Walking the tightrope: Bangladesh’s Tk40,000 crore industrial revival in a world of supply shocks

Bangladesh Bank is preparing to inject Tk40,000 crore into the economy to revive more than 1,200 closed factories. Much of the attention will focus on jobs and exports. But the more important story may be what this signals at a time when the global economy is becoming increasingly fragile.

The structure of the scheme is relatively straightforward. Bangladesh Bank will lend to commercial banks at around 5–6%, and those banks will lend to factory owners at roughly 8–9% through working capital loans with tenures of 12 to 18 months. Half of the funds will go to large industries, while SMEs and agriculture will each receive one-quarter.

The first point to understand is that this marks a deliberate shift away from the tight monetary stance maintained over the past two years. That policy was necessary to control inflation, but it also began constraining productive activity to a degree that justified intervention.

The timing is significant. The BNP government appears to be positioning Bangladesh for greater monetary flexibility ahead of what increasingly looks like a prolonged global oil supply shock.

The second issue is the multiplier effect. Every loan becomes a deposit elsewhere in the banking system, meaning the original Tk40,000 crore could potentially generate Tk1.5–2 lakh crore in total credit creation over 18 months.

In a country with limited investment alternatives beyond real estate, fixed income instruments, gold and equities, part of that liquidity is likely to flow into asset markets. That is why stock market participants are paying attention even before the formal circular is issued.

However, the inflationary risk is substantial.

Injecting liquidity on this scale into a banking system already facing inflationary pressure will likely push prices higher in the second half of 2026. Bangladesh Bank itself has acknowledged this trade-off.

Every loan becomes a deposit elsewhere in the banking system, meaning the original Tk40,000 crore could potentially generate Tk1.5–2 lakh crore in total credit creation over 18 months. In a country with limited investment alternatives beyond real estate, fixed income instruments, gold and equities, part of that liquidity is likely to flow into asset markets.

The external environment has made the risks even more complicated. Chevron CEO Mike Wirth recently warned at the Milken Institute that physical oil shortages are beginning to emerge globally. Buffers that have long cushioned disruptions around the Strait of Hormuz are now shrinking.

For Bangladesh, this raises the prospect of imported energy inflation on top of domestic monetary expansion.

The central question is whether productive output can grow quickly enough to absorb both the additional money supply and an external supply shock.

For banks, the short-term outlook is positive, though medium-term risks remain. Strong banks are expected to earn margins of around three percentage points on the funds they channel, improving net interest income.

The scheme's eligibility criteria, including requirements related to confirmed orders and clear market demand, suggest a more disciplined approach than the stimulus packages introduced during 2020. But improved design alone does not eliminate asset quality risks.

If oil prices remain elevated through 2026 and Asian economies slow as Wirth predicts, export demand itself could weaken, undermining the assumptions behind borrower selection.

For stock market investors, the picture is more nuanced than it appeared even a week ago.

The banking sector is still likely to benefit from expanding loan books and potentially stronger dividends among well-managed banks. But expectations of a broader market rally are now tied more closely to global developments.

Pakistan's KSE-100 index rallied 372% in 18 months once liquidity conditions aligned with broader catalysts. Bangladesh shares some of the same structural conditions: a relatively shallow market, limited investment alternatives and the prospect of significant liquidity injection.

But whether a similar rally materialises will depend heavily on how long global oil market disruptions persist.

The IMF dimension also becomes increasingly important in this context.

The IMF's conditionality framework places limits on monetary financing, and the government will likely argue that the scheme strengthens productive capacity rather than simply increasing liquidity.

Sajid Amit. Sketch: TBS

If oil prices remain high and foreign exchange reserves come under pressure, IMF leverage over policy decisions could increase precisely when Bangladesh seeks greater policy autonomy.

This creates a clear tension between domestic economic priorities and external financial constraints.

Ultimately, this has become a much higher-stakes policy move than initially anticipated.

The government is accepting near-term inflation risks, medium-term banking sector risks and the possibility of worsening global conditions in exchange for industrial revival, employment generation and recovery in private-sector credit growth.

Whether the policy succeeds will depend on three factors: the quality of due diligence by lending banks, the discipline of Bangladesh Bank in unwinding the scheme when necessary, and external developments, particularly the trajectory of global oil markets and the Strait of Hormuz situation.

Even so, the overall direction of the policy appears reasonable given Bangladesh's current economic conditions.

The programme includes more safeguards than many critics acknowledge. But the margin for error has narrowed considerably amid growing concerns over global energy supply disruptions.

The execution challenge is substantial, and the coming months will test whether Bangladesh has the institutional capacity to manage domestic monetary expansion during a period of external supply shocks.

Sajid Amit is a leading development practitioner, academic, investor, and researcher trained at Morgan Stanley, Columbia University, and Dartmouth College.

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.