Is MPS of FY2027economy-friendly?

The biannual Monetary Policy Statement (MPS) presents a forward-looking assessment of Bangladesh’s monetary conditions and macroeconomic management. Fiscal and monetary policies remain critical determinants of private sector performance, particularly for Bangladesh. The economy faces a critical juncture where the pursuit of macroeconomic stability clashes with unprecedented external economic shocks and sluggish private sector growth. Immediately after the political transition, expectations for a recovery-led turnaround grew; however, the rigid 10% policy rate and record-low private sector credit growth below 4% disappointed all key stakeholders. 

While this tight monetary stance was intended to anchor inflation amid elevated price pressure, banking sector fragility and an energy supply crunch, the reality is that a large and expansionary budget has raised concerns regarding the weak nexus between fiscal and monetary policies. Real GDP growth slowed to 3.97%, while businesses faced borrowing costs exceeding 12% alongside a growing crowding-out effect, as government borrowing from banks rose to BDT 45,239 crore. Another Tk. 60000 core aimed to supply to mitigate inflationary stress which may rather create banking sector incidence. Although the MPS targets demand-side inflation, the private sector faces cost-push pressure, as tight policy fails to address energy and utility cost while raising working capital expenses, creating a “production choke.” 

Structural vulnerabilities in Bangladesh’s financial system continue to weaken credit transmission, as persistent NPL pressures, particularly in certain banks and NBFIs distort lending, while long-term MPS reforms. The absence of targeted CMSME support risks slowing inclusive growth and employment.

The long-held demand for a policy rate cut has gone unaddressed, offering no effective relief to distressed businesses. Various local and external aspects are contracting the business growth and profit generation for a large segment of private sector, leading them to become defaulters. The MPS has set larger Net Foreign Asset (NFA) target that is slightly higher based on immediate past larger growth. Regarding private sector financing, the 6.8% target seems hard against the 21.8% public funding target, given the extreme bank borrowing by the government. This imbalance is set to intensify as fiscal revenue streams remain slim, leaving a substantial gap between revenue targets and the realization in the last fiscal year. It is worth stating that the private financing marked a slow turnaround to 5.5%.

The earlier MPS introduced several long-term structural reforms, including a flexible exchange rate regime and strengthened bank supervision. Nonetheless, tight policy and high lending rates continue to restrict credit flows. Private sector credit growth fell tothe lowest rate in two decades and below the target, signaling near stagnation in private investment. Consequently, the deviation between previous MPS targets and actual outcomes for FY26 reveals a significant gap between official projections and ground realities. High borrowing costs, conservative lending amid rising non-performing loans (NPLs), and persistent liquidity constraints jointly suppressed both credit demand and supply. The growing foreign exchange reserve is apparently inspiring but the declining import featured by lower share of industrial items and higher share of fertiliser and energy items cannot commensurate the needed economic surge. The revision of public credit to 21.8% reflects a mindset to cut public borrowing policy but the incremental government deficit budget plan creates concern, intensifying the chance of crowding-out of private investment. In contrast, public sector credit continued to expand, reaching 25.9% in the last MPS, while private credit marked very insignificant shift.

Macroeconomic outcomes also diverged noticeably from MPS targets. The FY27 GDP growth target of 6.5% is highly ambitious. Likewise, the inflation target of 7.5% seems unattainable, as inflation standsabove 8%. NPL also reached into arecord height. Persistent inflation despite a 10.0% policy rate suggests tightening has dampened growth more than prices, largely due to supply-side constraints and higher imported input costs.

11.5% larger broad money target is against the spirit of inflation control. This may improve the liquidity injection in the economy while the entire MPS upholds a contractionary context. Reserve money also recorded marginal contraction. Although Bangladesh Bank reduced the Cash Reserve Ratio (CRR), the released liquidity was largely absorbed by distressed banks burdened with NPLs, limiting positive impact on private credit. As a result, the private sector bears the brunt of contractionary policies while public sector borrowing expands.

The national budget of BDT. 9.34 trillion in FY2027 requires huge local financing against slow stream of local revenue, while this MPS goes against the fiscal spirit of the government. Therefore, a harmony of fiscal and monetary ideals must be ensured for the wider and better interest of the country in the given context.

Moreover, structural vulnerabilities in Bangladesh’s financial system continue to weaken credit transmission, as persistent NPL pressures, particularly in certain banks and NBFIs distort lending, while long-term MPS reforms. The absence of targeted CMSME support risks slowing inclusive growth and employment. Without effective NPL resolution, banks favor low-risk government instruments over private lending.In the external sector, the transition to a market-based exchange rate regime has enhanced transparency and supported remittance inflows; however, persistent Taka depreciation raises input costs for domestic producers, prolongs inflationary pressure. Weak import demand, sluggish investment, and cautious private sector sentiment indicate underlying economic fragility. Rationalization of interest rates on Sanchaypatra and government securities is essential to prevent liquidity diversion and rising debt costs. The slower trend of private borrowing allowed most of the banks to channel their fund into government securities which threatens the much-needed recovery of economy. Overall, the last MPS remains skewed toward stabilization with limited sensitivity to ground realities. Inflation exceeds targets, growth has slowed, investment momentum weakened, and even large corporates face mounting stress.

This MPS presents some indications to shift toward private sector revival though expansionary approach could be timely move. However, it should decisively focus on private sector expansion, enabling businesses to navigate persistent challenges such as energy shortage, limited access to affordable credit, and declining competitiveness, achieving economic revival while restoring investment momentum and private sector confidence. In such an unusual time, private sector led economic growth should always be prioritysupporting the economic stability and other transitional priorities around employment, investment recovery, and inclusive growth leaving no sector behind.