A temporary increase in private-sector credit growth could help revive the country's economic activity without significantly fuelling inflation or pushing up interest rates, according to a new Bangladesh Bank analysis.
The findings come as the central bank prepares to roll out a Tk 600-billion-credit stimulus package to support economic recovery and employment.
The analysis, titled "Macroeconomic Implications of Credit Stimulus Packages: A Narrative Sign Restriction Approach", examines how the additional credit could impact output, inflation, money-market rates, lending rates and private-sector credit growth.
The study has been prepared by Dr Saidul Islam, Joint Director of the Chief Economist's Unit at Bangladesh Bank, with comments from Dr Salim Al Mamun, Director of Research.
The analysis comes against the backdrop of weakening private-sector credit growth and slowing economic expansion.
Private-sector credit flows have declined over the past four fiscal years, coinciding with a slowdown in GDP growth, the paper reads.
"Central banks should determine whether declining credit flows to the private sector result from weak demand or from banks' balance-sheet constraints," the study report says.
"If demand is weak, supporting the real economy should be prioritised; if supply is constrained, strengthening the banking sector is appropriate."
The author argues that the relationship between credit conditions and economic activity has become increasingly important in Bangladesh as private-sector lending has weakened.
Against this backdrop, the study seeks to identify credit-supply shocks and measure their effects on economic fluctuations and credit growth.
The analysis uses a structural vector autoregression (SVAR) model estimated using a Bayesian approach, covering quarterly data from the third quarter of 2016 to the fourth quarter of 2025.
The model tracks five variables: output growth, inflation, the money-market rate, the lending rate and private-sector credit growth.
To assess the likely impact of the government stimulus package, the researcher constructed a conditional forecast based on a credit-growth path consistent with the announced Tk 600-billion package.
The amount is equivalent to around 3.15 per cent of outstanding private-sector credits, according to the analysis.
The exercise is intended to illustrate how a temporary acceleration in credit growth would be transmitted through the wider economy, rather than to provide an unconditional forecast of future economic performance.
"Output growth remains above the baseline path for most forecast horizons," the analysis says, suggesting that the additional flow of credit could support economic activity throughout the forecast period.
The inflation response, however, is limited.
The projected inflation path remains broadly unchanged from the baseline, indicating that the assumed credit expansion does not generate a significant additional inflationary impulse in the model.
The same applies to interest rates. Both the money-market rate and the lending rate show only limited deviations from their baseline paths.
The findings provide some support for using credit policy as a short-term tool to cushion weak economic activity, while also highlighting the importance of identifying the underlying causes of sluggish lending.
If businesses are reluctant to borrow because of weak investment demand, simply increasing the supply of credits may have only a limited impact.
