Inflation Control Without Growth Is a Dangerous Illusion

Bangladesh is now confronting a strange economic paradox. The country spent decades worrying about overheating, excessive imports, unsustainable credit expansion and inflationary pressure.

Today, however, a different anxiety is emerging beneath the headlines. Inflation remains stubborn, but the engine of investment itself appears to be slowing to exhaustion.

The debate is no longer merely about how to tame inflation. It is increasingly about whether the cure is quietly draining the blood from the patient.

Recent data on private sector credit growth should alarm anyone concerned with the future of the economy.

According to Bangladesh Bank figures, private sector credit growth fell to 4.72 percent in March, the lowest level in nearly two decades.

For an economy that still relies heavily on industrial expansion, manufacturing activity, small business growth and export-oriented production, such a decline is not a routine statistical fluctuation.

It is a warning signal.
Economists often describe credit as the oxygen of a modern economy.

Joseph Schumpeter, one of the most influential thinkers on capitalism and development, argued that entrepreneurs require access to finance in order to innovate and expand production. Without credit, economic dynamism weakens.

Factories delay investment, businesses reduce inventories, consumers cut spending and employment opportunities shrink.

A country may still display macroeconomic discipline on paper while silently entering a phase of economic suffocation.

Bangladesh appears dangerously close to that territory. The central bank’s contractionary monetary policy is intended to contain inflation, which has remained painfully high for ordinary citizens.

In theory, raising interest rates and restricting liquidity should reduce excess demand and stabilize prices.

This framework is rooted in conventional monetary economics and has been applied in different forms across the world. Yet monetary policy does not operate in a laboratory.

The success of tightening depends heavily on the structure of the economy itself.

Bangladesh is not an advanced industrial economy where consumption alone drives inflation.

A large part of inflationary pressure here comes from structural weaknesses, including high import costs, exchange rate volatility, energy shortages, transport inefficiencies and disruptions in supply chains.

When inflation is deeply connected to production constraints, excessively restrictive credit conditions can become counterproductive.

They suppress investment without necessarily resolving the original causes of rising prices.

This contradiction is becoming increasingly visible.

Lending rates have climbed to levels that many businesses consider unbearable.

Entrepreneurs now speak less about expansion and more about survival. Small and medium enterprises, which generate a major share of employment, are particularly vulnerable.

Many firms already struggling with rising utility costs, dollar shortages and declining consumer purchasing power are now facing expensive borrowing costs that make reinvestment nearly impossible.

The consequences extend beyond corporate balance sheets.

When businesses reduce production or delay expansion, workers lose jobs, household incomes weaken and domestic demand contracts further.

Economists from John Maynard Keynes to Hyman Minsky repeatedly warned that prolonged uncertainty can create a cycle where pessimism itself becomes economically destructive.

Investors stop investing not only because costs are high, but because they no longer trust the future.

That trust deficit is now becoming one of Bangladesh’s biggest economic challenges.

Business leaders and bankers have repeatedly expressed concerns regarding uncertainty surrounding interest rates, exchange rate management and broader monetary direction. Markets can tolerate hardship more easily than unpredictability.

Investors may accept temporary pain if they can anticipate future conditions. What they struggle with is inconsistency and ambiguity.

Adding to the problem is the growing dependence of the government on domestic bank borrowing.

Treasury bills and government securities are becoming increasingly attractive for commercial banks because they offer safe returns with minimal risk.

From the perspective of banks, this preference is rational.

Lending to struggling industries in an uncertain economic climate carries substantial risk, whereas government borrowing guarantees repayment.

However, what is rational for individual banks may become harmful for the economy as a whole.

Economists refer to this phenomenon as the crowding out effect.

When governments absorb a large share of available domestic credit, private businesses lose access to financing.

In developing economies, where capital markets remain shallow and alternative financing sources are limited, this problem becomes particularly severe.

The irony is striking. Bangladesh urgently needs private investment to sustain employment and industrialization, yet the current policy environment is steadily discouraging exactly that activity.

The economy risks entering a low-investment equilibrium where businesses stop expanding, productivity growth slows and future growth potential weakens.

During the Asian financial crisis of the late 1990s, excessive tightening in some economies deepened recessions and delayed recovery.

More recently, several developing countries confronting post-pandemic inflation discovered that aggressive interest rate hikes could stabilize certain indicators while simultaneously weakening industrial output and employment generation.

Inflation control achieved at the cost of long-term productive capacity often proves temporary and fragile.

Bangladesh’s challenge is even more delicate because the country stands at a transitional stage of development.

It is attempting to graduate from a low-income to a middle-income economy while also preparing for the eventual erosion of certain international trade privileges.

This transition demands higher productivity, stronger manufacturing competitiveness and sustained private investment.

A prolonged credit squeeze directly undermines those objectives.
There is also a deeper philosophical issue involved.

Modern economic management often treats inflation as the supreme enemy because rising prices produce immediate political and social anger.

Yet development economics has long emphasized that growth, employment and industrial capability are equally essential.

Nobel laureate Amartya Sen repeatedly argued that development should ultimately expand human capability and economic opportunity rather than merely improve abstract macroeconomic indicators.

An economy cannot become resilient through restriction alone. Discipline matters, but so does vitality.

A society where businesses stop investing, young people cannot find employment and industrial confidence collapses may eventually face consequences far more damaging than temporary inflation.

Economic stagnation breeds frustration, inequality and social instability.

This does not mean inflation should be ignored or monetary discipline abandoned. Reckless lending and uncontrolled liquidity would create another form of disaster.

The real need is balance. Bangladesh requires a policy framework that simultaneously stabilizes prices and preserves productive momentum.

That means clearer monetary communication, more predictable exchange rate management, targeted support for productive industries and reforms that reduce the structural costs of doing business.

At present, the country appears trapped between fear of inflation and fear of stagnation.

Unfortunately, the second fear may already be arriving quietly while policymakers remain consumed by the first. The danger is not merely that growth will slow for a quarter or two.

The greater danger is that economic confidence itself may erode.

Once entrepreneurs lose faith in future stability, rebuilding that confidence can take years.

The economy, after all, is not only governed by numbers. It is governed by expectation, trust and belief. When those disappear, even the most disciplined policies can begin to resemble self-inflicted wounds.

The most troubling aspect of the current situation is that the warning signs are emerging gradually rather than dramatically.

Bangladesh is not facing a spectacular banking collapse or a sudden currency meltdown. Instead, it is confronting a quieter erosion of entrepreneurial energy.

Factories postpone hiring decisions. New industrial projects remain on paper.

Young graduates enter a shrinking job market. Consumers become cautious. Over time, this collective hesitation can harden into economic paralysis.

Development is rarely destroyed overnight. More often, it weakens slowly through declining confidence, interrupted investment and the silent normalization of low expectations.

Policymakers therefore face an urgent responsibility not simply to reduce inflationary pressure, but to protect the economic optimism that allowed Bangladesh to rise so rapidly over the past three decades despite immense obstacles.

(The writer is an Academic, Journalist, and Political Analyst based in Dhaka, Bangladesh. Currently he teaches at IUBAT. He can be reached at nazmulalam.rijohn@gmail.com)