On June 30, the very day the government passed its massive expansionary budget in the National Parliament, Bangladesh Bank announced a new contractionary monetary policy. Such contradictory actions by the same government on the same day left the nation both surprised and disappointed.
The question naturally arises: Who is right -- the government or Bangladesh Bank?
In principle, the government’s fiscal policy and the central bank’s monetary policy should complement each other, working hand in hand for the welfare of the people.
Yet the nation is witnessing with astonishment that while the government has adopted an expansionary fiscal stance through a large budget, the central bank has been compelled to pursue contractionary monetary measures to rein in inflation.
What message does this send? The government’s attempt to stage a political stunt through an ambitious budget is likely to prove counterproductive.
For the past four years, Bangladesh has been grappling with persistently high inflation (about 10%). The central bank’s one and only responsibility is to curb inflation, because if inflation is not controlled, the value of the currency inevitably declines and purchasing power erodes.
To combat this, Bangladesh Bank has been following the IMF-prescribed remedy: Raising interest rates and reducing money supply in the market through contractionary monetary policy.
Higher interest rates naturally dampen demand for loans and money in the banking system, reducing liquidity in people’s hands, which in theory should slow down spending and bring inflation under control.
Yet after 16 years of mismanagement and plunder, banks already lack sufficient liquidity. Despite years of applying the IMF’s formula, inflation in Bangladesh has not come down.
According to the Bangladesh Bureau of Statistics (BBS), inflation has hovered around 9% in recent years, though private estimates put it at not less than 12%.
During the previous Awami League regime, the actual inflation rate was even higher, but BBS figures were artificially lowered by 5-7%age points.
The recently departed interim government did not interfere with BBS, so for the past two years, inflation figures have not been artificially suppressed.
Current inflation is largely cost-push rather than demand-push, with global factors -- Russia-Ukraine war, Iran-US-Israel war, and rising energy prices -- being blamed.
Economists argue that government policies themselves are also fueling inflation by raising production costs, with the latest expansionary, heavy debt-driven budget serving as a prime example.
The budget reality
This year’s budget, amounting to Tk 9.38 trillion, increased by Tk 1.5 trillion compared to the previous year and set a deficit of Tk 2.4 trillion. The government may have set an ambitious revenue target of Tk 7 trillion within a 9.38 trillion budget, but in reality tax collection is expected to fall short at around 4.5 trillion, leaving the nation facing a deficit close to Tk 5 trillion.
This will compel the government to borrow more and raise taxes. Economists fear this will further stoke inflation. Hence Bangladesh Bank has opted for contractionary monetary policy, which economists deem appropriate, while the government has taken the opposite path.
In a poor country like LDC Bangladesh, inflation should not exceed 3%-4%. Yet the new budget assumes 7.5% inflation alongside a GDP growth forecast of 6.5%. In reality, last fiscal year saw nearly 10% inflation against only 4% GDP growth.
In this context, Bangladesh Bank has marginally raised private sector credit growth to 5% this year from 4.5% last year, while public sector credit growth has been set at 13% compared to 15% in the previous year to meet the budget deficit.
At the same time, with 45% of loans classified as non-performing, the economy can no longer sustain the burden. More critically, the funds tied to these defaulted loans are not retained within the country, nor are they backed by any tangible assets; rather, they have been siphoned abroad.
As a result, the interest rate gap (spread) is widening, and general people are ultimately bearing the strain of higher borrowing costs and inflation.
Alarmingly, the gap between lending and deposit rates (spread) has expanded to 8%, whereas globally it cannot exceed 2%, thereby undermining the effectiveness of contractionary monetary policy.
Unless the interest rate gap or spread is reduced to a maximum of 2%, as practiced in advanced economies, contractionary monetary policy is bound to fail.
Although the central bank has formally approved a maximum spread of 4%, in practice it has doubled. Consequently, prospects of controlling inflation and stimulating investment appear increasingly unrealistic.
The new monetary policy kept the BB’s benchmark interest rate or policy rate unchanged at 10%, disappointing the business community.
In the current context, the central bank has adopted a strategy to sustain the fragile banking sector by increasing deposit interest rates also and providing more savings or consumer finance.
After four years of contractionary measures, inflation has not been brought under control; instead, it is now among the highest in South Asia.
Economists argue that in the current economic reality, tight monetary policy alone is insufficient. The government must also reduce fiscal spending.
Moreover, monetary control is now no longer fully in the central bank’s hands. Without government cooperation, it cannot succeed.
By inflating GDP figures, the government forces the central bank to print more money and extend loans to cover a highly deficit budget, while also borrowing heavily from commercial banks to finance its large projects -- crowding out the private sector.
This prevents healthy competition in interest rates and stifles new productive investment.
The financial sector remains in deep crisis, plagued by widespread loan defaults and structural weaknesses, yet the government has shown no clear initiative to address these issues.
For years, it has been evident that monetary policy alone cannot control inflation without broader state cooperation. Inflation is part of the overall economic management system, which also depends on taxes, supply chains, energy prices, export markets, global uncertainty, import and logistics costs -- all of which have become equally critical.
Private sector investment and economic recovery
Increasing private sector investment is essential for economic recovery. Yet, following Bangladesh’s graduation to middle-income status, the country has steadily lost its export market share, leading to stagnation in investment.
In addition, energy shortages, load-shedding, higher electricity prices, exchange rate volatility, high taxes, and elevated interest rates have created uncertainty among investors.
In the export sector, particularly in ready-made garments, the declining trend in purchase orders is alarming.
While exports were projected to surpass $100 billion by 2025, the reality is only $48bn. Between 2001 and 2012, exports accounted for 20% of GDP; today, they stand at just 10%.
Once Bangladesh fully graduates from LDC status, exports may fall to as low as 5% of GDP. Regional instability in the Middle East, declining demand in Europe, and global trade wars are exerting additional pressure on the economy.
Meanwhile, anti-competitive syndicates have grown stronger in the domestic market.
Against this backdrop, the government’s Tk 9.38 trillion budget claims to promote business expansion, investment growth, industrialization, and accelerated development. Yet monetary policy cannot align with these measures.
High inflation prevents monetary policy from reflecting a growth-oriented outlook. The government’s political stance signals a clear mismatch between fiscal and monetary policies. With high interest rates still in place, opportunities to reduce borrowing costs remain limited.
To revive business activity, the Bangladesh Bank’s announced Tk 600 billion stimulus fund has been welcomed by entrepreneurs. However, lessons from the Covid-19 era highlight the urgent need for transparent, efficient, and effective implementation of such funds.
Reviving already closed industries is necessary, but equally urgent is providing priority support to enterprises at risk of closure. Unless this stimulus reaches genuine, affected entrepreneurs quickly and effectively, it may backfire.
No matter how attractive the revenue incentives and tax structures in the budget may appear, without adequate and affordable financing, these initiatives cannot yield the desired outcomes.
Addressing current economic challenges and ensuring sustainable, private sector-driven growth requires effective coordination and policy alignment between monetary and fiscal strategies.
Monetary policy can never work in isolation; it must operate in tandem with fiscal policy, trade policy, and exchange rate policy.
Today’s inflation is driven primarily by supply shortages, corruption, and rising costs. Its connection to monetary policy is minimal. Therefore, tightening monetary policy alone will not succeed in controlling inflation if the government fails to take the right path.
Salahuddin Ahmaad Bablu is a senior journalist.
