Bangladesh Warned Over Monetary Financing Risks

Bangladesh’s central bank is increasingly resorting to money creation to finance government borrowing, a practice that economists have warned could further fuel inflation and deepen macroeconomic vulnerabilities.

At a seminar held on Thursday at the Policy Research Institute (PRI) office in Banani, Dhaka, experts cautioned that fiscal and monetary imbalances are intensifying amid weakening economic fundamentals. The discussion focused on recent macroeconomic trends for February and March, under the theme: “A Changing Global Landscape for Trade and Growth.”

Central Bank Financing Raises Alarm

PRI Chief Economist Dr Ashikur Rahman stated that in March alone the government borrowed around Tk 20,000 crore from Bangladesh Bank. He described this as “high-powered money”, effectively money creation, which could exacerbate inflationary pressures already burdening the economy.

He noted that limited domestic revenue capacity has forced the government to rely heavily on short- and medium-term commercial bank borrowing, alongside growing dependence on central bank financing.

Weak Recovery and Structural Fragility

According to Dr Rahman, Bangladesh’s economy has undergone a fragile recovery over the past 18 months, but this rebound rests on weak structural foundations. GDP growth in the second quarter of the current fiscal year fell to just 3 per cent, the lowest level since the COVID-19 period.

He further highlighted distress in the financial sector, with non-performing loans rising to around 30 per cent. As a result, private sector credit growth has slowed significantly to about 6 per cent, indicating subdued investment momentum.

Key Macroeconomic Indicators

External Pressures Intensify Risks

Dr Rahman warned that the fragile macroeconomic situation is being compounded by three external shocks: ongoing geopolitical tensions in the Middle East, Bangladesh’s impending graduation from Least Developed Country (LDC) status, and uncertainty surrounding US tariff policies.

These factors are contributing to higher energy prices, supply chain disruptions, and weakening trade flows. Combined with declining exports and rising import costs, they are creating growing imbalances in the external sector.

Inflation Concerns and Investment Hesitation

ICC Bangladesh President Mahbubur Rahman stressed that inflation has remained persistently high for an unusually long period. He cautioned that increased money printing and politically driven spending pressures could further accelerate price instability.

He also highlighted persistent investor uncertainty, particularly regarding access to gas and electricity. “If local investors remain hesitant, foreign investment will not materialise either,” he said, urging coordinated action between government and the private sector.

Calls for Deep Structural Reform

PRI Chairman Zaidi Sattar warned that global instability, particularly tensions in the Middle East and disruptions around the Strait of Hormuz, is having far-reaching implications for global trade and production. Bangladesh, he noted, cannot remain insulated from these shocks.

He argued that rising energy costs will continue to exert inflationary pressure and that only deep structural reforms—comparable in scale to those undertaken in 1991—could restore sustainable growth.

Australian Deputy Head of Mission Clinton Pobke added that emerging economies like Bangladesh must take difficult policy decisions to maintain long-term stability and growth.

Meanwhile, former National Board of Revenue Chairman Dr Muhammad Abdul Mazid described many of the current economic challenges as “self-inflicted”, calling for bold, domestically driven reforms. Meghna Group Director Tahmina Mustafa emphasised the potential of export diversification, particularly in the shipbuilding sector, provided appropriate financing and policy support are ensured.

The seminar concluded with a shared consensus: without urgent fiscal discipline and structural reform, Bangladesh’s fragile recovery could face further headwinds in an increasingly uncertain global economy.