Zakir Hossain from Dhaka
Bangladesh risks undoing two years of efforts to tame inflation by expanding money supply to meet government spending needs.
Concern has grown after “high-powered money”, or reserve money created by the central bank, rose sharply, with year-on-year growth reaching 13.35% in February, more than double the 6.16% recorded a year earlier. Economists said Bangladesh Bank recently injected about 200 billion taka (USD 1.65 billion) into the economy to meet government expenditure.
Reserve money is the base from which commercial banks create broader credit, and when it expands rapidly, inflation often follows. The timing is sensitive, with inflation only slowly easing after a prolonged cost-of-living squeeze. Food inflation remains politically sensitive, while fuel-price changes linked to the Iran war, exchange-rate pressure and supply bottlenecks have complicated disinflation.
The likely reason, analysts said, is a mix of politics and fiscal stress. The new BNP-led government under PM Tarique Rahman has inherited weak revenue mobilisation, subsidy pressures, state-enterprise liabilities and expectations of welfare relief. Bangladesh’s tax-to-GDP ratio remains among Asia’s lowest.
Among the new government’s priorities are reported welfare measures such as expanded family-card support, social transfers and broader cost-of-living aid. If tax revenues remain weak and foreign budget support is slow, governments are left with spending cuts, costly bank borrowing, or indirect central bank financing. Printing money is the least visible in the short run, but the cost often returns later through inflation.
As Policy Exchange economist M Masrur Reaz said, the 200 billion taka injection could be amplified through the banking system’s money multiplier, adding to persistent price pressures. Another economist, Md Ezazul Islam, said the situation remained manageable, especially if private-sector imports rise and absorb some of the liquidity.
Bangladesh Bank may argue reserve money also rose because it bought over USD 5.5 billion from the market this fiscal year, increasing foreign assets and reserves. Inflows from lenders such as the World Bank and ADB may also have lifted foreign assets. But for households, the source matters less than the impact: if more taka chase limited supplies of rice, transport, rent and services, prices rise.
Inflation is especially painful in Bangladesh because poorer households spend more on essentials. Even a small rise can mean fewer meals, delayed medicine or cancelled school expenses. There is also a credibility risk: if markets believe fiscal needs will keep overriding monetary discipline, businesses may raise prices in anticipation, workers may demand higher wages, and savers may shift to land, dollars or gold.
The government’s dilemma is real. Welfare expansion after years of strain may be justified, and targeted transfers can support the vulnerable. But financing them by printing money is a blunt tool that fuels inflation while directly helping only selected groups.
A better path, analysts say, would be to widen the tax base, cut wasteful spending, reform loss-making state entities, target subsidies better and secure concessional foreign funding. If temporary liquidity support is unavoidable, it should be transparent, limited and offset elsewhere.
Bangladesh may not yet face a monetary crisis, but it does face a familiar temptation: offering benefits now while pushing the cost into the future. For a government seeking to prove it can govern better than its predecessors, the test is clear, support families through budgets and reform, not quietly through the central bank’s balance sheet. Inflation, after all, is the most regressive tax of all.