Upcoming Reforms for Financial Discipline and MPS H1FY26

Bangladesh Bank (BB) organized a consultation meeting on Monetary Policy Statement (MPS) H1FY26 recently unveiled several elements of policy measures for the upcoming MPS. The discussion upstretched several concerns about the high policy rate for long, squeezed the credit facilities for the private sector, especially for CMSMEs, high Non-Performing Loans (NPL), sluggish investment, new investment is in wait and see while existing investment is in dilemma.

BB has opted for several policy options for stable management in lieu of hyperactive management to control inflation and allow absorption of shock. The difference between the policy rate and inflation rate becomes 3%, further reduction of inflation is expected, will facilitate the policy rate to be reduced. The expectation is that the policy rate will be reduced by December 2025 depending on inflation as per BB.

The target of private sector credit growth is 11% as per recently announced Budget. Interest rates are a major stress factor along with the exchange rate caused high shock for the customers. Private sector is in view of lowering the policy rate to increase the CAPEX investment and expedite private sector growth.

Huge presence NPL of Tk. 4,20,000 crore in the banking sector is one of the worries, Sonali Bank has an NPL of 19%, however the growth of NPL has been modest in the past ten months which is a good sign. Containing inflation may complicate the NPL management as regarded by the meeting. It is needed to assess what share of the additional NPL has followed better accounting standards and what share of NPL is the result of depressed economic climate. This decomposition needs to be included in the MPS to see the actual scenario.

Private sector credit growth has been slowed down. In terms of fiscal operation, the government borrowed mostly from scheduled bank (Tk. 1,40,000 crore). For FY26 budget, Tk 1,04,000 crore has been projected to be borrowed from banks, which of course depends on revenue collection. Revenue shortfall might be Tk. 70,000 to Tk. 80,000 crore in the 2024-25 fiscal, if it continues in the coming fiscal, then pressure will be created upon the government’s borrowings. Bank currently are more interested in treasury bond investment because of lending risk. Bangladesh Bank needs to consider these sensitivities in order to assess the impact on real economy. Government procurement prices have also become higher, stirring intensifying needs for money.

BB is trying to contain inflation, which is currently 8.48% from 11.66% in July 2024, projected to reduce it to 6.5 % by June 2026. The wage rate is still below inflation, which is a solemn anxiety for the economy with the increasing presence of unemployment. There is an improvement in food inflation from around 10% to 7.39%. But non-food inflation has increased, which is a barrier towards further reduction in inflation.

The interest rate is higher, especially for the CMSMEs. Policy innovation such as credit risk pricing, and revising indicators in constant optimization need to be expedited. BB has circulated a new CMSME master circular on March 19, 2025 where informal industries have been included. In the circular, the credit ceiling has been increased more for service and trading sector than that of manufacturing sector. This issue can be revisited as interest rate is high and adequate support to the manufacturing sector can be addressed. EDF funds have decreased recently. An alternative to EDF named Export Facilitation Pre-Financing Scheme was introduced, which was not highly availed or adored by the exporters.

BB has taken a number of policies for economic stabilization. As per them, debt sustainability is the issue to look at each time. But the main concern is not the debt, it is the revenue generation. Good governance and capacity development are the key matters. Despite the increase of debt of $5 billion, it can be manageable. But needs to be careful in future to pile more debt burden. Return on investment in terms of projects needs to be properly calculated and politically motivated decision has to be avoided.

Availability of foreign exchange in the open trade regime is a good sign to ensure stability. Without exchange rate stability, there will be no control in inflation. Our agriculture and energy policies are still intact. Petroleum and gas prices hiked because of disruption and other factors.

BB has taken the initiative to purchase $486 million (Tk. 6,000 crore) through two auctions in the last two days for improving BoP position. Liquidity is needed in the capital market which is coming back to the economy. The capital market is expected to change in a positive direction depending on the overall macroeconomic situation.

In response to point raised on EDF, BB response was because of the reserve situation, the Export Development Fund (EDF) amount has been reduced. The loss of reserve situation was also a headache of IMF. BB has assured IMF that reserve will not deplete further. EDF will not be reduced further as it is the best use for getting the highest return on reserve. As soon as reserves cross 6 months of import coverage, EDF amount, and disbursement will increase. A negotiation is going on with MIGA to provide guarantee on EDF and export financing. Rate may be a little bit higher. BB will go for it if it is commercially viable.

In order for bringing discipline into the banking environment, BB has conducted asset quality review of six banks. Three bigger banks have been finalized for the merger process. Eight more banks have been identified as vulnerable banks. A comprehensive asset quality review will facilitate the identification of actual problems. Tightening the loan classification has revealed the actual NPL. A risk-based system of supervision has been introduced to bring change in quality. Boards of 14 banks have already been changed. A continuous monitoring system has been implemented to hold the boards accountable.

Six fundamental laws of banks are being drafted. The Bank Resolution Ordinance already announced will facilitate the merger of weak banks. BB has established a Bank Resolution Department already. There will be more phases of merger if needed including focus on the governance issue. To emphasize financial inclusion, BB will introduce an interoperability system. More technological adaptation will be ensured by the BB in future, in view of that more MFS will be introduced to promote all channels for reaching out and making the economy cashless. About Tk. 20,000 crore is spent every year just to manage cash. It is a big cost for BB and commercial banks. Technological adaptation is the key towards financial inclusion. An initiative to implement a single national QR code is going on. All trade licenses will have mandatory QR code to display to facilitate cashless transaction could be a great option for business policy simplification.

BB is also giving more licenses to bigger MFS operators (currently 27 MFS operators). Digital banking licenses will be reopened. Use of credit cards and debit cards needs to be encouraged. Bangladesh is lowest in South Asia in terms of card usage. Google Pay has already been launched. Banks need to focus on giving more usable card limits and increasing card users.

In order to ensure independence and autonomy of the central bank for financial sector integrity, a landmark step toward central bank independence, present government has drafted the 'Bangladesh Bank Order, 2025', aiming to elevate the central bank to the status of a constitutional body. Currently, the central bank operates as a 'body corporate' under the Bangladesh Bank Order, 1972, and is meant to be autonomous. The reform initiative for bringing discipline in the banking sector is convincing.

The economy was showing some improvement, such as remittance and reserve growth, however, import performance is a big factor in the economy. Capital machinery imports have declined. US tariff shock has created uncertainty worldwide. Investment in Bangladesh is expected to slow down. Variable tariffs for different categories of imports for different countries are unprecedented in this new world. There is hope for adjustment of 35% tariff through negotiation which is still uncertain.

There is possibility of political and economic instability in the next six months. More attention should be given to these issues. Coordination in market and supply chain management needs to be prioritized regarding food inflation control given that the market demand will not increase in the next six months. Energy and non-energy prices have also been started to come down aligning with global price level. Exchange rate stabilization issue has been addressed as per BB.

It is needed to carefully monitor whether factoring is conducted adequately on the country’s debt servicing. The calculation of debt servicing is based on the previous date’s price which leads to a deflated figure in the next debt incurring value. The capacity of foreign debt servicing capacity needs to be monitored properly. Interest is considered in the budget expenditure for domestic and foreign loan’s payment issues, while principal is not considered. Recalculation and reformation are needed to see the real debt burden. So, money supply, demand, and pressure on foreign exchange can be calculated in a more transparent way by the BB.

Economy has got both positive and negative elements, upcoming MPS has to be framed in a much more calculative manner to address upcoming challenges of which export income, revenue generation might encounter hitches because of global and geo-political evolving environment.

Ferdous Ara Begum: Economist and CEO, Business Initiative Leading Development (BUILD)