BUILD urges BB to align monetary policy with expansionary budget

Business Initiative Leading Development (BUILD) has urged Bangladesh Bank to better align its monetary policy with the government’s expansionary fiscal policy, warning that the current contractionary stance could undermine investment, employment generation and industrial growth.

In a statement issued on Wednesday, BUILD appreciated the central bank’s continued commitment to restoring macroeconomic stability and containing inflation through the Monetary Policy Statement (MPS) for fiscal year 2026-27.

However, it argued that the existing policy mix risks slowing private sector activity at a time when the national budget relies heavily on private investment to drive economic growth.

According to BUILD, the budget aims to create 25 lakh new jobs during FY27 through increased private investment and industrial expansion. With one of Bangladesh’s principal economic drivers, exports, experiencing negative growth, maintaining a highly restrictive monetary policy could further discourage business expansion and weaken investor confidence.

The business organisation expressed concern over the central bank’s projection of 6.5 percent growth in private sector credit compared with 21.8 percent for public sector credit, saying the disparity could intensify the crowding-out effect by limiting credit availability for private enterprises.

It noted that the problem is being compounded by the fragile financial condition of several large banks, while the government’s continued dependence on bank borrowing to finance its fiscal deficit is placing additional pressure on credit availability for businesses.

BUILD also pointed out that government securities offering returns around one percentage point higher than the policy rate are encouraging banks to invest in risk-free government instruments instead of extending loans to productive private sector activities.

To achieve the budget’s long-term target of raising total investment to 40 percent of GDP by FY31, the organisation said private sector credit growth will need to gradually increase to at least 15 percent over the period.

The organisation also expressed concern over the prevailing high interest rate environment, noting that the policy rate of 10 percent, the Standing Lending Facility rate of 11.5 percent and the Standing Deposit Facility rate of 7.5 percent have resulted in commercial lending rates ranging between 14 and 17 percent.

Combined with an interest rate spread of 5.72 percent, BUILD said the high borrowing costs are discouraging fresh investment and reducing the competitiveness of domestic industries.

It further argued that inflationary pressures in Bangladesh are largely driven by supply-side factors, including disruptions in agricultural supply chains, market inefficiencies, exchange rate movements and structural bottlenecks, rather than excessive domestic demand.

Although overall inflation has moderated, food inflation remains above 8 percent, suggesting that tighter monetary policy alone is unlikely to significantly reduce inflation while imposing additional financing costs on businesses, BUILD said.

It added that the national budget also acknowledged structural factors as major contributors to inflation.
The organisation also questioned the MPS target of 13 percent broad money (M2) growth, saying it remains relatively high and could limit efforts to control inflation while the faster expansion of public sector credit risks crowding out productive private investment.

To address these challenges, BUILD recommended that Bangladesh Bank gradually recalibrate its monetary policy as inflation eases.

It suggested progressively reducing the interest rate spread from the current 5.72 percent to around 2.5 percent, increasing credit availability for Cottage, Micro, Small and Medium Enterprises (CMSMEs), exporters and manufacturing industries, and ensuring that financial resources are directed towards productive investments rather than non-productive uses.

The organisation also proposed that at least 20 percent of total bank lending should be allocated to CMSMEs, up from the current level of around 15 percent.

It welcomed the government’s recently announced Tk 60,000 crore refinance scheme, including Tk 5,000 crore earmarked for CMSMEs at a maximum interest rate of 9 percent.

BUILD said the scheme should be implemented transparently, with priority given to cottage and micro enterprises facing the greatest financing constraints. It also suggested that the interest rate could be reduced further on a temporary basis to support existing entrepreneurs during the current economic slowdown.

In addition, BUILD called for clearly defined and publicly available eligibility criteria for industries seeking assistance under the government’s Tk 20,000 crore allocation for sick industries to ensure transparency and accountability.

It also urged the government to formulate a comprehensive policy framework for the Tk 500 crore allocation for the creative economy, clearly specifying eligible sectors, beneficiaries and implementation mechanisms.

BUILD stressed that stronger coordination between fiscal and monetary policies is essential to restore investor confidence, stimulate private sector investment, create employment and place Bangladesh back on a sustainable path of inclusive economic growth.