Policy Contradictions: The Central Bank’s Multi-Front Battle

The Bangladesh Bank (BB) is currently engaged in a highly complex, multi-front economic management campaign. The monetary authority is attempting to simultaneously execute several critical mandates: subduing stubborn domestic inflation, rebuilding depleted foreign exchange reserves, maintaining exchange rate stability, offering financial cushions to distressed businesses, and reversing a historic contraction in private-sector credit growth.

However, prominent economists and financial analysts warn that these policy actions are moving in structurally opposing directions. This lack of alignment has raised serious concerns that the regulator is broadcasting contradictory signals to a market already struggling with deep macroeconomic uncertainty.

Macroeconomic Performance and Structural Dilemmas

This policy gridlock arrives at a delicate juncture for the national economy. Bangladesh’s external sector has registered measurable improvements compared to the acute balance-of-payments crisis of the preceding three years—supported by resilient remittance inflows, a moderate reduction in import demand, and a temporarily anchored exchange rate.

Despite these external gains, the domestic economy remains constrained by high consumer prices and an absolute freeze in business lending. The core statistical indicators defining this economic environment are detailed in the table below:

Liquidity Paradox of Foreign Exchange Purchases

A primary point of discussion among economists is the central bank’s recent policy of buying United States dollars directly from the commercial banking market. Under standard monetary rules, when a central bank purchases foreign currency, it injects a corresponding volume of local currency (the taka) into the financial system. This expansion of the monetary base increases net liquidity and, under normal conditions, fuels inflationary pressures.

Dr Fahmida Khatun, Executive Director of the Centre for Policy Dialogue (CPD), explained that these market interventions are driven by external-sector anxieties. The central bank is primarily attempting to fortify its official foreign exchange reserve position while suppressing sharp volatility in the exchange rate.

Muhammad A. (Rumee) Ali, former Deputy Governor of the Bangladesh Bank and current Chairman of the Commission on Banking at the International Chamber of Commerce Bangladesh, provided a similar assessment. He noted that large remittance inflows ahead of major festivals like Eid typically place strong downward pressure on the dollar exchange rate. If the taka appreciates too rapidly, migrant workers often bypass official banking channels in favour of informal hundi networks that offer higher premium returns. Consequently, the regulator is choosing to artificially support the dollar to protect official remittance channels.

Dr Mustafa K. Mujeri, former Chief Economist of the Bangladesh Bank, agreed that these dollar purchases aim to secure exchange-rate stability while simultaneously supplying liquidity to commercial banks. However, all three experts warned of the underlying risks, noting that unless the central bank fully sterilises these interventions—by absorbing the injected taka back through government securities—the resulting liquidity expansion will directly undermine its official anti-inflationary stance.

Imported Inflation and Currency Weakness

Dr Khatun also cautioned against allowing the national currency to weaken excessively to support exporters and remitters. Because Bangladesh is structurally dependent on imported fuel, food, fertiliser, industrial raw materials, and machinery, a weaker taka drives up landing costs. This cost-push inflation is ultimately passed down to ordinary households via higher consumer prices, and to businesses through squeezed corporate margins and reduced global competitiveness. This strategy effectively creates a domestic inflationary channel that complicates the central bank’s inflation-control mandate.

Regulatory Forbearance versus Financial Discipline

Another major policy contradiction is the central bank’s willingness to grant relaxed loan rescheduling facilities to distressed corporate borrowers. Faced with high interest rates, weak consumer demand, and foreign exchange constraints, businesses have intensified their demands for repayment flexibility.

However, macroeconomists argue that repeated debt restructuring has institutionalised a culture of regulatory forbearance that degrades basic financial discipline. Dr Khatun emphasised that the central bank must rigorously evaluate these rescheduling requests, particularly since non-performing loans (NPLs) now exceed 30 per cent of the banking sector’s total portfolio.

Rumee Ali questioned whether proper asset quality reviews had been conducted to determine if the companies seeking debt relief are fundamentally viable. He observed:

“Loan rescheduling simply delays repayment. In many cases, these businesses do not require repeated debt rollovers; they actually require fresh equity capital, operational restructuring, mergers, or formal liquidation.”

He warned that repeated rescheduling prolongs structural insolvency instead of resolving it, raising the broader question of how many rescheduled loans over the past five years have successfully returned to normal, profitable operations. Dr Mujeri echoed these sentiments, calling the continuous relaxation of loan classification terms a “bad culture” that must be halted through uncompromising regulatory enforcement.

The Real Economy and Credit Displacement

The near-total collapse of private-sector credit growth has introduced further complications. Despite institutional efforts to stabilise the economy, lending to private enterprises has decelerated sharply to an annualized rate of 4.7 per cent.

Rumee Ali pointed to a major structural shift within the commercial banking ecosystem to explain this credit freeze. He observed that commercial banks are actively moving away from lending to the real economy, choosing instead to deploy their investable funds into government treasury bills and sovereign bonds. Because the government’s fiscal deficit has driven yields on public securities to highly attractive levels, banks can generate secure, risk-free revenue streams through sovereign debt trading, completely bypassing the credit risks inherent in private enterprise lending.

This creates a serious policy dilemma. While high policy rates and elevated government bond yields are necessary to combat inflation and fund the state’s fiscal needs, they effectively crowd out the private sector—particularly small and medium enterprises (SMEs). As a result, productive industrial sectors face severe financing shortages even when surplus liquidity exists within the banking system. To counter this, Ali suggested that the Bangladesh Bank introduce targeted, ring-fenced refinancing schemes with concessionary interest rates specifically earmarked for employment-generating, high-productivity sectors.

The Critical Need for Policy Coherence

The collective observations of these financial experts point to a fundamental lack of policy coherence. The Bangladesh Bank is attempting to hit multiple, mutually exclusive targets at once:

• Subduing inflation via high interest rates while trying to rejuvenate credit growth.

• Rebuilding foreign reserves through dollar purchases while trying to prevent local currency expansion.

• Extending short-term credit relief to businesses while attempting to lower an NPL ratio exceeding 30 per cent.

When an institution executes expansionary actions (buying dollars and loosening loan classifications) alongside contractionary policies (maintaining high policy rates), the market is left with highly ambiguous signals. Dr Khatun concluded that the central bank must immediately harmonize its policy frameworks to eliminate market confusion, while Rumee Ali described the current relationship between domestic interest rates, inflation management, and monetary policy as fundamentally confusing. Ultimately, Dr Mujeri emphasised that correcting these distortions requires absolute accountability and legal penalties for those responsible for banking-sector irregularities, without which purely technocratic policy adjustments will fail to restore institutional confidence.