Government borrowing is hampering monetary policy, economists and bankers tell the banking conference

Excessive government borrowing from the banking system is hampering the effectiveness of monetary policy, economists and bankers have said. Policy coordination between Bangladesh Bank and the government is essential to control inflation, raise investment and restore the pace of growth, they added.

The remarks came at the opening session of the 11th Annual Banking Conference 2026 at the Bangladesh Institute of Bank Management (BIBM) auditorium in Mirpur, Dhaka, on Wednesday. The two-day conference is focusing on the banking sector's crisis, the challenges of reform and policy directions for restoring macroeconomic stability.

In the keynote paper, Dr Zaidi Sattar, chairman of the private research organisation Policy Research Institute of Bangladesh, said monetary policy effectiveness is being hampered because the government takes about 60 percent of its borrowing from domestic sources. Coordination, rather than a subordinate relationship, must be ensured among the policies, he said.

In Zaidi Sattar's view, monetary policy should be used to control inflation, fiscal policy to support growth and a flexible exchange rate policy for trade activity. He recommended tariff cuts, or 'compensated depreciation', to deal with the impact of the taka's roughly 40 percent devaluation since May 2022.

As chief guest, economist and former interim government planning adviser Professor Dr Wahiduddin Mahmud said private banks were allowed to be established in the 1980s without an effective regulatory framework being built first. Although the situation later improved, after 2010 the banking sector's default culture turned into a more dangerous 'culture of looting', he said.

Wahiduddin Mahmud said banking reform cannot be achieved by strict laws alone; bankers and industrial entrepreneurs must have a minimum of ethics and values. He stressed stopping the use of the financial sector as a tool for distributing favours for political purposes, keeping adequate safeguards when relaxing some restrictions to revive weak banks, and getting finance to honest and genuine entrepreneurs.

Bangladesh Bank Deputy Governor Kabir Ahmed said foreign exchange reserves rising to 36 billion dollars has created the capacity to meet six months of import costs. To restore confidence in the banking sector, asset quality reviews of 15 banks have been carried out with World Bank support, and that work will continue, he said.

Kabir Ahmed said the non-performing loan rate was 36 percent in December 2025, and it is hoped it will be reduced significantly by the end of this year. A special Asset Management Act and a Money Act are being drafted for that purpose, and a coordinated plan with the Finance Ministry is being taken to meet banks' capital shortfalls, he said.

Masrur Arefin, president of the Association of Bankers Bangladesh and managing director of City Bank, expressed concern that credit flow to the private sector has fallen to almost zero. He said imports of capital machinery and factory expansion have stalled, and the PMI falling to 48 signals economic contraction.

Masrur Arefin added that high inflation and a 9.5 percent policy rate are having a contractionary effect on the economy, and hesitation is visible in the central bank's policy as well. He called for government mega projects to be started to restore momentum to the market.

Abdul Hai Sarker, president of the Bangladesh Association of Banks and chairman of Dhaka Bank, said most of the country's economic financing comes from private banks. Reform policy must be such that genuine businesspeople and industrial entrepreneurs receive financing and banks' operational capacity is maintained, he said.

At the conference, World Bank Country Director for Bangladesh and Bhutan Jean Pesme stressed asset quality reviews of banks and international cooperation in controlling defaulted loans. BIBM Director General Dr Md Ejazul Islam chaired the opening session, and Professor Dr Prashanta Kumar Banerjee, chairman of the conference organising committee, gave the welcome address.