Bangladesh Cannot Reach $1 Trillion by Rewarding Passivity

The most important question in Bangladesh’s economy right now is not whether money is expensive, i.e. whether interest rates are too high. It is whether money is moving, i.e. whether the machinery for deploying capital is functioning.

The standard argument against reducing rates is familiar: Cheaper money fuels borrowing, borrowing fuels demand, and demand fuels inflation.

That logic holds in economies where the financial system actively transmits monetary policy into real economic activity -- where banks lend, firms invest, households spend, and extra demand pushes up prices.

Bangladesh today is not one of those economies.

The language of discipline dominates our economic discussions. High interest rates are presented as prudence, and caution is framed as wisdom. On the surface, this textbook approach sounds responsible.

However, the economic ground realities are hard to ignore.

Growth has slowed sharply, down to around 3 percent; and private-sector credit growth has fallen to a 22-year low. The stock market is sliding. In a young country with significant room for growth, these are not signs of dangerous excess or an overheated economy. Rather, these are signs of an economy whose financial arteries are clogged, one that is struggling to deploy capital.

Yet the policy instinct remains the same: Hold money tight, preserve what we have, avoid risk. This instinct is understandable but it is self-defeating.

Part of the reason borrowing is weak is that Bangladesh is still living with the aftereffects of an earlier investment cycle. Too much capacity was built in many traditional sectors on assumptions that no longer hold: Reliable energy, predictable imports, and uninterrupted growth. Many factories are now underused and construction has slowed. In older industries, demand for fresh borrowing is understandably weak.

However, that is not an argument for keeping interest rates high. It is an argument for moving capital differently. The fact that yesterday’s sectors cannot absorb more money does not mean Bangladesh has no use for capital. It means tomorrow’s sectors need room to emerge.

New industries, new export capabilities, new technologies, new logistics, new business models -- these do not grow on their own. They require a financial system willing to search, judge and back them.

A banking system that is rewarded for passivity will not make that leap. New muscles do not grow in comfort. This is the real danger of high interest rates in the current environment. When the capital transmission mechanism weakens, high interest rates stop functioning as an instrument of macroeconomic control.

Instead, they become a reward for standing still. Banks can earn comfortably from sovereign paper, and avoid the difficult work of understanding new sectors, pricing risk, restructuring weak borrowers and supporting new enterprise.

In the short run, the arrangement can look reassuring. Depositors feel protected, banks remain profitable, and the system seems stable. But over time the incentives begin to reshape behavior. Easy returns from safe sovereign debt are intoxicating.

Institutions become less focused on finding the next source of growth, and more focused on avoiding uncertainty. Banking shifts from the work of allocating capital to the habit of preserving comfort. Judgment weakens, passivity becomes entrenched, and the capacity to invest begins to erode.

The real risk is not just weaker borrowing today, but a slower, deeper loss: The country forgetting how to invest in its future.

This is how stagnation takes root. If capital does not flow into productive activity, growth slows. If growth slows for long enough, confidence weakens. Once confidence weakens, pressure builds on the currency. And once the currency adjusts, the apparent gains from high nominal interest rates disappears through loss of purchasing power.

Even the savers, those dependent on interest income, lose.  A financial system cannot permanently prosper when the real economy is losing momentum beneath it. What began as prudence becomes a downward spiral.

Stagnation is not merely an economic outcome; it carries the seeds of political shifts. When growth weakens, opportunity narrows and frustration rises. When frustration rises, political risk increases. And these risk, once embedded, does not stay confined to politics.

It enters balance sheets, borrowing decisions, investment horizons, and the basic psychology of capital. Capital looks to exit the market, making the downward spiral harder to arrest. The spiral can accelerate faster than policymakers can react.

To summarize: High interest rates encourage bank passivity and weaken investment mindset. Weak investment slows long-term growth. Slow growth creates currency pressure and political anxiety. Those pressures further undermine confidence, making capital even more defensive and eager to leave  -- creating a currency devaluation cycle.

Nobody wins in that cycle: Not entrepreneurs, not workers, not savers, not even the institutions that think they are protecting themselves.

Unfortunately, foreign capital will not save the day either. Industrial policy is back in fashion across the globe -- PLI Schemes in India, CHIPS act in the US etc. Governments around the world are leaning more towards wartime generals, than free-market economists. Capital is no longer gliding around the globe searching for elegant textbook opportunities. It is a world of energy insecurity, strategic supply chains, and activist industrial policy -- a pattern of de-globalization is emerging.

Bangladesh, in any case, has long underperformed in attracting foreign investment relative to its peers. There is little reason to believe foreign money will suddenly compensate for domestic hesitation. This is what makes the current moment so critical.

If we want to become a trillion-dollar economy, it will not happen by accident or on auto-pilot. We cannot expect that the current capital preservation culture will somehow become a dynamic culture. A trillion-dollar economy requires a financial system that can recognize risk, tolerate risk, and allocate capital with intelligence.

It requires a state that is strategically alert, and a banking system capable of backing the future. Lower rates will not solve every structural problem. They will not produce more gas, fix congestion, repair governance, clean up bank balance sheets or substitute for a serious industrial strategy. But they would do something essential: They would stop paying the system to stand still.

A timid, drawn-out reduction in rates risks sending the message that policymakers themselves are unconvinced. Bangladesh will need something clearer: A decisive shift in incentives, an opening move that tells the system the era of rewarding inertia is ending.

There is also a fiscal reason for acting. Lower rates reduce the government’s own interest burden. In a resource-constrained economy with strained tax collection, that matters. Expensive money does not only discipline borrowers, it also raises the cost of governing. Essentially the government is taxing activity and rewarding passivity through large interest payments, which now stand at 20 percent of total budget.

Of course, fixing capital transmission will require more than cuts in policy rates. Over time, Bangladesh will need stronger institutions, healthier banks, deeper capital markets and better channels for directing savings beyond the traditional banking system. But that is the longer discussion.

The immediate questions are simpler: What is the impact of high interest rates on the culture of the financial system? Do we want a financial system that simply becomes ever better at avoiding risk? Or one that understands how to take risk well?

A country does not become dynamic by rewarding passivity. It becomes dynamic by building institutions that know how to take risk with judgment and purpose. Until money starts moving again, high interest rates will continue to be praised as discipline --  even as it quietly finances stagnation.

Waseem Alim is the co-founder and CEO of Chaldal.