Can stimulus revive economy?

Governor Mostaqur Rahman has remained true to his announcement. He committed to helping reopen closed factories and has launched stimulus packages to create synergy in the economy, though much depends on commercial banks, government guarantees and, more importantly, entrepreneurs themselves.

In times of economic uncertainty, governments and central banks often turn to stimulus as an instrument of revival. Bangladesh is no exception. The Bangladesh Bank’s Tk 60,000 crore stimulus initiative reflects an urgent attempt to restore momentum in private sector activity, revive struggling industries, support CMSMEs and create employment. At first glance, such initiatives appear timely. Yet history since the rise of the Keynesian era in the 1930s suggests that stimulus alone cannot guarantee recovery unless deeper structural weaknesses are addressed. The philosophy behind stimulus is simple: inject liquidity, reduce borrowing costs, encourage investment, and lift production and employment. In practice, effectiveness depends less on the size of the package and more on implementation quality, targeted intervention and the overall business climate.

The latest package seeks to channel low-cost credit into sectors that have long struggled with financing constraints. Nearly 70 percent of the fund will reportedly come from banks’ excess liquidity, with the remainder financed by the central bank against government guarantees. Borrowers may receive loans below market rates, offering temporary relief to businesses facing high borrowing costs.

Yet an important question remains: can subsidised credit alone revive an economy facing structural bottlenecks? The answer is more complicated than policymakers would prefer. Although high interest rates remain a barrier, investment decisions are not determined by interest rates alone. Businesses invest when they foresee stable demand, uninterrupted production and policy consistency. Many industries continue to struggle with energy shortages, especially gas supply disruptions, while logistics inefficiencies, exchange rate volatility and regulatory unpredictability raise the cost of doing business. Under such conditions, cheaper loans may improve liquidity but not production. A factory cannot operate at full capacity without adequate energy, however affordable its financing. Nor will investors undertake major expansions if policy uncertainty clouds future profitability.

There is also the issue of fiscal sustainability. The proposed structure implies significant interest subsidies from both the government and the central bank. The economy is already burdened by substantial subsidy commitments, particularly in energy, and expanding subsidised lending without productive outcomes could place additional pressure on the public exchequer.

Moreover, the banking sector remains fragile. High non-performing loans continue to weaken financial discipline and credit allocation. Directed lending programmes often carry the risk of political influence, weak monitoring and poor borrower selection. We saw this during the Covid-era stimulus, when a disproportionate share of benefits reportedly went to large and well-connected borrowers, including defaulters, rather than genuinely distressed small enterprises. Inflation is another concern after years of persistent price pressures. If stimulus-induced credit expansion raises demand without corresponding growth in domestic production, the benefits of cheaper borrowing may quickly be offset by rising prices and declining purchasing power.

This does not mean stimulus packages are ineffective. Studies show targeted fiscal and monetary interventions during slowdowns can prevent deeper contraction and preserve business confidence. But stimulus is temporary support, not a substitute for structural reform. For stimulus to contribute meaningfully, several complementary measures are essential. Energy security must improve. Governance in the banking sector must strengthen. Loan recovery mechanisms need to become more effective. Policy predictability should increase to restore investor confidence. Most importantly, credit allocation must remain transparent and insulated from political or corporate influence.

Recovery is driven not merely by liquidity, but by productivity, confidence and institutional credibility. A stimulus package can buy time for the economy; it cannot solve long-standing structural weaknesses on its own. Genuine recovery will depend not on financial packages alone, but on whether those resources translate into sustainable production, private investment and long-term employment generation.

The writer is an economic analyst