Frozen credit, fading confidence: Reviving private sector in Bangladesh in uncertain times

The fact that private sector credit growth in Bangladesh is at its lowest level in 22 years isn't just a dry statistic; it shows something far deeper unravelling in the country's economic fabric. At the surface, this might seem like a predictable response to higher lending rates and political uncertainty, but taken together, these forces have created a stifling environment for business.

Entrepreneurs, wary of risk and lacking confidence in the future, are hitting pause. This is not just a question of declining access to credit - it implies a change in sentiment. When factories start shutting down, not because of demand issues but due to hesitation about tomorrow, that speaks volumes.

What complicates matters further is that this slowdown comes at a moment when the country is already under significant stress. The transition in political leadership, following a period of mass mobilisation and upheaval, has left parts of the economy in limbo. Some banks, overwhelmed by liquidity issues or shaken by changes at the top, are pulling back from lending altogether.

At the same time, others are turning toward safer bets - government securities instead of private risk. This means that the engine of job creation and business activity is not working.  And when a quarter of the banking industry stops supporting business activity, there are sure to be ripple effects, like higher unemployment and lower consumer confidence.

From this perspective, Bangladesh Bank's strategy appears to be walking a tightrope. By prioritising inflation control through higher policy rates, it hopes to stabilise the broader economy. But the unintended consequence has been a credit squeeze - one that's pushing even well-established firms into distress.

A 14–15% interest rate might help cool inflation, yes, but it also cools ambition (though the success of cooling down inflation has also remained limited). Especially in an atmosphere already tinged with political ambiguity, that's a dangerous trade-off. Businesses don't just need capital - they need clarity. Without it, no stimulus or interest cut alone will be enough to spark movement again.

To get things moving again, we need a coordinated plan that goes beyond just changing interest rates and restores people's faith in the system. First, the central bank might want to think about a more flexible interest rate policy. This would still fight inflation, but it wouldn't completely stop private investment. But trust can't be fixed by policy alone. What investors really need is political clarity and regulatory consistency.

A credible timeline for elections, assurances of institutional stability, and clear signals that the rule of law will be upheld -these can do more to unlock credit demand than any rate cut ever could. At the same time, temporary interest rate subsidies or targeted credit guarantee programs for small and medium-sized businesses could help get things going again at the grassroots level. The final message is: unless both financial and political conditions improve in tandem, private sector dynamism will remain frozen.

Dr Selim Raihan is the executive director of the South Asian Network on Economic Modelling (Sanem).

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.