Stimulus in a supply-constrained economy

The newly announced Tk 60,000 crore stimulus package by the Bangladesh Bank comes with ambitious goals: reviving closed industries, supporting Cottage, Micro, Small and Medium Enterprises (CMSMEs), expanding agriculture and rural activity, diversifying exports, and creating more than 2.5 million jobs.

The presentation accompanying the package portrays a broad-based recovery effort at a time of slowing growth, weak investment sentiment and growing pressure on the private sector.

The intent is understandable. With growth slowing, industrial activity weakening and financial stress rising, pressure for policy intervention is increasing.

But good intentions do not automatically produce good outcomes. The more important question is whether the package addresses the binding constraints of the economy or whether it risks adding pressure to an already fragile macroeconomic environment.

The package is framed as a countercyclical intervention. That logic works best when an economy is suffering from weak demand, low inflation, and temporarily idle productive capacity. Bangladesh today faces a more difficult combination: growth is slowing while inflation remains elevated and persistent.

In such conditions, additional stimulus does not automatically translate into higher output. If supply cannot respond, it may raise prices faster than production.

That concern matters because the constraints facing many firms today do not appear to be purely financial. Energy shortages, logistical frictions and uncertainty about operating conditions continue to limit production capacity.

Reports of substantial installed investment sitting idle because of inadequate gas supply point to a broader issue: firms may have capacity but lack the conditions to use it productively. In that context, cheaper credit may improve liquidity without generating proportionate increases in output or employment.

The structure of the package deserves similar scrutiny.

Of the Tk 60,000 crore package, Tk 41,000 crore is described as a refinancing facility sourced from banks with excess liquidity through longer-term deposits, while Tk 19,000 crore comes from Bangladesh Bank’s resources under government guarantee arrangements.

This matters because the package is not simply reallocating existing fiscal resources. It is mobilising additional credit through a financial system that is already under pressure.

The refinancing component may help redirect liquidity towards productive sectors. But it also places additional lending demands on banks at a time when the sector continues to carry high levels of stressed assets even after years of restructuring and rescheduling. When credit allocation mechanisms are already weak, expanding directed lending risks reinforcing existing distortions rather than correcting them.

This is where political economy becomes difficult to ignore. Bangladesh has seen versions of this before: large pools of directed credit introduced with developmental objectives but weakened by poor targeting and incentives that reward access over performance. Without stronger safeguards, the package risks throwing good money after bad.

The Bangladesh Bank-funded component raises a different concern. With private credit growth already subdued, the immediate risk is not excess demand. It is that additional liquidity may loosen financing conditions without materially expanding production if supply constraints remain binding.

In that case, credit expansion may increase nominal spending faster than real output, raising the risk of further inflation without commensurate gains in growth or employment.

There are fiscal implications as well.

Bangladesh is already carrying substantial subsidy obligations, particularly in energy, while operating under increasingly constrained fiscal space. Even where this package does not appear directly in the annual budget, guarantees, interest support and contingent liabilities remain claims on the public balance sheet.

The external side should not be ignored either.

If a significant share of the additional credit finances imports or working capital while production remains constrained, pressure on the foreign exchange market could intensify. The magnitude of that risk will depend less on the volume of credit than on whether supply conditions improve quickly enough to support output and exports.

The employment projections also deserve caution. The package targets more than 2.5 million direct and indirect jobs across multiple sectors.

Yet the methodology behind these estimates is not explained. Employment is ultimately generated by production, not credit disbursement. Without clearer assumptions about capacity utilisation, output response and investment realisation, the numbers appear closer to aspirational targets than dispassionate forecasts.

None of this means the package is misguided in every respect. Support for SMEs, agriculture, cottage industries, export diversification and smaller enterprises may generate meaningful returns if financing is paired with measures that ease operational bottlenecks, especially energy availability, import access and stronger lending discipline.

But success will depend on sequencing.

Stimulus works best when firms are fundamentally operational and temporarily constrained by finance. If firms remain constrained by energy and institutional bottlenecks, additional credit may preserve liquidity without reviving production.

The issue is not credit availability alone. It is whether the economy can convert credit into output. Without that, the package may succeed in disbursing funds while falling short on growth, exports and jobs.

Such a failure would not simply mean disappointing results. It could leave the economy with higher inflation, greater pressure on public and financial balance sheets and weaker macroeconomic stability without materially expanding productive capacity.

The writer is a former lead economist of the World Bank’s Dhaka office