THE economic debate is increasingly about a familiar policy question: should the country alter its monetary policy to accelerate growth? People are calling for lower interest rates and a stronger push toward growth since inflation is still hurting families and businesses seeking easier financing.
The reasoning makes sense. When the economy slows, people often urge policy-makers to lower interest rates to spur spending and investment. But for countries such as Bangladesh that are still developing, the link between interest rates and growth is more complicated than what you might read in a textbook. If monetary easing happens before inflation is under control and exchange-rate pressures are kept in check, it might not lead to higher growth. Instead, it might lead to higher inflation, unstable currencies and more serious economic problems.
Bangladesh does not have to choose between growth and stability. It has to decide which policies to implement first. Restoring macroeconomic stability, especially price stability and exchange-rate credibility, must be the country’s top priority right now. These are the conditions that enable long-term growth.
Over the past year, inflation has remained high in Bangladesh, lowering real incomes and making things difficult for both families and companies. For regular people, rising prices mean their payslips buy less and less each month. Businesses have a harder time budgeting their investments because inflation makes expenses less predictable.
In this situation, decreasing interest rates might help borrowers in the short run. But, it could also send out the wrong message to the markets. When people expect inflation to stay high, lowering interest rates too soon can make people less sure that the central bank is committed to keeping prices stable. Investors and savers react by moving their money into safer assets, such as foreign currency or real estate, which can make the macroeconomic climate even less stable.
Once people start to expect inflation, it becomes much harder and more expensive to restore stability. This is why it is important to have a credible anti-inflation policy not just for the economy, but also for long-term growth.
In Bangladesh, the exchange rate has a big effect on inflation. Because the economy relies heavily on imports, especially for energy, capital goods and intermediate inputs, changes in the taka have a direct effect on pricing in Bangladesh.
When the currency depreciates, the prices of imported fuel, fertiliser and other industrial goods rise quickly. These additional prices then ripple through the economy, raising the cost of transportation, food, and production.
If the central bank makes money too easy to get too soon, it can put too much pressure on the exchange rate, which can make inflation worse. It does not help growth; instead, it makes things less certain and makes people less likely to invest.
This is why Bangladesh’s macroeconomic strategy needs to focus on exchange-rate policy. A more open and adaptable foreign exchange system, backed by enough reserves and reliable policy signals, can assist in stabilising the currency market by keeping expectations in check and lowering volatility.
The Bangladesh Bank is being careful right now because it is aware of these hazards. Keeping a reasonably tight monetary policy when inflation stays high makes the central banks promise to keep prices stable seem more credible.
But, the credibility of a policy also depends on how well it is communicated. When interest rate signals do not get through to lending and deposit rates well, the economy pays the price for tight policy without getting the full advantage of disinflation.
So, it is very important to strengthen the monetary policy transmission mechanism. This includes improving the interest-rate corridor, reducing credit market distortions, and making financial intermediation more open.
Communication is just as crucial. Markets react not just to policy decisions but also to what people think will happen with policy in future. Clear information from the central bank on when policy will soften, such as when inflation stays low and external balances improve, can make the bank more credible and lower uncertainty.
An economy cannot be stabilised by monetary policy alone. Fiscal policy needs to work together with other policies. Bangladesh’s revenue-to-GDP ratio remains low compared with many other countries. This makes it tougher to fund development investment without putting pressure on the economy as a whole.
So, making tax administration stronger and expanding the revenue base should be important parts of economic change. Digitising tax collection, making it easy for people to follow the rules and updating VAT systems can all help the government raise more revenue while running things more smoothly.
At the same time, the government needs to spend money more effectively. Broad subsidies often strain the budget without helping the most needy people. A move toward specialized social protection programs can help reach social goals while keeping the budget in check.
The health of the financial system is another important part of macroeconomic stability. Weak banks pose a risk to financial stability and make monetary policy less effective.
For a long time, Bangladesh’s financial sector has faced high levels of non-performing loans, poor governance and inadequate regulation. When banks have a lot of bad assets, they often lend money in ways that do not make sense, giving money to borrowers who are not productive and not lending to new, active companies.
To fix these difficulties, financial institutions need better governance standards, tighter regulatory monitoring, and more reliable asset-quality assessments. In some circumstances, the banking sector may need to be restructured or recapitalized to regain public trust. One of the most important drivers of long-term growth is a solid banking system that ensures funds go into productive investments.
Bangladesh’s external position has improved, especially due to changes in its currency rate strategy and increased remittance inflows. These changes give us the chance to rebuild our foreign exchange reserves and strengthen our external buffers.
Remittances remain a major part of Bangladesh’s economy. They help millions of families and bring in a lot of foreign income. Policies that make it easier to use formal remittance channels, such as digital payment systems and low transaction costs, can further strengthen this important source of stability. Rebuilding reserves when things are relatively stable also makes you less likely to be hurt by outside events and boosts investor confidence.
Bangladesh has shown incredible strength and advancement in the past 30 years. The country has shown an incredible ability to change its economy, from cutting poverty to increasing exports.
There should not be a fight between growth and stability in the current macroeconomic debate. They cannot be separated.
For growth to be sustainable, the economy as a whole needs to be stable. This means that inflation is predictable, the currency rate is reliable, and banks are safe. When these things are in place, private investment goes up not because borrowing is cheap, but because firms believe in future.
Policy-makers in Bangladesh face tough decisions, but the path should be obvious. The country can lay the groundwork for the next stage of economic growth by focusing on keeping prices stable, improving its fiscal capacity, restructuring the banking sector, and sticking to credible exchange-rate policies.
Short-term stimulus may help for a short time, but long-term success depends on stability, trust and careful management of the economy.
M Kabir Hassan is a distinguished professor of finance at LSU-New Orleans, USA.
