Md. Touhidul Alam Khan :
The first half of 2025 marks a pivotal moment for Bangladesh as the country embarks on a transformative journey following the ousting of an authoritarian regime in August 2024. The student-led mass uprising that catalyzed this political shift has paved the way for sweeping economic and legal reforms, particularly in the financial sector. Against this backdrop, Bangladesh Bank (BB) has unveiled its Monetary Policy Statement (MPS) for the second half of FY25, outlining a roadmap to restore macroeconomic stability, address structural imbalances, and rebuild public trust in the banking system. This editorial examines the key elements of BB’s monetary policy, the challenges ahead, and the opportunities for sustainable economic recovery.
A new dawn for economic reforms
The political transformation of 2024 has created a unique opportunity for Bangladesh to address long-standing structural issues in its financial sector. Under the guidance of the interim government, BB has prioritized reforms aimed at restoring macroeconomic stability, curbing inflation, and stabilizing the foreign exchange market. Establishing three task forces underscores the central bank’s commitment to tackling systemic challenges: conducting an asset quality review of banks, enhancing BB’s regulatory capacity, and aggressively pursuing the recovery of stolen assets domestically and internationally.
These reforms are critical at a time when the banking sector is grappling with rising non-performing loans (NPLs), liquidity constraints, and diminished public confidence. The MPS for H2FY25 reflects BB’s strategic focus on addressing these issues while fostering an environment conducive to economic growth.
Inflation: A persistent challenge
Inflation remains a significant concern for Bangladesh, with headline inflation hovering above 10% for much of 2024. However, recent data indicates a modest decline, with point-to-point inflation easing to 9.94% in January 2025 from 11.38% in November 2024. This decline, driven primarily by reduced food inflation, is a positive sign, but inflationary pressures persist due to supply chain disruptions, exchange rate depreciation, and global commodity price volatility.
BB’s decision to maintain the policy rate at 10.0% reflects a cautious approach to balancing inflation control with the need to support economic growth. The central bank anticipates further declines in inflation, projecting a target range of 7-8% by June 2025. Stable exchange rates, global commodity price moderation, and expected agricultural output expansion support this outlook. However, achieving this target will require sustained fiscal and monetary discipline, as well as proactive measures to address supply-side constraints.
Exchange rate stability and foreign reserves
The foreign exchange market has been a focal point of BB’s reform agenda. The introduction of a crawling peg exchange rate mechanism in May 2024 represents a significant step toward enhancing exchange rate flexibility while maintaining stability. BB’s decision to halt interventions in the interbank market and establish a Foreign Exchange Spot Reference Exchange Rate (RR) underscores its commitment to a market-driven approach.
These measures have yielded positive results, with foreign exchange reserves rebounding to USD 21.4 billion by December 2024. However, challenges remain, particularly in managing the balance of payments (BoP) and sustaining remittance inflows. The MPS highlights the importance of continued exchange rate flexibility and prudent reserve management to support export growth and remittance inflows, which are critical for economic stability.
Banking sector reforms: Restoring trust and good governance
The banking sector remains a critical area of concern, with NPLs projected to exceed 30% of total outstanding loans. BB’s reform initiatives, including the establishment of an asset management company and the introduction of stricter loan classification and recovery guidelines, are steps in the right direction. The proposed Bank Resolution Act and Deposit Insurance Act (Amendment) aim to create a robust framework for resolving distressed banks and protecting depositors.
Moreover, BB’s implementation of a Risk-Based Supervision (RBS) framework and its focus on enhancing governance and transparency are essential for rebuilding public trust. The recovery of stolen assets, both domestically and internationally, will also play a crucial role in restoring confidence in the financial system.
Growth prospects: A mixed outlook
Bangladesh’s economic growth has been sluggish, with real GDP growth slowing to 4.22% in FY24. The first quarter of FY25 saw a further deceleration to 1.81%, reflecting the impact of political uncertainty and disruptions caused by the 2024 uprising. While the industrial sector shows potential for recovery, challenges such as sluggish private credit growth, rising unemployment, and agricultural losses due to floods continue to weigh on the economy.
BB projects GDP growth to remain in the range of 4-5% for FY25, with a rebound to 6% or above expected in FY26. This outlook hinges on several factors, including political stability, improved fiscal discipline, and the effective implementation of structural reforms. The resurgence in remittance inflows and strong export performance, particularly in the ready-made garment (RMG) sector, provide a glimmer of hope for economic recovery.
Monetary policy stance: A balancing act
BB’s decision to maintain a tight monetary policy stance reflects its commitment to curbing inflation while supporting economic stability. The policy rate corridor, with the Standing Lending Facility (SLF) rate at 11.5% and the Standing Deposit Facility (SDF) rate at 8.5%, aims to balance liquidity management with the need to control borrowing costs. However, the slowdown in private sector credit growth to 7.3% in December 2024-the lowest in over a decade-highlights the challenges of stimulating investment in a high-interest-rate environment.
Looking ahead, BB will need to carefully calibrate its monetary policy to support growth without exacerbating inflationary pressures. The central bank’s focus on enhancing financial inclusion and promoting a cashless society through digital lending and open banking frameworks is a positive step toward fostering inclusive growth.
The MPS for H2FY25 outlines a comprehensive strategy to address Bangladesh’s economic challenges while capitalizing on the opportunities presented by the country’s political transformation. The road ahead is fraught with challenges, including persistent inflation, exchange rate volatility, and a fragile banking sector. However, the interim government’s commitment to reform and BB’s proactive measures provide a solid foundation for sustainable economic recovery.
As Bangladesh navigates this critical juncture, the success of its reform agenda will depend on effective implementation, stakeholder collaboration, and a steadfast commitment to good governance. By addressing structural imbalances, restoring public trust, and fostering a resilient financial system, Bangladesh can pave the way for a brighter economic future. The journey will not be easy, but with determination and strategic foresight, the country can emerge stronger and more prosperous in the years to come.
(Md Touhidul Alam Khan, FCMA, CSRA is an accomplished banking professional. Having extensive expertise in financial management, corporate governance, sustainable banking operation and strategic planning, he has established himself as a seasoned leader
in the banking sector).
