Tight money, weak taka, soft loans: Is BB sending conflicting signals?

Highlights:

• BB battling inflation, reserve rebuilding, exchange-rate stability, weak businesses, and record-low private-sector credit growth
• Economists warn some recent policy moves may be working against each other and sending mixed signals to markets
• Inflation remains high, while businesses struggle with weak demand and expensive borrowing
• Experts say BB is now managing difficult trade-offs rather than a simple economic crisis

The Bangladesh Bank is fighting several battles at once. These include containing inflation, rebuilding reserves, stabilising the exchange rate, supporting distressed businesses, and reviving the historical low private-sector credit.

But economists warn that some of the regulator's recent policy moves may be pulling in opposite directions, raising concerns over whether the central bank is sending mixed signals to markets already struggling with uncertainty.

The concern comes at a delicate moment for the economy. The country's external sector has improved significantly compared to the acute reserve stress seen over the past three years. Remittance inflow has strengthened, import pressure has eased somewhat, and the exchange rate has become relatively stable.

Yet, inflation remains stubbornly high, businesses continue to struggle with weak demand and high borrowing costs, while private-sector credit growth has fallen to a historic low of around 4.7%.

Against this backdrop, the Bangladesh Bank appears to be trying to carefully balance multiple and sometimes conflicting objectives: keeping the dollar market stable without fuelling inflation, supporting businesses without weakening banking discipline, and tightening monetary policy while also encouraging lending to the productive sector.

Experts say the challenge is no longer simply managing a crisis. It is now about managing difficult trade-offs.

Why Bangladesh Bank is buying dollars

One of the recent policy moves drawing attention is the Bangladesh Bank's dollar purchase from the market.

Traditionally, when a central bank buys dollars, it injects local currency into the banking system because it pays taka in exchange for foreign currency. That increases liquidity and, under normal circumstances, can add inflationary pressure.

But economists say Bangladesh Bank's current interventions are driven largely by external-sector considerations.

Dr Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), said the central bank is probably trying to build a stronger reserve position and prevent excessive volatility in the exchange rate.

Muhammad A (Rumee) Ali, former deputy governor of Bangladesh Bank and the chairman of the Commission on Banking at the International Chamber of Commerce Bangladesh, offered a similar assessment.

According to him, a large inflow of remittances ahead of Eid could put downward pressure on the dollar exchange rate. If the taka strengthens too quickly, remitters may again shift towards informal channels offering higher returns.

"It is primarily to manage our external sector, which has been a great stabilising factor, that the regulator is taking these steps," he said.

Dr Mustafa K Mujeri, former chief economist of Bangladesh Bank, also said the dollar purchases are aimed at maintaining exchange-rate stability while simultaneously increasing banking-sector liquidity.

However, all three also pointed to the risks associated with such interventions.

The inflation dilemma

The core challenge lies in the relationship between reserve accumulation and inflation control.

When the Bangladesh Bank buys dollars from commercial banks, more taka enter the financial system.

To prevent that additional liquidity from worsening inflation, economists say the central bank needs to sterilise the intervention by absorbing excess money through instruments such as government securities.

Fahmida Khatun warned that unless the intervention is fully sterilised, the resulting liquidity expansion could undermine the central bank's anti-inflation stance.

She also cautioned against allowing the taka to weaken excessively to support exporters and remitters. "A weak taka may help exporters. But Bangladesh is also an importing country," she noted.

Bangladesh imports fuel, food, fertiliser, industrial raw materials and machinery. A weaker currency increases import costs, which eventually feed into consumer prices and production costs.

"In Bangladesh, that means ordinary households pay through inflation, while businesses pay through squeezed margins and reduced competitiveness," Fahmida said.

Her comments reflect a broader concern among economists that Bangladesh's exchange-rate management strategy may be creating another inflationary channel in an economy already struggling with elevated prices.

Soft loans versus banking discipline

Another major concern relates to the Bangladesh Bank's willingness to consider relaxed loan rescheduling facilities for distressed businesses.

Businesses facing high borrowing costs, weak demand, and foreign exchange stress have increasingly sought repayment flexibility.

But economists argue that repeated rescheduling has gradually evolved into a culture of regulatory forbearance that weakens financial discipline.

Fahmida said the central bank should carefully scrutinise such demands because the banking sector is already burdened with high non-performing loans – over 30%.

Rumee Ali questioned whether proper assessments had been made to determine whether the companies seeking rescheduling are fundamentally viable.

"Loan rescheduling simply delays repayment," he said, adding that in many cases, businesses may actually require fresh capital, restructuring, mergers, or liquidation rather than repeated debt rollovers.

According to him, repeated rescheduling risks prolonging structural weaknesses instead of resolving them.

He also raised a broader policy question: how many rescheduled loans over the past five years have genuinely returned to normal operations?

Mujeri echoed similar concerns, calling repeated rescheduling a "bad culture".

"This must not repeat. The regulator has to be strong," he said.

The convergence of views from the two economists and a former deputy governor of the central bank suggests a growing concern that the Bangladesh Bank may be trying to provide short-term relief at the cost of long-term discipline.

Credit growth collapse raises new worries

At the same time, the Bangladesh Bank faces another problem: the collapse in private-sector credit growth.

Despite the central bank's efforts to stabilise the economy, lending to businesses has slowed sharply.

Rumee Ali pointed to a structural shift inside the banking system itself.

According to him, banks are increasingly moving away from lending to the real economy and instead investing heavily in treasury bills and bonds, where returns are high and risks are relatively lower.

"They are generating high revenue streams through trading and the yield on these government papers," he said.

This raises a difficult policy dilemma.

High interest rates and attractive government securities may help contain inflation and finance fiscal needs, but they can also discourage banks from extending credit to businesses, particularly small and medium enterprises.

As a result, productive sectors may face financing shortages even when liquidity exists in the banking system.

Rumee suggested that the Bangladesh Bank considered targeted refinance schemes with lower effective interest rates for employment-generating and productive sectors.

His remarks indicate a broader concern that the current monetary stance may be unintentionally crowding out the real economy.

The bigger challenge: policy coherence

Taken together, the experts' observations point to a deeper issue: policy coherence.

Bangladesh Bank is trying to achieve several objectives simultaneously: keeping inflation under control, stabilising the exchange rate, rebuilding reserves, supporting struggling businesses, and reviving credit growth.

But some of these goals naturally conflict with one another.

A weaker taka may support exports and remittances, but it also raises inflation. Dollar purchases may strengthen reserves, but they inject liquidity into the economy.

Soft loan rescheduling may help distressed firms survive temporarily, but repeated regulatory flexibility can weaken banking discipline and encourage moral hazard.

Higher interest rates may reduce inflation, but they can also suppress investment and private-sector borrowing.

This is why economists increasingly worry about mixed signals.

Fahmida Khatun said the Bangladesh Bank must ensure its policies remain coherent and do not confuse markets.

Rumee Ali described the overall relationship between interest rates, inflation and monetary policy as "confusing".

Mujeri, meanwhile, stressed that restoring discipline will ultimately require accountability for those involved in banking-sector irregularities.

Without that, experts say, policy adjustments alone may not be enough to restore confidence.