Governor Mostaqur Rahman has followed through on his promise to assist in the reopening of shuttered factories by introducing stimulus packages aimed at boosting the economy. The success of these efforts hinges on the collaboration of commercial banks, government guarantees, and the proactive involvement of entrepreneurs.
During times of economic uncertainty, governments and central banks often resort to stimulus measures to revive economic activity. Bangladesh has also joined this trend with the Bangladesh Bank’s Tk 60,000 crore stimulus program. This initiative aims to kickstart private sector activities, rejuvenate struggling industries, support CMSMEs, and spur job creation. While such initiatives may seem promising, historical evidence dating back to the Keynesian era highlights that stimulus alone cannot guarantee economic recovery without addressing underlying structural issues.
The current stimulus plan focuses on directing low-cost credit towards sectors that have long grappled with financial constraints. The majority of the funding, approximately 70%, is expected to come from banks’ surplus liquidity, with the remaining portion backed by government guarantees through the central bank. By providing loans at below-market rates, businesses facing high borrowing costs may experience temporary relief.
However, a critical question arises: can subsidized credit on its own revive an economy plagued by structural bottlenecks? The answer is multifaceted. While high interest rates pose a challenge, investment decisions are influenced by factors beyond interest rates. Businesses are more likely to invest when they anticipate consistent demand, uninterrupted production, and stable policies. Many industries in Bangladesh continue to struggle with energy shortages, logistical inefficiencies, exchange rate fluctuations, and regulatory uncertainties, which collectively increase the cost of operations. Therefore, while cheaper loans may enhance liquidity, they may not necessarily boost production capacity. Without adequate energy supply, even affordable financing may not enable factories to operate at full capacity. Additionally, policy uncertainty can deter investors from making significant expansions.
Furthermore, there are concerns regarding fiscal sustainability. The proposed stimulus structure entails substantial interest subsidies from both the government and the central bank. Given the existing subsidy burdens, particularly in the energy sector, expanding subsidized lending without tangible outcomes could strain the public finances further.
Moreover, the banking sector in Bangladesh faces challenges with high levels of non-performing loans, which undermine financial discipline and credit allocation. Directed lending programs are susceptible to political interference, inadequate monitoring, and suboptimal borrower selection. During the COVID-19 pandemic, reports indicated that a disproportionate share of stimulus benefits went to well-connected large borrowers, including defaulters, rather than genuinely distressed small businesses. Inflation is another worry due to persistent price pressures. If the credit expansion from the stimulus leads to increased demand without a corresponding rise in domestic production, the advantages of cheaper borrowing might be outweighed by escalating prices and reduced purchasing power.
While stimulus packages can provide vital support during economic slowdowns, they are not a panacea for systemic issues. To ensure that stimulus efforts yield meaningful results, complementary measures are crucial. Improving energy security, enhancing governance in the banking sector, strengthening loan recovery mechanisms, enhancing policy predictability, and ensuring transparent and unbiased credit allocation are essential steps. Ultimately, recovery is driven by productivity, confidence, and institutional trust, and a stimulus package can only serve as a temporary measure, not a permanent solution. Sustainable economic recovery requires translating available resources into lasting production growth, increased private investment, and the creation of long-term employment opportunities.