Is MPS of FY2027 Economy Friendly?

The economy faces a critical juncture where the pursuit of macroeconomic stability clashes with unprecedented external economic shocks and sluggish private sector growth. Immediately after the political transition, expectations for a turnaround grew. However, the rigid 10% policy rate and record-low private sector credit growth below 4% disappointed all key stakeholders. While this tight monetary stance was intended to anchor inflation amid elevated price pressure, banking sector fragility and an energy supply crunch, the reality is that a large and expansionary budget has raised concerns regarding the weak nexus between fiscal and monetary policies. Real GDP growth came down to 3.97%, while businesses faced borrowing costs exceeding 12% alongside a growing crowding-out effect, as government borrowing from banks rose to Tk 45,239 crore. Another Tk 60000 core aimed to supply to mitigate inflationary stress which may rather create banking sector incidences. Although the monetary policy statement (MPS) of FY2027 targets demand-side inflation, the private sector faces cost-push pressure, as tight policy fails to address energy and utility costs while raising working capital expenses, creating a “production choke”.

The long-held demand for a policy rate cut has gone unaddressed, offering no effective relief to distressed businesses. Various local and external aspects are contracting the business growth and profit generation for a large segment of the private sector, leading them to become defaulters. The MPS has set a larger net foreign asset (NFA) target that is slightly higher based on immediate past larger growth. Regarding private sector financing, the 6.8% target seems hard against the 21.8% public funding target, given the extreme bank borrowing by the government. This imbalance is set to intensify as fiscal revenue streams remain slim, leaving a substantial gap between revenue targets and the realisation in the last fiscal year. It is worth stating that the private financing marked a slow turnaround to 5.5%.

The earlier MPS introduced several long-term structural reforms, including a flexible exchange rate regime and strengthened bank supervision. Nonetheless, tight policy and high lending rates continue to restrict credit flows. Private sector credit growth fell to the lowest rate in two decades and below the target, signalling near stagnation in private investment. Consequently, the deviation between previous MPS targets and actual outcomes for FY26 reveals a significant gap between official projections and ground realities. High borrowing costs, conservative lending amid rising non-performing loans (NPLs), and persistent liquidity constraints jointly suppressed both credit demand and supply. The growing foreign exchange reserve is apparently inspiring, but the declining import, characterised by a lower share of industrial items and a higher share of fertiliser and energy items, cannot compensate for the needed economic surge. The revision of public credit to 21.8% reflects a mindset to cut public borrowing policy, but the incremental government deficit budget plan creates concern, intensifying the chance of crowding out of private investment. In contrast, public sector credit continued to expand, reaching 25.9% in the last MPS, while private credit marked a very insignificant shift.

Macroeconomic outcomes also diverged noticeably from MPS targets. The FY27 GDP growth target of 6.5% is highly ambitious. Likewise, the inflation target of 7.5% seems unattainable, as inflation stands above 8%. NPL also reached a record height. Persistent inflation despite a 10.0% policy rate suggests tightening has dampened growth more than prices, largely due to supply-side constraints and higher imported input costs.
An 11.5% larger broad money target is against the spirit of inflation control. This may improve the liquidity injection in the economy while the entire MPS upholds a contractionary context. Reserve money also recorded marginal contraction. Although Bangladesh Bank reduced the Cash Reserve Ratio (CRR), the released liquidity was largely absorbed by distressed banks burdened with NPLs, limiting positive impact on private credit. As a result, the private sector bears the brunt of contractionary policies while public sector borrowing expands.
The national budget of Tk 9.34 trillion in FY2027 requires huge local financing against a slow stream of local revenue, while this MPS goes against the fiscal spirit of the government. Therefore, a harmony of fiscal and monetary ideals must be ensured for the wider and better interest of the country in the given context.
Moreover, structural vulnerabilities in Bangladesh’s financial system continue to weaken credit transmission, as persistent non-performing loan (NPL) pressures, particularly in certain banks and on-bank financial institutions (NBFIs), distort lending, while long-term MPS reforms are slow. The absence of targeted cottage, micro, small and medium enterprises (CMSME) support risks slowing inclusive growth and employment. Without effective NPL resolution, banks favour low-risk government instruments over private lending. In the external sector, the transition to a market-based exchange rate regime has enhanced transparency and supported remittance inflows.  However, persistent taka depreciation raises input costs for domestic producers and prolongs inflationary pressure. Weak import demand, sluggish investment, and cautious private sector sentiment indicate underlying economic fragility. Rationalisation of interest rates on Sanchaypatra and government securities is essential to prevent liquidity diversion and rising debt costs. The slower trend of private borrowing allowed most of the banks to channel their funds into government securities, which threatens the much-needed recovery of the economy. Overall, the last MPS remains skewed towards stabilisation with limited sensitivity to ground realities. Inflation exceeds targets, growth has slowed, investment momentum weakened, and even large corporates face mounting stress.

Looking ahead to the H1Y2027 MPS, a positive mindset has been affirmed by the government for a sustainable financial sector to strengthen the lifeline of the country. However, the central bank should have gradually reduced the policy rate to ease borrowing costs and revive private investment, supported by pragmatic credit targets. Reducing government reliance on commercial bank financing through non-bank and concessional sources is critical to reduce fiscal burden. The MPS must introduce targeted interventions for CMSMEs, which have been harmed by policy tightening despite their central role in employment and domestic value chains, making continued credit deprivation a systemic risk. However, considering the upcoming economic transformation upon LDC graduation, financial sector readiness and programmes for private sector engagements are non-existent. And the STS should be considered in MPS. The MPS could mention strategic stands against unsolicited external geopolitical shocks, as these overshadow the economic journey. The upheaval due to the bank merger and Islami Bank's ownership gives a bad, dreadful message across the world about our financial sector, which should be soon mitigated.

This MPS presents some indications to shift toward private sector revival, though an expansionary approach could be a timely move. However, it should decisively focus on private sector expansion, enabling businesses to navigate persistent challenges such as energy shortages, limited access to affordable credit, and declining competitiveness, achieving economic revival while restoring investment momentum.
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The writer is a macroeconomic policy researcher and analyst