Dr. AKM Asaduzzaman Patwary
Economic Policy researcher and analyst
The fundamental objectives of monetary policy include controlling inflation and ensuring smooth liquidity management in any economy, including Bangladesh. Meanwhile, Bangladesh Bank introduced a cautiously tight monetary policy in February 2025 for the second half of FY 2025. lately, the economy has been facing various external economic shocks and macroeconomic challenges, including foreign exchange reserve volatility, rising cost of doing business, declining trade and investment, and persistent double-digit inflation. These have emerged as key economic challenges, hindering the country’s desired economic prosperity. The recently announced MPS for H2 of FY2025 has kept the policy rate unchanged, including the repo rate at 10% and the Standing Deposit Facility (SDF) at 7%. Keeping these rates unchanged, the central bank sought to curb inflation and stabilize the money supply. However, despite multiple policy rate adjustments, inflation has remained in double digits over the past year. Given the scenario, achieving the single digit inflation target of 9% in MPS remains highly challenging. Tight monetary policy strategies theoretically help to ease inflationary pressure by reducing the money supply and discouraging excessive spending, contributing to price stability. However, inflation has averaged 11%, the highest in the last decade, indicating an alarming economic condition. Even though quantitative easing through broad money rate reduction has failed to contract inflation effectively. Inflation has not only eroded living standards but also escalated the cost of doing business, causing widespread economic repercussions. As a result, Bangladesh is experiencing severe economic stress during this transitional period.
The MPS for H1 of FY2025 set new credit growth targets for both the public and private sectors. The public sector credit target significantly reduced to 14.2% down from 27.8%, yet actual borrowing reached 18%. Conversely, private sector credit growth fell short of projections, with a recorded rate of 7.3% against a target of 9.8% for both H1 and H2 of 2025. The overall macroeconomic setback has diminished confidence among both local and foreign investors, as reflected in weaker credit scores. GDP growth in the first quarter of 2025 was alarmingly low at 1.81%, the lowest since the COVID-19 pandemic. This suggests that private sector investment may fall further below the target, crippling the private sector-led economic growth in 2025. Furthermore, the previous MPS introduced a market-driven reference lending rate replacing the previous lending rate cap, but this shift has not significantly improved the lending climate.
To ensure a more effective and pragmatic monetary environment, a well-managed fiscal policy is essential. The excessive national budget deficit may surpass the public sector borrowing target. Alongside, stable exchange rate is vital tool for maintaining a favorable business climate, fostering trade, and ensuring economic competitiveness.
Imports have remained moderately low due to weak foreign reserves and the continuous depreciation of the BDT against the USD. This trend has also negatively impacted export growth and related local industries, as reflected in the recent Quantum Index of Industrial Production in the last quarter of 2024. Maintaining a stable foreign exchange rate and reserve has gained importance in our current context. As part of this strategy, the MPS has adopted a crawling peg system. However, historical evidence shows that crawling peg system has failed in Bangladesh and in other countries where it has been implemented.
Currently, there are multiple exchange rates, including interbank exchange rate and separate transaction rates for import, export and remittance. The different approaches have hurt the foreign exchange reserve. The establishment of a policy interest rate corridor and the adoption of a revised approach have not stabilized the foreign exchange rate. The market-based exchange rate system may not be successful as long as disparities exist between the curb market rate and the central bank-determined interbank exchange rate. Ensuring a stable foreign reserve is crucial for guiding economic policies, including foreign trade and industrial operations. Moreover, the Net Foreign Assets (NFA) projection of 7.7% and the Domestic asset projection of 8.5% for FY2025 indicate slow asset formulation and reduced foreign investment. Amid this economic uncertainty, S&P and Moody’s have rated Bangladesh’s credit ranking at B+ long-term, which may not be sufficient to attract higher levels of foreign investment.
The strategies outlined in the MPS primarily focused on containing inflation through a combination of tight monetary policy, careful management of credit growth, and exchange rate stabilization. By maintaining high interest rates and reducing public sector borrowing, the central bank aims to limit the money supply and demand-pull inflation. However, this conventional strategy has not yielded the expected results in previous MPS implementations.
The liquidity crisis has been becoming increasingly evident in recent months, as several banks have undergone board restructuring and have been declared dysfunctional. Governance in the banking sector remain prevalent, and compliance with BASEL III standards is largely absent. Given the current economic vulnerabilities and challenges, Bangladesh Bank may need to adopt a more flexible monetary policy, adjusting policy interest rates and closely monitoring their impact on inflation and economic growth.
Despite the challenging economic landscape, the large deficit in the balance of payments marked a significant narrowed, appearing to be a positive development in July–December FY2025. However, this reduction occurred primarily due to a lower import activity—at the expense of the local economy and severe price shocks
The MPS for H2 of FY2025 should have prioritized reducing public sector borrowing in alignment with ideal fiscal planning. Given the prevailing liquidity constraints, currency printing, higher bank lending through savings certificates, T-bills, and bonds have weakened the government’s fiscal strength, increasing the indirect fiscal burden. Since the liquidity is gradually improving, T bill and bond rates may be adjusted downward. The current economic situation may necessitate greater austerity, rationalization of public sector projects, reduction in operational expenditures, and other administrative cost-control measures. Strong coordination between fiscal and monetary policies is essential to streamline the financial sector. Improved risk management practice and oversight are needed. Bangladesh Bank can provide re/pre-financing schemes to key sectors like manufacturing, agriculture and CMSMEs through tailored credit facilities with higher moratorium to stimulate local economic activities.
We believe that merely announcing the MPS and its circulation is insufficient; instead, regular monitoring of market factors, monthly market guidance, and oversight of financing trends are necessary. In the USA, the Federal Reserve System has a Federal Open Market Committee (FOMC) which regularly follows the lending and credit management trend and guides to achieve the objectives of MPS. Similarly, improving foreign reserve and stabilizing exchange rates can help mitigate cost-push inflation by controlling import costs.
In addition, effective solutions are needed to cut the non-food inflation factors and items. Usually, the non-food inflation becomes higher than food but this has become the opposite since the last year. The MPS should clarify whether Bangladesh’s banking sector and fiscal policies will continue following IMF guidance, particularly in areas such as liquidity governance, capital adequacy, loan classification, and tax-to-GDP ratio improvements, as there are various repercussions of these measures. Lessons from central banks in England, Japan and Canada to monitor money flow in the economy can be enforced through frequent meetings and market trend assessments. Moreover, the central bank’s proactive measures, such as the Prompt Corrective Action framework for weak banks to reduce NPL have not worked. However, a prudent and flexible monetary policy, combined with structural reforms, rigorous market monitoring, and strong fiscal-monetary coordination, may help reduce NPLs and usher in a new era of banking sector stability. Thus, establishing a resilient and enabling financial sector is essential for Bangladesh’s much-needed economic transformation in the coming years.
