Can We Avoid Printing Money?

Bangladesh has long operated under a structural fiscal constraint: it is a deficit-budget economy. Governments spend first and then scramble to finance that expenditure through domestic borrowing, foreign loans or, increasingly, the central bank. That model, while not unusual for developing economies, has now reached a point where its sustainability must be seriously questioned.

The current government faces an added complication. It is not just managing its own fiscal priorities but also absorbing the legacy costs of poorly conceived and weakly executed projects inherited from previous administrations. These sunk costs are now translating into real fiscal pressure.

At the heart of the problem lies a severely underperforming revenue system. Government revenue, primarily tax-based, remains the only reliable source of income, yet it is faltering. In the first nine months of the current fiscal year, the revenue shortfall has reached nearly Tk1 trillion, the highest on record. This is not merely a technical gap; it reflects deeper structural weaknesses in tax administration, compliance and economic activity. With business conditions remaining subdued, expecting a sudden surge in revenue would be unrealistic.

Against this backdrop, the government’s expenditure obligations remain rigid. Salaries, interest payments, subsidies and ongoing development projects cannot simply be paused. As a result, borrowing has become the default option, not the exception.

The scale of this borrowing is now becoming concerning. In the FY2025-26 budget, the government set a target of borrowing Tk1.04 trillion from the banking sector. Yet, within just over nine months, borrowing has already exceeded that target. More strikingly, the current administration borrowed an amount in just 52 days that surpasses the annual budgetary target. According to the latest data from Bangladesh Bank, total government borrowing from the banking system has reached unprecedented levels. This has two immediate consequences.

First, it crowds out private sector credit. Banks, faced with the safety and certainty of lending to the government, naturally reduce their exposure to private borrowers. At a time when Bangladesh urgently needs private investment to stimulate growth and employment, credit to the private sector has slowed to historic lows. This is not a coincidence; it is a direct outcome of aggressive public sector borrowing.

Second, and more critically, the government is increasingly relying on the central bank to bridge financing gaps. This is where the situation becomes more delicate.

When borrowing shifts from commercial banks to the central bank, it effectively leads to money creation. Through instruments such as Ways and Means Advances, overdrafts and outright purchase of treasury bills and bonds, Bangladesh Bank injects liquidity into the system. This is not merely accounting; it is expansion of reserve money, often referred to as “high-powered money”.

The implications are well understood but often underappreciated in policy discussions.

An increase in reserve money has a multiplier effect. A single unit of base money can translate into several units of broad money in the economy. In Bangladesh’s context, this multiplier can be significant. The result is an increase in aggregate demand without a corresponding increase in supply. This is a textbook recipe for inflation.

Bangladesh is already experiencing cost-push inflation driven by higher energy prices and global supply disruptions. Adding demand-driven inflation through excessive money creation only compounds the problem. The impact is not abstract; it directly erodes purchasing power, particularly for fixed-income households.

There is also an external dimension. Excess liquidity in the domestic economy puts downward pressure on the exchange rate. A weaker currency makes imports more expensive, further fuelling inflation. In a country heavily dependent on imported fuel, raw materials and capital goods, this creates a vicious cycle.

To use a simple analogy: printing money is like diluting milk with water. The volume increases, but the quality deteriorates. In macroeconomic terms, the nominal size of the economy may appear to expand, but its real strength weakens.

This is not to suggest that short-term borrowing from the central bank should be entirely avoided. Instruments like Ways and Means Advances serve a legitimate purpose. They help governments manage temporary mismatches between cash inflows and outflows. However, when such mechanisms become routine rather than exceptional, they signal deeper fiscal stress. The responsibility, therefore, lies on both sides.

The government must undertake urgent fiscal reforms. This includes broadening the tax base, improving compliance, rationalising subsidies and prioritising high-impact expenditures. Equally important is restoring discipline in project selection and implementation to avoid the accumulation of unproductive liabilities.

At the same time, Bangladesh Bank must exercise restraint. Central banks exist to safeguard monetary stability, not to serve as a fallback financier for fiscal deficits. While short-term accommodation may be unavoidable, unchecked monetisation of deficits risks undermining macroeconomic stability and proves the central bank is susceptible to pressure.

Bangladesh stands at a critical juncture. Continuing on the current path may offer temporary relief but will impose long-term costs on growth, stability and public welfare. The choice is not between borrowing and not borrowing; it is between disciplined financing and unsustainable dependence.

The time to recalibrate that balance is now.

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The writer is an economic analyst and Chairman at Financial Excellence Limited