk 22.7 billion respectively. One may argue that SCBs operations and client base are much bigger than those of PCBs and FCBs. Gross NPL to total loan or net NPL to total loan , which Bangladesh Bank uses to measure asset quality, may give a better indication of comparison of bad loans by types of banks. In 2010, gross NPL to total loan by SCBs was 15.7. Meanwhile, it was 3.2 per cent for PCBs and 3.0 per cent for FCBs.(Source: Bangladesh Bank) By the end of June 2018, gross NPL to total loan for SCBs, PCBs and FCBs rose to 28.2, 6.0 and 6.7 percent respectively. It is evident that percentage of bad loans to total loans is far more higher in SCBs than those in PCBs and FCBs. How the decision is made at the management board calls for greater scrutiny.

One of the public banks has come under scanner after a news report divulged that $603,947 had gone missing from an exchange house in New York operated by Janata Bank. Stealing had taken place in the transition period, when outgoing CEO would hand over the responsibility to incoming CEO. A temporary worker had been playing the role of acting CEO in the meantime. The exchange house maintained an account at the Habib American Bank's New York branch. It appeared that the acting CEO did not deposit the money at the Habib Bank account contrary to her claim. While the acting CEO was stopped answering to official emails and shut all the contact with her employers. The Janata Bank authority decided to settle the matter through legal means. It is surprising that a temporary telephone operator turned CEO was given the charge to run an exchange house, which has already been on a loss-making path, in foreign shore. This incident laid bare how clumsily decisions are being made in public financial institutions.

Unbridled corruption is taking place at private banks too. A data entry operator, who got the job by forging educational certificate, swindled Tk 80 million from NCC Bank. He even constructed a six-storey building, bought residential plot and car at native village.

A staff at Premier Bank in Rokeya Sharani branch took loan in the name of two clients manipulating office documents. He invested the money in his family run grocery. One of the victim clients got aware of this when he applied for loans in other bank. Bangladesh Bank has stipulated that client took a certain amount loan not be eligible for further loan. Denial of the client's loan request surfaced the murky scam.

Last year I did a small survey among some rickshaw pullers. One puller shared with me a fraudulent incident. The rickshaw puller opened a deposit account, which would become mature in two years, at a private bank. He regularly deposited the monthly amount in time. By the time the account got matured , he came to learn that he would have to wait for another year for its maturity. He protested. But he was told one of the cashiers did not keep record of any money of his account for a year. Daily wage earners are not even spared from the greed of corrupt staffs.

What we are seeing is mimicking of corrupt practices at individual level in the banks. If the management and high officials could indulge in corrupt practices and go scot free then it is ok for a staff to take one or two "peanuts"! More aptly, trickle down of corrupt practices from top to bottom. When the fever of "Ektu Elo Melo Kore De Ma/ Lute Pute Khai( O wind ! put everything in disorder / let me relish much of the plunder)"[I borrow the lines from a popular song of the film "Jamai 420"] sweeps across the Bangladesh, it would be naive to expect dramatic improvement in corporate governance.

Until the feverish pitch for corruption subsides, replacing one political appointee with another, curtailing the power of central bank, changing regulations, interfering with the decision making process of the management board will not produce the desired outcome in financial institutions. What has to be changed first is the attitude and tolerance towards corruption.

Default Loans: In Search Of Root Cause

Default loans have reached Tk 1 trillion mark by the end of this March, as indicated by press reports citing Bangladesh Bank. It is in stark contradiction to government's stance to not allowing the default loan to increase even by one Taka. Default loan situation is so dire that Bangladesh Bank convened a meeting with the directors of seven troubled banks to know more about piling up of default loans. According to news reports, key borrowers failed to pay their installments in time  in spite of rescheduling their loans.

What is alarming  is that banks with sound records are also being contaminated by the rapid rise of default loans. Of the seven banks, three are private: Islami Bank, Al Arafah and National Bank. Earlier default loan problem had not taken a virulent form in these banks.

Bangladesh Bank in its annual report observes that non performing loans (NPL) have the potential to trigger spill over effect and to have profound risks for financial stability by making policy implementation harder.

