Bangladesh Bank Governor Dr Ahsan H Mansur on Monday warned that implementing a new government pay scale without increasing tax revenue could add to the government’s reliance on bank borrowing, potentially fuelling further inflation.

Speaking at a press conference at the central bank headquarters while announcing the new monetary policy, the governor said that if revenue collection does not improve, the financial burden on banks will rise again, putting additional pressure on prices.

He noted that private sector credit growth has fallen short of expectations due to political uncertainty and a lack of confidence in the economy. Despite budgetary cutbacks by the government, borrowing from the banking sector has increased, he added.

Dr Mansur also stressed the need to amend the Bangladesh Bank Order to ensure the banking sector remains free from political influence. He said central banks around the world often operate under pressure, expressing hope that political parties would honour their electoral commitments to reform the financial sector.

Referring to Bangladesh’s engagement with the International Monetary Fund (IMF), the governor said all IMF conditions have been met. 

He added that over the four-year period during which IMF loans were scheduled, Bangladesh has purchased more dollars for its reserves than the amount of financing received. “We do not want to remain dependent on others,” he said.

He further informed that USD 4 billion has been purchased from the market in the current fiscal year. Over the past year, dollars have been bought, but none have been sold from the reserves.

On remittances, Dr Mansur said inflows have grown by more than 18 percent, and total remittance earnings could reach USD 35 billion in the current fiscal year.

Meanwhile, in a separate notification, Bangladesh Bank said that under the existing Standing Deposit Facility (SDF) rate, some banks have been more inclined to place excess liquidity with the central bank rather than lend in the interbank money market or to the private sector. This has reduced the dynamism of the interbank money market.

To address the issue and strengthen liquidity management under the interest rate corridor framework, the central bank has decided to lower the lower bound of the policy rate corridor — the Standing Deposit Facility — by 50 basis points, from 8 percent to 7.50 percent.

The upper bound of the corridor, the Standing Lending Facility, will remain unchanged at 11.50 percent, while the overnight repo policy rate will stay at 10 percent. The revised rates will come into effect from February 15.