Economic stimulus is necessary, but caution must be exercised

We appreciate the central bank’s plan to reinvigorate the economy by making cheap credit available to the private sector, including cottage, micro, small and medium enterprises (CMSMEs). However, it would be unwise to assess the possible outcomes of the Tk 60,000 crore stimulus package announced by Bangladesh Bank on Saturday through a rosy lens.

Nearly 70 percent of the package, i.e. Tk 41,000 crore, will come from deposits by banks with surplus liquidity, and the remaining Tk 19,000 crore from BB’s own resources. The central bank will pay a 10 percent interest rate on these deposits—six percent of which will be subsidised by the government, while BB will pay the remaining four percent from its refinancing scheme. Large borrowers can access this fund at around seven percent interest, whereas the current average lending rate is about 12 percent. However, interest for small borrowers will be slightly higher due to administrative and operational costs. In other words, BB will mobilise funds at 10 percent and lend them at seven percent, thanks to government subsidy. This raises the question: when the economy is already burdened with substantial subsidies, especially in the energy sector, how wise would it be to take on the additional burden of interest payments and potential losses from defaults?

What is more, given the current repo rate and yields on treasury bills and bonds (10-12 percent), what incentive would commercial banks have to invest their excess funds in deposits earning 10 percent? In fact, several bankers have expressed scepticism about the implementation of this package. Since one of its objectives is to revive closed and failed industries, banks may be reluctant to shoulder the associated high risks. Restarting closed factories requires restructuring, management changes, workforce rehiring, and resolution of underlying financial and operational problems.

Furthermore, experts are sceptical about whether the stimulus package will meet its objectives of addressing industrial disruption and employment generation. According to a former World Bank economist, financial constraints are not the sole reason behind low private sector investment. Other structural problems such as energy shortages, logistical frictions, and unstable operating conditions also limit private sector production and growth. Cheap credit may increase firms’ liquidity, but it may not translate into higher production given the ongoing gas crisis. Consequently, firms are also unlikely to expand employment significantly. Moreover, if easier credit boosts spending without a corresponding increase in output, it could intensify demand-side inflationary pressures in an economy that has already experienced persistent inflation over the past three years.

Besides, such directed lending in the past, during the Covid-era stimulus package, concentrated funds in the hands of a few borrowers. Furthermore, such lending may reinforce existing distortions in the financial sector, which is already burdened with high levels of non-performing loans. There is no question about the good intention behind this package considering its objectives—supporting CMSMEs, expanding agriculture and rural activity, diversifying exports, and creating more than 25 lakh jobs. However, this vision must be matched with an effective implementation strategy. Otherwise, alternative approaches should be considered.