In 2010, the amount of NPLs was Tk 227.1 billion and rose to Tk 893.4 billion by the end of June 2018. A little less than 50% of those NPLs belong to state-owned commercial banks(SCBs).Meanwhile, NPLs for private commercial banks (PCBs) and for foreign commercial banks(FCBs) stood at Tk 389.8 billions and Tk 22.7 billions respectively. One may argue that SCBs operational and client base are much bigger than those of PCBs and FCBs. Gross NPLs to total loans or net NPLs to total loans, which Bangladesh Bank uses to measure asset quality, may give a better indication of comparison of bad loans by types of banks. In 2010, gross NPLs to totaloans by SCBs was 15.7. Meanwhile, it was 3.2 percent for PCBs and 3.0 percent for FCBs. By the end of June 2018, gross NPLs to total loans for SCBs, PCBs and FCBs  rose to  28.2 , 6.0 and 6.7 respectively.Its is evident that percentage of bad loans to total loans is far more higher in SCBs than those in PCBs and FCBs. How the decision was made at the management board and its implementation calls for greater attention.

(Data Source: Bangladesh Bank)

Bangladesh Bank's management of Equity and Entrepreneurship Fund, a fund created to provide capital for promising businesses, is not beyond controversy. Couple of years ago reports surfaced on the press that thugs swindled hundreds of crore taka from the fund submitting fake documents.

So there is doubt over its ability to rein in curbing NPL.

Bangladesh Bank measures profitability of a bank in terms of its Return on Asset(ROA), Return On Equity(ROE) and interest rate margin. Bangladesh Bank observes that NPL tends to bring down ROA and ROE.

I did a small study on the interaction between ROA and the NPL annd gross NPL to total loan. My objective is to find out whether NPL and NPL to total loans influence ROA. I gleaned data on these three variables for the period between 2010 and 2018(June).In fact, I ran a logit model to see probability of ROA in the presence of NPL and gross NPL to total loan. To get the probability of ROA,P,I hinged on relative frequency, which I got by calculating the ratio of ROA at a particular level of NPL to total ROA in the industry at that level. Taking natural logarithm of P/(1-P) gives us the logit. Next the equation L = a + bNPL+cNPLLOAN+u was transformed by a weight. The weight  was derived by multiplying total ROA, P and (1-P) for a corresponding level of ROA. Then I took the square root of weight and then multiplied the above equation by square root of the weight. Transformed equation looked like:

sqrt(weight)L = sqrt(weight)a + sqrt(weight)bNPL+sqrt(weight)cNPLLOAN+sqrt(weight)u
or
wL= wa+bwNPL+cwNPLLOAN+wu

Then I ran an ordinary least squares regression using the transformed equation. The advantage of this transformed data is that it eschewed heteroscedasticity and yielded efficient estimates of the coefficients.

For SCBs the model fitted well, but for the PCBs and FCBs I was not that lucky. The result of statistical analysis for SCBs indicates that for a unit increase in the weighted NPL the weighted log of the odds in favor of ROA increases by 0.0055492. Alternatively, for a unit increase in the weighted NPL the weighted odds in favor of ROA increase by 1.28 percent. The odds could have been much higher without NPL.

Meanwhile for a unit increase, 1 percent in this case, in the weighted gross NPL to total loan the weighted log of the odds in favor of ROA decreases by 0.0944032. In other words, for 1 percent increase in the weighted gross NPL to total loan the weighted odds in favor of ROA decrease by 19.54 percent.

The above findings are pretty much in line with the Bangladesh Bank observation that NPL slows down profitability of banks.

What led the management board of these banks to endorse these bad loans left many puzzled. Recovery of the loans requires higher time, money and effort, increasing the operating expenses. One of the tools Bangladesh Bank uses to measure capability of management is the ratio of total expenditure to total income(EI). For SCBs, EI was 80.7 in 2010. A gradual rise was recorded till 2016 when it reached to 90.2 then lowered in the later years, 81.7 in 2017 and 83.9 in 2018(June). Meanwhile, for PCBs it was 67.6 in 2010, 73.8 in 2017 and 78.4 in 2018(June). For FCBs, EI was 64.7 in 2010, 46.6 in 2017 and 44.3 in 2018(June). This means FCBs managed to lower EI significantly in recent years. The operating expenses are much higher for SCBs and PCBs than those for FCBs. This is clear indication that management board of FCBs are more capable in dealing with their assets(loans ) and in running businesses in this country. The solution also lies here. What does make them different from the SCBs and PCBs? Who are the members of these boards? Did they face intervention from making and implementing decision?

(Data source: Bangladesh Bank)

Now we come to the same roundabout. Poor governance at banks leads to piling up of bad loans. Sheer size of this loan spurs operational expenses and makes expectations of sound banking process untenable. At the end of the day, it contributes to corrode depositors' trust and to augur calamity for the whole economy. Fixing corporate governance instead of injecting further taxpayers' money is the prerequisite.